Market maturation progresses as preparations continue for the inevitable wave of delinquencies to strike land.
M&A Activity in the second quarter of 2023 was up from the first quarter in both deal volume and count in the ARM vertical. Though the first quarter results were a little depressing relative to expectations for agency owners, the inevitable wave of delinquencies is the proverbial “light at the end of the tunnel.” While it is unclear when that will happen and what impact the broader economic picture has on liquidations, it undoubtedly feels like there is an inflection point coming to the ARM industry.
According to a recent report highlighted by PYMNTS, delinquency rates for credit card payments have surpassed pre-pandemic levels for companies like Capital One, Discover, and Bread Financial. As delinquency rates are rising instead of declining as expected, analyst Bill Carcache from Wolfe Research suggests that the term “normalization” referring to decreased delinquencies coming out of Q1 should be abandoned.
Carcache predicts that delinquency rates will continue to increase in the upcoming months, and that we should expect consumer spending to weaken in the latter half of 2023 due to diminishing savings. Fitch Ratings also anticipates a decline in consumer savings. Notably, despite households holding $1.7 trillion in excess savings, the distribution is disproportionality skewed toward higher-income households. All reports considered, it appears that the runway for consumers’ personal balance sheets is nearing the end.
The resumption of student loan payments this fall is also expected to have significant economic implications for both the overall economy and millions of American households. With individuals facing real and often painful cuts to their spending, there is a concern that this could lead to a slowdown in economic activity. For many borrowers, the additional monthly payment will be a burden, particularly for those with lower incomes who already spend a higher share of their income, and those in the younger demographic.
According to estimates from Moody’s Analytics, the resumption of payments will withdraw around $70 billion annually from the economy, which is higher than initially expected due to the Supreme Court’s rejection of the Biden administration’s debt forgiveness plan. This change could result in a reduction of about 0.4% in real personal consumption expenditures in 2023 after the restart in payments. We are interested to see how liquidation rates change after the September 1, 2023 restart date—and where student loans fall on the hierarchy of bills to pay.
In the first quarter of 2023, auto loan delinquency rates exceeded levels seen during the recession, per a report published by TransUnion. S&P Global Mobility reported that auto loans more than 60 days past due reached 1.69 percent, surpassing the recession-era highs of 1.46 percent in 2009 and 2010. The figure is also 26 basis points higher than the first quarter of 2021.
This increase in delinquencies primarily affects the subprime tier, with the greatest impact being felt by the independent lenders specializing in subprime loans for used-vehicle purchases. S&P Global Mobility suggests that inflation and high interest rates may be contributing factors. The rise in interest rates is putting pressure on the monthly budgets of average consumers, making it challenging for them to meet all their financial obligations.
The pandemic led many lenders to withdraw from the subprime market, but the subprime volume has slowly recovered. However, the delinquency rate has prompted captive finance companies, banks, credit unions, and independent lenders to tighten their underwriting standards. This, combined with high interest rates and lower used-car inventories, has resulted in a decline in loan originations.
On a positive note, the performance of new-vehicle loans, as measured by vintage performance, has shown relative strength – with recent vintages performing better than pre-pandemic portfolios. This trend holds constant with the above paragraph; there seems to be a “k-shaped curve” of the consumer credit environment.
Beginning July 5, 2023, several text message carriers, including Twilio, will require companies using 10-digit telephone numbers (10 DLC) for SMS and MMS messages to U.S. consumers to register them under an approved campaign. Unregistered numbers will face increased message blocking up until August 31, 2023; after the 31st, there will be a complete block of unregistered U.S.-bound messages.
As a result, phone carriers AT&T, T-Mobile, and Verizon are raising fees for unregistered numbers.
Registration delays and third-party approvals are causing customer frustrations, however the Federal Communications Commission (FCC) does not regulate these private efforts. Nonetheless, the wireless industry’s trade association, CTIA, updated best practices for businesses using 10 DLC.
This trend will influence one of the new “tools in the toolbelt” of ARM industry participants and increase the cost associated with the texting communication channel, but given the low cost relative to other omnichannel outreach strategies, the impact remains to be seen.
Despite a recent decline in inflation, retail sales saw a year-over-year decrease.
Consumers, still feeling the pinch on their wallets, are turning to buy now, pay later (BNPL) services to make everyday purchases, like groceries and home goods, rather than using it for discretionary spending, per a report from Retail Brew.
In 2022, the share of online purchases using BNPL grew by 14 percent year over year, with BNPL revenue increasing by 27 percent year over year. However, in the first two months of 2023, while the share of BNPL orders increased by 10 percent year over year, revenue fell by 19 percent year over year, indicating that consumers are using BNPL for smaller purchases.
BNPL usage spans across various categories, with groceries and home furnishings experiencing significant growth. Electronics, on the other hand, saw a decline in demand following a record holiday shopping season. It is worth noting that while BNPL services attract consumers due to their lack of interest charges, users may still face financial challenges, as they are more likely to have delinquencies and higher credit card balances compared to non-users. While this data seems “aged,” it is an important trend that we at CAS continue to harp on. The alternative point of sale installment is likely going to add increased pressure on the consumer in a recessionary environment. It is truly unchartered territory….
The statistics in a recent report published by the CFPB regarding chatbots and consumer finance reveal that consumers with higher education levels are more comfortable with digital communication and online payments. Preferences for email payment reminders and online bill payments are higher among those with bachelor’s degrees compared to those with a high school diploma or less. Younger consumers also show a preference for digital communication. Most consumers are comfortable with online payment options, while check and giving credit card information over the phone are less preferred.
Understanding consumer preferences is crucial for collection agencies, as reaching debtors through their preferred channels increases the likelihood of response and successful collections, thus driving down expenses. Contrary to the myth, older consumers, including baby boomers, are comfortable with online payments but may need awareness and demonstration of available technologies (i.e., simplicity and security is key).
Technology adoption is positively correlated with higher income and education levels, while unbanked communities face challenges in engaging with online payment methods. Predicting customer communication channel preferences early in the process is essential, and AI and technology solutions can assist in determining the most useful channels based on debtor data and other variables.
Nevertheless, companies need to be sure they are remaining compliant in the use of the AI tools and technologies and avoid anything that can even loosely look like a violation of FCRA or other legislation. Per the report, phone calls are becoming less effective (which should come as no surprise to CAS Market Report readers), and strategies should incorporate complementary channels, such as emails and text messages, considering regulations and blocking issues.
The evolution of AI in receivables management has progressed from basic machine learning (MLP) for scoring applications to the current utilization of natural language processing (NLP) to generate debtor communication, whether written or voice-based. The next milestone for the industry is to develop tools with actionable intelligence capabilities, leveraging the vast amount of data available to create predictive analytics and business intelligence solutions.
Still, there are challenges to overcome. Regulations specific to the accounts receivable management (ARM) industry will likely introduce guardrails, and the conceivable return on investment for developing AI technology needs to be considered in light of potentially cheaper and more general AI solutions in the future.
Additionally, the ARM industry tends to lag in adopting ultra-innovative solutions compared to other sectors. Data feeding the AI models poses a dilemma between structured and unstructured data – with most agencies only effectively utilizing a small percentage of their stored data. Collector notes, for example, contain valuable insights but are often unstructured and costly to process.
However, the potential benefits of structuring and analyzing collector notes in real-time with AI-powered analytics tools are immense. It is vital for businesses to evaluate the worth of storing large amounts of data, considering the cost of storage and the possible cybersecurity risks. When developing AI solutions, it is imperative that agencies and developers listen to industry feedback to address actual issues and avoid the influx of “hot but useless” solutions, per an article published by Aryeh Derman and Joann Needleman of Clark Hill in insideARM.
We touch on this more in our new “emerging technologies in the OBS sector,” but avoiding being first to market (and thus the compliance risk) may be useful in the practical application, as regulators have their sights set on AI.
Deals to Highlight:
Atradius Collections acquired Pro Kolekt Group
AG Adjustments acquired D&S Global Solutions
Aktos raised a 4.4M Seed Round to revolutionize ARM software
Cora Group acquired WebRecon LLC