ARM Industry in for a Wild Ride in 2008

Despite a gloomy prognosis for the broader economy, the accounts receivable management industry is poised for strong growth in 2008, according to a number of expert projections. But contingency collection agencies should prepare to battle, not only to keep their existing bank and lender clients but also to collect money from consumers.

Many of the credit-specific issues that are plaguing the economy will benefit ARM and collections as creditors seek out help managing and collecting their receivables in the face of rising delinquencies and charge-offs.

A consumer survey released the last week of December showed that U.S. households are gearing up for the coming trouble by creating a “delinquency budget” to determine which bills will be paid. According to the survey conducted by Web-based financial systems provider Online Resources, 98 percent of consumers would pay their mortgage first and let other debts slide.

One expert said that lenders will seek help managing their debt as more consumers default on non-mortgage debt, and that could lead to significant growth in the debt purchasing sector.

“As the economy slows and publicly traded credit issuers struggle to meet earnings expectations, debt portfolios will be sold in increasing numbers and in larger sizes,” says Paul Legrady, director of ARM advisory firm Kaulkin Ginsberg.

Legrady says that contingency agencies will feel pressure from bank and lender clients, but agencies with a well-defined niche – whether geographic or debt-type specific – will stand to grow. Also, debt purchasers will need to contract with collection agencies to collect the debt they buy.

Other predictions paint a rosier picture for traditional outsourced collections. Major collection agency and BPO provider Vengroff, Williams & Associates issued their predictions for the market in late November of last year. Using external research and internal analysis, the firm predicted a strong year for collection and general finance accounting outsourcing services.

“We expect companies to elevate receivables to their 2008 list of priorities as CFOs have to make sure their receivables are in tip-top shape to ensure steady cash flow,” said in a press release. Mark Vengroff, CEO of VWA.

VWA used research from EquaTerra, a BPO research and advisory firm. In his most recent report on financial services outsourcing, EquaTerra Managing Director Stan Lepeak wrote that financial services outsourcing, including ARM, was becoming “recession-proof” due to cost pressures at large lenders.

Lepeak found that demand for accounts receivable/credit & collections BPO services was the second-fastest growing BPO segment in the third quarter of 2007, behind Payroll and Benefits outsourcing

Andy Efstathiou, a director at BPO research firm Nelson Hall, told insideARM that the field may become more crowded for collection agencies in 2008. Efstathiou said that many established BPO companies are branching out into ARM, leveraging their relationships with current clients to take on those services. “This is a very high-growth area in BPO,” he said. Competition should be fierce for collection work, he said.

Efstathiou said that this environment of increased competition was one of the drivers of the huge NCO Group-Outsourcing Solutions, Inc. merger announced late last year (“NCO Group to Buy OSI for $325 Million,” Dec. 12, 2007).

However, there is also the issue of collectability. Legrady says that an economic dowturn will make it more difficult for collectors to get money from cash-strapped consumers. “All other things being equal, a dollar may be 5 to 10 percent harder to recover from U.S. consumers in 2008 than it has been in recent years,” he said.