Getting Current on the Credit Card Sector

Mark Russell

It has been a while since I updated my findings on the credit card sector, so in response to growing demand here is the first of two blogs geared toward this market. This one will focus on credit card portfolio liquidation trends and the follow up will cover debt portfolio pricing and purchasing trends.

Liquidation performance in 2011 has been nothing but a roller coaster ride for credit card agencies and law firms. Q1 started off strong, similar to 2010, but petered out quickly toward the end of March and beginning of April, reflecting the seasonality of debt collection. Since then, we have seen slight reductions in liquidation performance across all stages of delinquency in Q2. The table below shows average liquidation decline ranges by stage of delinquency. The numbers in red indicate average liquidation improvements.

Average Credit Card Liquidation Decline

Stage of Delinquency	2007 to 2008	2008 to 2009	2009 to 2010	H1 2010 to H1 2011
Fresh	20% – 30%	30% – 40%	-10% – 5%	5% – 20%
Primary	20% – 30%	30% – 40%	-10% – 5%	5% – 20%
Secondary	25% – 30%	20% – 30%	-5% – 10%	5% – 15%
Tertiary	20% – 30%	20% – 30%	-5% – 15%	0% – 15%
Quads+	15% – 25%	25% – 35%	5% – 20%	0% – 10%

One important note about these ranges – they represent a combination of low, mid-range and high balance accounts. When we look at performance by average balance size, we note that on average larger balances (> $3,500) are experiencing greater liquidation declines than lower balances.

When discussing these results with owners of collection agencies and law firms, the primary culprit seems to be a reduction in government stimulation, which has impacted debtors’ abilities to make large, up-front payments or total payoffs. To counteract this issue, some agencies and law firms have invested into better scoring and account analytics technologies to help them prioritize their inventory in order to maximize liquidation results as soon as possible – in some cases, these ARM companies have developed proprietary scoring and analytic capabilities to augment their off-the-shelf solutions. These investments seem to be paying off for some via improved liquidation performance and better management of costs as a result of a more efficient collection operation.

Simultaneous to this liquidation trend has been the ongoing reduction in placement volumes driven by the continued decline in credit card delinquency and charge-off rates. This has motivated credit card issuers to further consolidate their collection agency vendor networks – many issuers have reduced their vendor networks by 20% to 60% over the past 18 months.

While net remittance to the client continues to be the primary driver for market share allocation, liquidation performance is becoming a more important component as placement volumes decline and commission rates have dropped about as far as they can go. This means that those agencies and law firms who can maximize their liquidation performance and net remittance results are better positioned to survive this consolidation phase and gain greater market share going forward.

Stay tuned for the update on portfolio pricing and debt purchasing trends.

Mark Russell manages M&A transactions for Kaulkin Ginsberg. To confidentially discuss your business interests, please contact Mark Russell at 240-499-3804, or by email.