ARTICLE...
Weathering the Storm
Can we mitigate the effects of the credit crunch if we all pull together?
Every day the press is full of the latest economic gloom and impending recession. At such tough times for consumers - and therefore everyone involved in credit - how can lenders, debt buyers and collection agencies work together to navigate safely through the choppy waters ahead?
The short answer is that we may all need something of a reality check. Creditors who outsource or sell debt may need to adjust to higher commissions and lower sale prices. Some debt buyers will need to move away from 'feeding the beast' with deals at outdated marginal prices, and collection agencies need to ensure they know just how cheaply they can afford to take on commission-based debt. And we'll all need to work closer, more transparently and more efficiently than ever before if we're to maintain the capacity to work greater volumes of lower quality debt if the recession really bites.
Starting with the outlook for debt sale, US debt sale pricing has been commoditised for years, with transparent prices for prime debt through to skips. Since August 2007 prices across the Pond have fallen by 15-50%, with many sellers still unable to find willing buyers. By contrast, most UK prices have remained stubbornly high. How can this be, if we all expect our customers to have lower propensity to pay?
One reason is that some sellers may be delaying their sales, fearful no doubt of a large provision shortfall, but sitting on your hands is a brave move indeed in the current economic downturn. Another factor supporting prices is that any reduction in supply means regular sellers are finding frustrated buyers who need to use up their funding lines and capacity, and can still justify now-optimistic pricing based on old deal comparables and pre-crunch pricing models. All buyers and funders should be urgently revisiting cherished pricing models which are slowly capsizing as low risk consumers turn into low propensity debtors. Those who don't could be heading straight for the rocks.
Only time will tell whether there will be an adjustment in sale prices towards Christmas, but it could be a nervous time for sellers and buyers alike, with volume and price volatility leading to a year-end offloading of large deals at more sensible prices, but with some sellers potentially missing out. There are lots of good things happening to prevent this scenario, though, and the cooperation between sellers and buyers at DBSG has been very encouraging, particularly concerning the CCA06 statements and notices, and a better general understanding of each other and their deal flows. There is also the growing use of white SCOR data by buyers, which has now become BAU and is buttressing the levels of larger settlements and payment plans, while reducing the costs of the can't pays.
So what's the outlook for collection agencies and tracers? A steady decrease in prevailing commission rates, coupled with additional client reporting and interfaces, have eroded margins to the point where enlightened agencies have walked away from some of their high-volume work, usually because their profitability models start releasing emergency flares. Earlier sale of debt by the lenders has also had an influence, but many agencies are now turning to the larger debt buyers for high volumes of debt and lower client service overheads. Innovative clients are starting to realise that greater engagement with their agencies can pay dividends, with data sharing taking off nicely. Segmentation and intelligent allocation of debt across each panel is still in its infancy, however, and this is an area of real opportunity for larger lenders.
Meanwhile, tracers should soon have their own Tracing Code of Conduct as a result of the recent CSA/DBSG initiative, and the industry is working together with Credit Today to fight the nonsensical changes to the Electoral Roll.
As the inevitable downturn continues, will these initiatives help us to minimise the effects on all our businesses? I firmly believe that by working ever more closely together, and constantly looking for new innovation and efficiency, the best players in the credit chain will not merely survive, but will come through leaner, fitter and stronger than ever.
I hope to see you on the other side!
By Leigh Berkley, CEO of Tessera Group Plc, and Chair of the DBSG
