The Accounts Receivable Management Industry Deserves Greater Support

September 19th, 2017

According to numerous studies by universities and government agencies, the accounts receivable management (ARM) industry is critically important to the success of the U.S. credit economy – the largest in the world. In fact, these studies found that over regulating this industry hinders consumer access to the credit market – lower income consumers in particular. However, the ARM industry, unlike many other industries, does not receive the most favorable endorsements from regulators or the media, despite its importance to the U.S. economy. Instead, it faces backlash from regulatory groups on the basis of the potential harm a select few consumers may face as a result of the actions of a handful of, typically, non-collection association affiliated companies.

The ARM industry, as we’ve defined it, is an amalgamation of several different industries – debt collection, debt buying, and repossession. Other complementary industries, like collection law firms, are excluded from this analysis due to the lack of data on the collection segment, in particular, and the overlapping nature of this work with many debt buyers and collection agencies. Since 1998, the industry has grown in nominal terms from nearly $8 billion in 1998 to approximately $15.3 billion in 2016, and is forecasted to exceed $17.2 billion by 2019. While more than doubling in size over a 21 year period sounds great, the reality is that the industry is nowhere near the level that it should be.

Once the rate of inflation is introduced into the equation we can see that the ARM industry hasn’t really grown much at all due to the events of the Great Recession. In fact, it has actually decreased in value relative to its peak in 2007. Under the projected industry growth rate of 3.9%, it appears the industry will grow slightly in real terms, but still won’t be fully recovered as of 2019. So what’s behind this less than stellar rate of growth? We believe structural changes related to economic, policy, and business classifications are the three major factors that are behind the industry’s low rate of growth.

The economic factors that are critical to the growth of the ARM industry, until recently, haven’t been as strong, which prevented consumers from fully utilizing the credit markets and spending excess disposable income on non-essential goods and services. However, the data suggests that this could be changing, and the next three-to-five years could see greater levels of growth that will bring the industry back towards its 2007 peak.

Policies have changed significantly since the Great Recession for the ARM industry and credit grantor markets, and have become far more consumer friendly. As a result, the industry experienced significant constraints in select credit grantor markets like financial services, which was the primary culprit behind the events leading to the Great Recession. Additionally, many ARM firms now face greater regulatory compliance requirements than ever before, and are tasked with changing the culture of their collection operations – a difficult task to say the least. However, the industry now benefits from increased barriers-to-entry that were not present prior to the Great Recession. Furthermore, even with industry revenue remaining flat in real terms, the average revenue per ARM firm has been on the rise due to the natural rate of consolidation that has been taking place. This suggests that, on average, the typical ARM firm is in better shape now than it was in 2007.

Business classification is the shifting of a group of industry participants from one industry towards another. As consumer and business demands evolve, so too do industries. This has resulted in the creation of the unofficial revenue cycle management (RCM) industry. We’ve all heard of the RCM industry, but if you try looking it up on market research platforms or government industry classification systems, then you are going to come up empty. Recent trends within the ARM industry have shown a number of healthcare collection agencies moving their operations towards more first-party and back office support work, and the corresponding rebranding of RCM. As more startups enter the RCM industry, the popular classifications tend to include software or technology solutions, among other broad categories. The result has been a decrease in the number of new entrants into the ARM market, even though many overlap with the service offerings of traditional ARM companies. This may suggest that the potential revenue for the ARM industry should be higher than is currently shown, but capturing this “missing amount” just isn’t feasible.

Lastly, it is clear that the ARM industry, irrespective of related industries, has not fully recovered from the Great Recession and is lagging behind the recovery of other industries that have received far greater support from varying government initiatives. While the ARM industry will eventually recover, claims by associations that regulations and policies have damaged the industry are, at least to some extent, justified. Considering the critical role the ARM industry plays in the U.S. economy and its susceptibility to market changes, we believes regulators need to carefully examine the potential effects of policy changes given recent discussions on updates to the Fair Debt Collection Practices Act and Telephone Consumer Protection Act to avoid causing undue hardships for the ARM industry and consumers.

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