Q2 was a remarkable quarter from an M&A perspective, as deal activity within the Global Tech-Enabled Outsourced Business Services (OBS) sector soared to pre-pandemic levels. In Q2, 60 transactions were consummated representing almost $6.6 billion in total deal value. These statistics incorporate several large transactions, which are noted within the specific OBS industries covered in our newsletter: Accounts Receivable Management (ARM), Customer Relationship Management (CRM) and Healthcare Revenue Cycle Management (RCM). The level of quarterly M&A activity since Q4 2020 has met or exceeded pre-pandemic volumes and total deal value, clearly indicating not only a re-established comfort among both strategic and financial buyers to consummate deals, but a motivation driven by emerging business and market trends. CAS is proud to announce their advisory role in the sale of Professional Credit to Tonka Bay Equity Partners.
Accounts Receivable Management (ARM)
ARM industry players have endured interesting shifts in the political and technological landscape and have proven to be resilient and innovative despite headwinds induced by lawmakers. CAS predicts that the industry would further consolidate in the second half of 2021.
Read the complete ARM insights and access the market data here.
In Q2 2021, CAS witnessed a revolutionary adaptation of ARM players to regulatory changes on a federal and state level. Despite headwinds from new rulings that affected the ARM industry, companies are rebounding from the impacts of COVID-19 and prospered in parts due to the timely stimulus checks. More importantly, mergers and acquisitions (M&A) activity experienced a strong growth spurt and multiple tech-enabled ARM startups raised capital in Q2. Looking onward, CAS predicts a continuation of the consolidation trends in the second half of 2021 with the Biden tax proposal and new final rulings such as Huntstein.
President Biden announced three plans for tax increases on high-net-worth individuals and changes on capital gains tax: The American Jobs Plan proposes $2.3 trillion in spending towards infrastructure and job creation; the American Families Plan designates an additional $1.8 trillion to education, childcare, and support for women in the work force; finally, the Made in America Tax Plan proposes tax increases on many corporations and businesses with international operations that could raise over $2 trillion in tax revenues in the next 15 years. In further detail, this tax plan would increase the corporate tax rate from 21% to 28% and raise the levy on long-term capital gains from 20% to 39.6% for taxpayers whose income exceeds $1 million. Overall, the Biden’s tax plans would reverse the 2017 Tax Cuts and Jobs Act and could lead to a sweeping surge in M&A volumes as companies seek to “cash out” prior to the implementation of the higher tax rates. While consolidation activity has been strong in the first half of 2021, CAS projects a sustained upward trajectory in the number of M&A deals in the latter of 2021 and early 2022.
On a federal level, ARM companies met the implementation deadline to Telephone Robocall Abuse Criminal Enforcement and Deterrence (TRACED) Act on June 30th, 2021. Signed in late 2019, the First Order of the TRACED Act outlined the STIR/SHAKEN authentication framework, mandating that originating and terminating voice service providers must uphold the standards in the IP portions of their networks and take reasonable measures to implement the framework in the non-IP portions of their networks. In the face of rising mistrust and high levels of fraudulent and scam calls, consumers were not picking up phone calls; as a result, they also missed legitimate and critical calls from ARM call centers. The TRACED Act was a necessary measure to help protect consumers and regain their trust for the industry. To decipher if a call is unwanted or a scam, reputational analytics would continue to exist in the mobile and app ecosystem. The STIR/SHAKEN framework would provide additional data points to improve the accuracy of reputational analytics but would not replace the technology used today to display calls as Potential Fraud or Scams. As a result, ARM companies would still need to address call blocking and labeling in their efforts to reach consumers.
Relating to consumer protection from fraudulent and scam calls, the Supreme Court released the Facebook, Inc. vs Duguid’s final ruling, which unanimously agreed that Facebook did not violate the Telephone Consumer Protection Act (TCPA) by maintaining a database that stored phone numbers and programming its equipment to send automated text messages. To further elaborate, the Supreme Court decided that Facebook’s technology was not an Automatic Telephone Dialing System (ATDS) because it did not use a “random or sequential number generator.” The Facebook ruling was a helpful clarification on the TCPA regulations as it means that accounts receivable companies do not require prior expressed consent to call or text an individual. Although the decision appeared to be a sweeping win for the industry, we should still tread carefully as TCPA attorneys may still leverage the perceived holes in the Facebook case and dress up former TCPA claims to legally pursue ARM entities.
In the second quarter, debt collection was affected by the Hunstein v. Preferred Collection and Management Services, Inc. court ruling. On April 21st, via the Hunstein decision, the FDCPA defined “communication” as “the conveying of information regarding a debt directly or indirectly to any person through any medium.” In other words, unanswered calls do not fall into a form of “communication.” As a result, the court held that “information regarding a debt” was communicated neither directly nor indirectly to the consumer by the receipt of the unanswered call. In holding that unanswered calls are not a communication, the court noted that no “information regarding a debt” was conveyed directly or indirectly to the consumer by his or her receipt of unanswered calls. This decision was further fortified in the Southern California’s ruling in the Pearson v. Apria Healthcare Group, Et al case. In addition, the Huntstein decision stated that debt collection must not exchange any information relating to the debt with any party other than the consumer. This decision would require ARM entities to insource services in which they do not have the technological acumen and expertise, such as direct mailing. Not only would the shift pressure ARM firms’ profitability and operating margins, but also negate the experience of consumers as they no longer can enjoy the fully automated transactional mailing and mail tracking that the third-party servicers offer.
House also passed the Debt Collection Improvement Act, which consists of eight bills to curb the rising number of consumer complaints against debt collectors. Among other things, the Act would prohibit collectors from threatening a servicemember, restrict the use of confessions of judgment for small business owners, require the discharge of private student loans in the case of permanent disability of the borrower, require companies to give consumer notice about their rights under the FDCPA and the FCRA prior to the collection of medical debt, and prohibit text messages and emails if the collector has not acquired prior consent from the recipients. The Act was introduced by House Financial Services Chairwoman Maxine Waters to prevent abusive and predatory debt collection practices, especially during the pandemic crisis.
As states lifted their respective lockdown measures, the moratorium on foreclosures and forbearances also reached their end. On May 5, a federal judge invalidated CDC’s moratorium. However, the Biden administration requested the judge to consider an emergency stay for the tenants, which was granted. Since then, the moratorium was maintained and has since expired on June 30, 2021. The CARES Act, which is the federal moratorium for student loans forbearance and deferral, is still set to expire September 31, 2021.
In technology trends, CAS witnesses an increasing implementation of cryptocurrency in accounts receivables payments. Early adopters of this digital currency are allowing consumers to pay their bills with bitcoin by leveraging bitcoin debit cards, direct-to-biller crypto payments, crypto bill pay platforms such as Coinsfer and Bity. Such platforms automatically convert cryptocurrencies to dollars and even enable customers to set up recurring payment schedules. Payment options such as direct-to-biller also help payers avoid service and conversion fees. Recently, Arizona passed a legislation that verify crypto payments as a valid form of payment for state and local taxes. Meanwhile, other states such as Illinois and Georgia are considering allow Bitcoin for payments of state taxes as well. From public exchanges to day-to-day payments, crypto had been gaining popularity among consumers, and accounts receivable could be where the trend pervade.
As an overview, the ARM industry has endured interesting shifts in the political and technological landscape. Nevertheless, firms have proven to be resilient and innovative despite various challenges from lawmakers. Especially with the new tax proposals which are likely to come into effect in 2022, the ARM industry would continue to consolidate with high volume and sizes of M&A deals. CAS is well-equipped with information and expertise to guide industry leaders in these turbulent and exciting times.
Customer Relationship Management (CRM)
In Q2 2021, the CRM industry experienced a surge in M&A activity in both deal value and volume. CAS sees exciting trends in technological transformation and expansion of CRM into the emerging cannabis industry.
Read the complete CRM insights and access the market data here.
CRM was among the most expansive tech-enabled industries in the first half of 2021 thus far, characterized by strong M&A deal flows and revenue growth. Consolidation activity saw a surge in deal volumes and deal sizes in Q2 2021. In total, there were 84 transactions. Arguably, the noteworthy transactions were: Allied Global BPO’s acquisition of CallTek BPO, Inc., and Sykes Enterprises (NASDAQ: SYKE)’s definitive merger with Sitel Group. Recently, Zoom also announced its acquisition of the cloud contact center Five9 in an all-stock deal worth $14.7 billion.
While lower brick-and-mortar retail traffic in Q1 spurred a surge in e-commerce sales, Q2 enjoyed a massive rebound in consumer spending and corporate profits, which drove industry demand and call volumes for CRM centers. According to IBISWorld, revenue for CRM system providers would likely increase 4.6% industry-wide by the end of 2021 as the shelter-in-place order comes to an end. Rising vaccination rates are bolstering the American people’s confidence to leave their homes as the economy reopens. Household savings and government stimulus checks boosted disposable income well above pre-pandemic levels and many families are itching to increase spending. As a result, in May alone, recreational spending spiked by 3.5% as compared to the numbers in April. As top-line revenue grows steadily, clients of CRM companies are now also looking to improve their margins by moving to in-house call center specialists. Traditionally, third-party, offshore, and near-shore centers have been used extensively because of their clear cost and time saving advantages. However, companies have been seeing revenue benefits in additional value-add services with in-house centers. Instead of simply answering questions that customers have, the internal call center representatives leverage their extensive knowledge of their own products to upsell and cross-sell services. Many firms reported that inhouse specialists have contributed to an increase in revenues. As a result, inbound call centers not only provide a cost-cutting opportunity but also generate an additional source of revenues and profits. While this could threaten industry growth, CAS also views this as a vital catalyst for existing CRM providers to revamp their technological platform and further reduce operating expenses for clients. Furthermore, we expect more CRM companies to consolidate in the coming year as they become coerced to gain auxiliary competitive advantage and capital to improve their platforms.
To bolster clients’ conviction that outsourced CRM platforms provide superior cost savings and revenue generation benefits to in-house specialists, CRM platforms are obliged to leverage the full extent of omnichannel capabilities and voice automation in their services. Omnichannel user experience (UX) refers to an operations strategy in which all touchpoints of the user experience lifecycle are integrated into one seamless source. In other words, customers can now assess social media, live chat, follow-up emails, phone calls, and live assistance via one singular site, with intuitive and conversational UX design. Secondly, technologies such as Interactive Voice Response (IVR) and Intelligent Virtual Assistant (IVA) continue to empower voice automation in CRM systems. IVR can direct customers to live agents or other digital channels. IVA acts as a digital agent that listens to customers and allow them to self-service. These assistances have the capability to filter through convoluted sentence phrasing, decipher accents, and even bypass background noises to deliver customers’ requests. As result, customers have a seamless experience and grow increasingly satisfied with the implementations for this intelligent automation.
Another crucial trend to highlight in the CRM industry is the intimate connection between call centers and the cannabis industry. Despite the coronavirus pandemic, cannabis sales hit a record for in 2020. According to a new report, legal sales across the United States breached $17.5 billion, which grew by over 46% as compared to 2019. By 2026, BDSA projects that the legal U.S. cannabis market would exceed $41 billion in annual sales. CAS predicts that CRM implementation would be vital for the cannabis industry’s aggressive upward trajectory. Already, there are myriad connections between cannabis operators and call centers. First, cannabis and hemp have short shelf lives, meaning that the industry players require extensive direct marketing to keep their products flying off the shelves. As a result, the cannabis industry is not only ripe for CRM integration but also desperately need expert call center specialists to help consume their rising customer inquiries and call volumes. Second, the consumer base of cannabis and hemp also skews younger, which indicates that their customers expect a seamless user experience from companies’ websites and customer care assistance. Additionally, cannabis companies also are under high scrutiny and must adhere by strict calling and messaging regulations relating to consent, recordkeeping, interstate calling concerns, conflicting state and federal law, and ad hoc state-based regulatory landscape; many industry players may not also be familiar with or aware of the TCPA. Therefore, CRM providers, with their wealth of industry expertise, would be critical to the new cannabis industry operators.
Overall, the CRM industry experienced healthy consolidation activities in Q2 2021. We will continue to see the trend continues, with more companies leverage joint resources to improve their technological platforms and expand into new markets such as cannabis. CAS observes that leading CRM providers would leverage automation such as IVR, IVA, AI, and omnichannel capabilities to streamline customer experience and improve their services, similar to other tech-enabled business service industries.
Revenue Cycle Management (RCM)
CAS witnesses the RCM industry undergo extensive technology enablement to resist pressing margins, improve staff education and adapt to patients’ everchanging preferences.
Read the complete RCM insights and access the market data here.
In the first half of 2021, the coronavirus pandemic had spurred fewer mergers and acquisitions within the Healthcare RCM industry; however, what the M&A activity lacked in volumes, it made up for in magnitude. The deal sizes were larger than average, according to a study from Kaufman Haul. In Q2 2021, a noteworthy transaction is R1 RCM’s acquisition of venture capital-backed VisitPay for $300 million. CAS also witnessed a recurring trend of “soft” consolidation in Medicare ACOs, in which practices are not formally acquired by a healthcare system. Although these softer consolidation strategies are permissible under federal antitrust laws, a study out of Harvard University indicated that these arrangements may also be inflating prices for patients, as compared to what happens after the more formal healthcare M&A deals. Next to consolidation activity, COVID-19 and healthcare consumerism also have a long-lasting impact on hospitals’ and healthcare systems’ operations and technology. As a result, Healthcare RCM calls for the accelerated implementation of technology such as interactive voice response, artificial intelligence (AI), and visual experience for heightened customer experience and convenience in payment.
With the wake of new initiatives such as hospital price transparency and patient financial responsibility, hospital and healthcare systems face immense pressure to revamp their financial experience and patient collections strategies. Consumers require companies to have revenue cycle strategies that mirror their growing sophistication. To do so, successful RCM companies must gain acute visibility into data, learn consumer payment patterns, and acquire a thorough understanding of patients’ demands and hardships. According to a new research from the Kaiser Family Foundation, patients are owing more out-of-pocket for their healthcare expenses than ever: New data from the study indicates that the burden of deductibles across all covered workers had increased by 111 percent in 2020. This abrupt increase in deductibles was triggered by a spike in both the number of workers enrolled in plans with deductibles and the average deductible amounts. This sets the challenge for RCM to maintain quality of service while consuming higher volumes of patients.
Secondly, RCM automation no longer is a nice-to-have capability but instead has grown to be expected by patients, especially in healthcare systems with convoluted data, regulations, and claim denials. While the need for technology implementation is there, many RCM companies are struggling to elevate their platforms while maintaining accuracy in account management. The challenge only intensifies for traditional center specialists who struggle to handle the heightened call volumes. Healthcare revenue cycle still succumbs under manual management, especially in claims management and follow-ups. Patients deem traditional collection strategies to be archaic and dated as they seek modernized bill options to pay their providers. As a result, identifying methodologies for patients to self-pay their balances in ways that match their preferences would not only improve cash flows but also raise satisfaction ratings. For patients who prefer the option to call in, leading RCM platforms have leveraged automation, such as interactive voice response (IVR), to streamline customer service experience. For those who prefer to pay online, establishing a centralized digital portal with electronic consolidated statements have grown to become the new industry standard.
Additionally, revenue cycle systems must also keep up with the upward trajectory of claim denials from payers, which was further accelerated by the recent pandemic. An analysis by Change Healthcare reported the average rate has increased by 23 percent in 2020 compared to the rate from four years ago. According to a recent report by AHA, claim denials not only negate hospitals’ revenues but also erode quality and accessibility of patient care. However, the good news for RCM companies that a significant percentage of claim denials could be preventable with strategies such as staff education and automation such as artificial intelligence (AI). Research has shown that AI empowers the human decision-making process, allows technology to take over redundant tasks, and allow healthcare staff to foster patient relationships. A study by Phillips indicates that AI would soon supplant telehealth to become the most sought-after investment priority as optimization of accounts receivable management is now one of the strongest use cases for innovative AI solutions. By leveraging AI, RCM automation can identify and direct account follow-up while tracking patient payment patterns to maximize revenue recovery success. According to another survey by KLAS and the Center for Connected Medicine, the most quintessential technologies in revenue cycle management improvement are AI, predictive analytics, chatbots, and automation.
Although leveraging automation is necessary, it does not mean RCM companies do not face challenges in implementation. Firms must be cognizant of increased cyber security risks. In fact, healthcare is the hardest-hit sector by the dollar amount when it comes to data vulnerabilities. According to IBM’s latest Cost of a Data Breach report, these cyber weaknesses cost the healthcare industry $7.13 million annually. Moreover, in implementing artificial intelligence, there are increasing concerns over patient privacy protection. It is common knowledge that healthcare data is highly coveted, especially for AI companies. However, many of these technology firms do not seem to mind disregarding code of ethics to acquire patient information. As a result, RCM systems would need to be vigilant in protecting patient privacy so as to adhere to HIPAA regulations. The second challenge that healthcare faces in leveraging automation is the high upfront cost, especially as low margins continue to beleaguer hospitals’ revenues. A study by Kaufman Hall reported that the median operating margin has fallen to a slow as 1.4 percent because of the recent pandemic. Looking forward, Kaufman Hall projects hospital margins to decrease as much as 80 percent and revenues down as much as $122 billion compared to pre-pandemic levels as hospitals continue to feel the dire repercussions of COVID-19.
In a major win for hospitals, CMS is pitching a mandate that would abandon a plan that requires hospitals to disclose certain negotiated rates it reaches with Medicare Advantage organizations. The rule would also update some data collection requirements for hospitals, adjust quality metrics collected and changes regarding COVID-19. On another news, HHS secretary Xavier Becerra also sent on a letter reminding healthcare providers and insurers that coronavirus vaccinations and tests must be free of charge for patients. The agency requires group health plans and health insurers to cover coronavirus diagnostic tests without cost-sharing, and that those who fail to comply may be reported to state insurance departments or to CMS for possible enforcement action. Healthcare RCM industry should also anticipate surprise billing and consumer collection laws. Soon, new federal law would alter the way consumers are billed for emergency care and being treated by out-of-network providers when they are within in-network facilities. As a result, it is critical that healthcare organizations ensured their debt collection partners and practices align with the upcoming regulations. The most recent Consumer Financial Protection Bureau (CFPB) rule, effective Oct. 1, 2021, would dictate new rules for electronic communications with consumer, which would impact digital medical debt collection strategies: “The final rule, among other things, clarifies the information that a debt collector must provide to a consumer at the outset of debt collection communications and provides a model notice containing such information, prohibits debt collectors from bringing or threatening to bring a legal action against a consumer to collect a time-barred debt, and requires debt collectors to take certain actions before furnishing information about a consumer’s debt to a consumer reporting agency.” Additionally, although lawmakers have been focused on passing a law to prevent surprise billing, organizations should still prepare for unexpected legislation.
Overall, Healthcare RCM is undergoing an exciting evolution with extensive technology enablement in an everchanging regulatory and political environment. Successful revenue cycle systems would be ones who embrace automation, improve staff education, and adapt swiftly to patient preferences to become true patient-centric platforms.
FinTech and Debt Settlement
While FinTech experiences revolutionary shifts with the decentralization of finance, the Debt Settlement industry proves its resilience against the downward pressure from lawmakers and regulators who threaten to suppress its growth.
Read the complete FinTech and Debt Settlement insights and access the market data here.
FinTech & FinTech Lending
Many of us may remember the notorious GameStop trading scandal, in which a Reddit subsidiary thread WallStreetBets short-squeezed several hedge funds in Q1 2021. The incident not only lost these funds billions worth of dollars, but also exposed the centralization on stock trading, as almost all brokerages paused trading on the GameStop stock, allegedly due to downward pressure from Wall Street. Former hedge fund manager and CEO of Galaxy Digital, Mike Novogratz said, “In a decentralized trading market, no one would have that power.” Many people share the same notion as Novogratz as they believe that traditional banks are failing to provide trustworthy, accessible, and transparent financial systems. As a result, decentralized finance, or DeFi, is growing in popularity and is becoming the next big thing in FinTech.
With DeFi, anyone and everyone in the world can borrow, lend, send, and trade assets using digital wallets without having to go through intermediaries such as banks, brokerages, and institutional lenders. Essentially, DeFi is an ecosystem of products and services that were enabled by smart blockchain contracts, which execute autonomously when set conditions are met. As a result, transactions could be executed without the traditional middlemen while boasting superior transparency and automation. Users could either conduct rudimentary financial tasks like peer-to-peer borrowing and lending, or even trade unorthodox derivatives, crypto assets, and leverage unusual forms of insurance. There are also extensive opportunities for profits as DeFi relieve users of the transaction fees and regulations that accompany traditional financial intermediaries.
Beyond their transparency, DeFi also offers many benefits to users with their low barriers to entry, rigorous risk assessment, and modern infrastructure. The Ethereum-based applications are “permissionless” and share the same database, which in turn allows users to “fork” (or copy and adapt) code bases. Therefore, end consumers are the ones who enjoy the most benefits as DeFi projects must face fierce competition among each other on fees and user experience. The process of innovation is also highly accelerated in a decentralized system. For example, during the development of “exchange aggregator” applications, app builders accessed multiple liquidity venues, split orders across myriad platforms; as a result, they were able to provide users with the optimal exchange rate in just a few months, a process that would have taken traditional systems and formal regulation years to complete. Next, decentralized financial system foster transparent accounting and rigorous risk assessment. Platforms mimic the model of repurchase agreements and allow users to enter secure peer-to-peer lending arrangements, where they can verify the quality, accuracy, and leverage of a collateral portfolio at any time. This means that services under DeFi is almost always under high scrutiny by its users. Thirdly, the modern infrastructure of DeFi systems enable superior accessibility: Settlement could be autonomous, transaction fees would be minimal, and the financial system would operate 24/7.
However, while DeFi systems boast myriad advantageous, many critics still believe that it lacked the practicality for mainstream adoption. For example, the current infrastructure of Ethereum does not yet have the bandwidth for the billions of transactions that occur daily; currently, it is already processing at its maximum capacity of 1.5 million unique transactions per day. However, developers and investors alike are working to develop multiple scaling options, promising to alleviate Ethereum’s burden while maintaining its security and decentralization. Second, the crypto ecosystem is limited in geographies and is burdened with skyrocketing transaction fees, along with the currently devastating cost to the environment. The onboarding process of DeFi requires excessive technical acumen for the average user. Additionally, there is also significant regulatory risks as lawmakers acquire more understanding of blockchain technology within the financial markets. As a result, new policies could stifle the growth of the decentralized finance wave.
Although DeFi still faces many frictions in its mainstream adoption. However, despite what its skeptics say, the movement is already here and it may be here to stay. Today, Ethereum hosts thousands of transparent and permissionless platforms and supports trillions of dollars of worth of transaction value. The platform also serves as the infrastructure for legacy financial giants and has vastly contributed to cutting edge cryptography research.
Debt Settlement
With improving macroeconomic environment, debt settlement enjoyed a boost in revenue and rising settlement amounts. However, the industry still is under downward pressure from lawmakers and opposing regulations that threaten to stifle its growth.
In Q2 2021, the U.S. economy tread closer to recovery with a declining rate of unemployment, and higher per capita disposable income. Unemployment edged down to 6 percent in March, down considerably from its recent high in April 2020 but is 2.3 percentage points higher than its pre-pandemic level in February 2020. The number of unemployed persons, at 9.7 million, continued to trend down in March but is still 4 million higher than in February 2020. The central bank maintains a relatively muted forecast for lower unemployment rate this year despite very strong economic rebound. However, the participation rate, or the total number of people or individuals who are currently employed or in search of a job, is expanding. The labor force participation rate edged up to a 3-month high of 61.5 percent. Fed Chair Jerome Powell describes the participation rate expanding and the unemployment rate holding up as a ”highly desirable outcome,” since that means people are reentering the labor force steadily and not risking the economy overheating. Treasury yield on the 10-year note stood at 1.74% by the end of March 2021. Upon positive private payroll data, the yield on the benchmark 10-year Treasury note dipped to its current rate of 1.58%. The yield on the 30-year Treasury bond was flat at 2.26%. According to IBISWorld, per capita disposable income in the U.S. is projected to increase to $48,982 by the end of 2021. The disposable income of Americans rose by 67%, compounded annually, during the first quarter of 2021—the largest such jump ever recorded. This happened thanks to the pandemic relief bills passed in December and March, which disbursed relief payments and topped up unemployment benefits. Economists estimate households have accumulated at least $2 trillion in excess savings during the pandemic. Overall, the lockdown order has not left a significant impact on the disposable income of households.
More importantly, there was a significant increase in the total debt balance, which signals positivity for debt settlement operators. Aggregate household debt stands at $14.56 trillion at the end of Q4 2020, which is $414 billion higher than 2019. Mortgage debt reached a record high of $1.2 trillion. On the flip side, a historical low of 30,000 individuals having a new foreclosure notation added to their credit reports in the second half of 2020 – the lowest documented due to the CARES-provisioned moratorium. Credit card debt decreased by $108 billion to $820 billion at the end of 2020, stemming from the weakened consumer spending and paydowns by cardholders. Auto loan balances increased to $1.37 trillion. Outstanding student loan debt stood at $1.56 trillion. About 6.5% of aggregate student debt was 90+ days delinquent or in default at the end of 2020. The lower level of student debt delinquency reflects a Department of Education decision to report current status on loans eligible for CARES Act forbearances. Delinquency rates by product continued to decline, and new transitions into early delinquency declined across the board, continuing to reflect the various borrower assistance programs available. The share of student loans that transitioned to delinquency continue to fall, as the majority of outstanding federal student loans are covered by CARES Act administrative forbearances. With federally-backed mortgages also eligible for forbearances, the share of mortgages that transitioned into delinquency fell to 2% in the fourth quarter, down one and a half percentage points since the fourth quarter of 2019. Auto loans and credit cards also showed continued declines in their delinquency transition rates, reflecting the impact of government stimulus programs and bank- offered forbearance options for troubled borrowers.
Data from the CDC also shows that the number of new daily cases is declining steadily since February 2021. As of now, 58.7% of adults are vaccinated with at least one dose. This concludes a successful vaccine rollout, and the economy is primed for a full reopening. Current-dollar personal income decreased by $339.7 billion in the last quarter of 2020. This decrease was more than accounted for by decreases in personal current transfer receipts and proprietors’ income that were partly offset by increases in compensation and personal income receipts on assets. In March 2021, U.S. personal income skyrocketed, increasing by 21.1% and signaling a return to the “new normal” for the economy.
From the regulatory front, the debt settlement industry is under upward pressure from lawmakers with introduction of bills and potential cancellation of student loans. Recent bills have made material impacts on debt settlement as well as the valuations of industry operators. First, the introduction of Assembly Bill No. 1405, which would have enforced a fee cap for debt settlement in California, threatened to suppress profit margin of companies in the state. Fortunately, the Consumer Debt Relief Initiative (CDRI) successfully persuaded the sponsor of the bill to accept their amendment and removed the referral fee. According to our source, the organization was able to make four amendments to the original bill before it moved in front of Senate, which protected the debt settlement industry from the most impactful detriments. However, in North Carolina, the House Bill 76 had recently passed. The regulation would potentially incinerate the right to choose debt settlement from residents in this state. Secondly, the industry also anticipates a portion of student debt to be removed as advocates for student loan borrowers continue to press the Biden administration for nationwide education debt cancellation. The administration announced that Education Secretary Miguel Cardona will be exploring potential legal authorities that could be the basis for widespread student loan forgiveness, implemented through executive action. The Department of Education will review possible legal avenues for student loan forgiveness using executive authority. In the meantime, most federal student loan payments, interest, and collections efforts have been temporarily halted under the CARES Act until September 30, 2021.
Despite pressure from policymakers and impacts from the coronavirus crisis, the debt settlement industry still proved to be highly resilient. Industry organizations have made significant strides to lobby and advocate for the health of debt settlement operators. CAS will continue to monitor material shifts in the regulatory and macroeconomic environment, as well as provide strategic advisory to foster growth for companies in the industry.
