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Stormy Weather
a tumultuous year for the credit-and-collections industry

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Some creditors and collectors have been blown onto the rocks by the gale of change howling through the industry. Here's how five corporate leaders are steering through the storm.

It has been a tumultuous year for the credit-and-collections industry. Consumer credit quality continues to decline as bankruptcies soar to record levels. Downward pressure on collections fees, increasing needs for investments in technology, continuing globalization of all industries, and the relentless pace of consolidation are forcing everyone from credit card issuers to sub-prime auto lenders, commercial creditors to credit bureaus, attorneys, and agencies to rethink their strategies.

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Under these conditions, it's not surprising that some industry participants have not adapted fast enough and have either gone out of business or been gobbled up by larger, more vigorous contenders.

Consider membership in the American Collectors Association. It has declined for the fifth year in a row, to 3,576 as of March 1 - down about 5% since mid-1993. It's not only small, under-capitalized agencies that are being squeezed out: Earlier this year the nation's seventh-largest consumer-collections agency filed for protection from creditors under Chapter 11 of the U.S. bankruptcy code. And the second-largest commercial agency was sold to a venture-capital firm as its owner was driven out of the collections industry by legal troubles. "We're still at the early stages of a consolidation play in the collections industry, but a number of factors will move the industry toward more rapid consolidation," says Michael D. Ginsberg, vice president at mergers-and-acquisitions specialist M. Kaulkin and Associates, Bethesda, Md. "Some will buy, some will sell, some will merge."

Fragmented But Growing

Nonetheless, the industry remains highly fragmented. As Ginsberg points out, the largest collections agency accounts for only 4.2% of the industrywide contingency-fee revenue of $5.5 billion in 1996. As a group, the top 10 agencies accounted for just under 20% of the contingency-fee total, or about the same market share as last year. When fees from outsourcing, telemarketing, and other non-traditional lines of business are considered, the top-10's total market share is certainly larger, but based on the traditional contingency-fee measure, 80% of the business remains in the hands of the other 5,000 or more commercial and consumer agencies.

Overall, the U.S. Small Business Administration projects total collections-industry employment will increase from 1.7 million workers in 1994 to 2.9 million by 2005, a 68% gain. On the revenue side, contingency fees were up 10% in 1996 from 1995's $5.0 billion, Ginsberg estimates. But nontraditional work such as early-out collections, account-receivable outsourcing, and a variety of call-center-based services are expected to become the growth engines of the future. "Contingency-fee revenue will continue to grow, but rates are being compressed," Ginsberg says. "The growth of these firms will come from other lines of business such as outsourcing."Meanwhile, the credit side of the industry continues to grow faster than the overall economy. As of Dec. 31, for example, outstanding lines of commercial and industrial credit at U.S.-based banks stood at $785.9 billion, up 9.7% from a year ago. Total consumer debt topped $5 trillion, including $1.195 trillion in consumer-installment credit and $3.85 trillion in residential mortgages. And the pace hasn't slackened. Second-quarter residential mortgage credit is forecast to reach $3.94 trillion, up 5.1% from the second quarter of 1996. Consumer installment credit reached $1.212 trillion at the end of February, up 8.0% from a year ago. And outstanding commercial and industrial credit stood at $797 billion in February, up 10% over the same month a year ago.

Here are some of the key developments of 1996 and early 1997:

Departures: Milliken & Michaels Inc. owner Michael G. Sanderson ended the legal problems that had plagued the No. 2 commercial agency by selling it to H.I.G. Investment Group, Miami, and exited the collections business under a long-term non-compete agreement. And HHL Financial Services Inc. fell victim to the rapid changes in health-care collections and declared bankruptcy early this year (stories, pages 8, 10).

Mergers: The high level of merger-and-acquisition activity that has characterized the collections industry in recent years continued. For example, NCO Group merged with Management Adjustment Bureau last summer, bought Goodyear & Associates and CMS A/R Services in January, and acquired the collections division of CRW Financial Inc. in February. All told, NCO agencies now boast more than $2.5 billion in placements, which would have put NCO in the top 10 consumer agencies; Kaplan & Kaplan, the commercial agency that is part of the CRW deal, already is No. 9 (table, page 35). NCO also went public via an initial public offering.

Bankruptcies: There were 1.1 million consumer bankruptcies in 1996, the first time more than a million U.S. consumers have filed in a calendar year. And record-high filings in the first quarter indicate that 1.44 million personal bankruptcies will be filed in 1997 (story, page 9). Moreover, 3.72% of credit card accounts were at least 30 days past due at year end, up from 3.34% a year ago and a new record high, the American Bankers Association reports. And the value of seriously delinquent accounts hit 1.92% of outstandings, worth $4.6 billion, up from 1.61% on Dec. 31, 1995, according to Veribanc Inc. data. Legislation: Congress amended the Fair Debt Collection Practices Act, easing the burden of the so-called mini-Miranda warning in which collectors must tell debtors that any information they reveal will be used to help collect a debt. The warning now is required only on the first communication with a debtor and can be omitted from formal legal pleadings. The Federal Trade Commission also has proposed exempting attorneys who handle only debt-related litigation from the FDCPA; industry groups are seeking to exempt non-judicial foreclosure communications, to spell out what is allowed during the 30-day debt-validation period, and to limit some class-action suits.

Litigation: Barnett Bank's collections subsidiary, Barnett Recovery Corp., settled a class-action suit that challenged its practice of not including the mini-Miranda and validation notices when collecting debt for its parent. Barnett agreed to pay more than $54,000 in cash and $1.7 million in credits. The settlement might imply that creditors are subject to the FDCPA, but it is not precedent-setting.

Technology: Computer technologies made further inroads. Dun & Bradstreet Corp. rolled out an electronic network linking 200 attorneys. American Express unveiled a scoring model to flag accounts for litigation. And MDG Capital Inc. introduced a suite of predictive models that score debts for collectibility, dollar value, and locatibility. "Not long ago, the key to this business was who had the data," says D. Van Skilling, chairman of Experian Inc. "Today, we are past the simple data-delivery stage." Agrees D&B chairman Volney Taylor, "Speed is the ultimate competitive advantage as we go into the next millennium."

Here's how one industry leader is steering his company through the storm:

D&B Is Ready To Work on Growing Its Core Business

Less than a year after spinning off its non-credit operations as separate companies, the new Dun & Bradstreet is regaining its focus. Now, it's time to show it can work.

Volney Taylor rises from his place at an industry dinner and bends slightly in a golfer's stance. He isn't demonstrating his own swing, but making a point about the Japanese, who love the game. He's been studying the subject, and even speaks a bit of the language: "Shin-ken sho-bu," he later intones, and then explains that it is an ancient phrase meaning a contest with swords.

And he has his favorite Japanese author, a famous 17th-century samurai, Miyamoto Musashi, who late in life wrote a book summarizing what he had learned about strategy, or the art of the advantage. "By strategy, I mean guidance on how to prevail in all areas of life, including the global battlefield of commerce," says Taylor, who is chairman and chief executive of Dun & Bradstreet Corp. "And increasingly those of electronic commerce as it relates to credit and collections."

Ironically, for most of the past year Taylor has not been able to concentrate fully on the very battlefield where his company's future will be determined. That's because he played a major role in the breakup of the old Dun & Bradstreet, a task far more complex than anyone had anticipated. "We spent a good part of last year working on the breakup process, which turned out to be a lot more complicated than most of us realized," he says. "We had something like 500 subsidiaries around world. It required an incredible amount of time and effort to separate out into three companies."

Nor was the separation of the new D&B from the old conglomerate without cost. As Taylor notes in his first message to shareholders as CEO, "Reported results for 1996 are not pretty." The company - consisting of the traditional commercial credit-information and collections business plus directories publisher Reuben H. Donnelley and debt-rater Moody's Investors Service -reported a net loss for the year of $44 million ($.26 per share) on $2.159 billion in revenue. The loss was largely due to $492 million in after-tax charges for reorganization costs and losses on divestitures. Clearly not what any chief executive wants to tell his shareholders.

Falling Fortune?

Adding insult to injury, the new D&B also fell off the Fortune 500 list, on which the old corporation was ranked 242nd a year ago. Due to the 60% lower revenue compared to the old D&B, the new company this year ranks 579th. Moreover, the restated annual results show that operating revenue for the lines of business that now are D&B has been stagnant at just over $2.1 billion for at least five years. And while these ongoing operations have been profitable in each of the five years, the level of income has been inconsistent. Excluding this year's loss and a charge for accounting changes in 1993, income has ranged from a low of $284.5 million in 1993 to $629.5 million in 1994.

But there is good news. For example, the company is No. 5 in Fortune's computer- and data-services group, behind First Data Corp. (No. 2 with $4.9 billion in revenue) but ahead of Equifax Inc., its nearest counterpart on the consumer credit-and-collections side (No. 7 in the industry group with $1.8 billion in revenue).

Moreover, the worst is perhaps over as Taylor and his top executives now can turn their attention to their core businesses. Completing the breakup "has enabled us to generate excitement about and around the company to focus on the fact that we really determine our own success," Taylor says. "Each of the three businesses has a wide array of opportunity in front of it."

Getting Focused

D&B is off to a good start in 1997, with first-quarter profits of $38.0 million on $459 million in revenue, up from $31.2 million net on $430 million in sales a year ago. Receivable Management Services says it had one of its best quarters ever, helped along by all-time record revenue in March. That comes on top of a solid performance last year, when RMS reported a 12.2% gain in sales. That's the sort of performance Taylor needs as he, like his customers, increasingly must focus on the top line in order to grow their bottom lines. "You can't cost-cut your way out of a basic problem when your top line isn't growing," Taylor says. "We're seeing a real shift in emphasis onto the top line.&quote;

Here's how Taylor plans to build his own top line:

Global competition: "We just created a global-accounts group based in Portugal that will have teams in the U.S., Europe, Asia-Pacific, and Latin America to enable our multinational customers to do business around the world through one contact. Volumes are growing nicely on our first global product, World Base, and we will be bringing out a global [credit] score so a 70 in one country will mean the same as a 70 in any other country."

Technology: "The future is here as far as the Internet is concerned. A couple of thousand customers are now accessing [our data] via the Internet and by year end we may have [up to] 15,000. We are working with customers to build an intranet link, kind of a home page of D&B on their [corporate intranet]. The world of electronic commerce creates a revenue opportunity for us." Acquisitions: Buying a company might be a quick way to boost D&B's revenue stream, and Taylor "wouldn't rule it out, but we would be very selective. Our experience is that a lot of times you don't get what you pay for so we prefer on balance to grow internally and leverage our global position." Outsourcing: Taylor is counting on outsourcing to be a big contributor to the top line. It already accounts for some 20% of RMS's revenue, and is growing at a double-digit rate. The potential, D&B insiders say, is "huge." D&B now has several so-called insourcing contracts under which it takes over collections on site and the customer's people are now D&B employees, but operate as first-party collectors.

Consumer collections: "We've always had a bit of a blend. Sometimes it's difficult to sort out consumer from commercial,"especially in small-business credit. "We don't want large volumes [because] commercial margins are higher. But for those customers who want both, we are in discussions with some consumer agencies to partner."

Just the possibility of such a partnering is a dramatic shift in D&B's strategic thinking. Maybe it's the influence of the old samurai and Taylor's new experience in spin-off warfare. As Taylor says, "This is not your father's or your grandfather's D&B."

The Top 10 Commercial Collections Agencies
(ranked by 1996 placements in $ millions)

Agency Headquarters       1996 Placements 1995 Placements
Dun & Bradstreet Murray Hill, N.J. $1,000†  $1,000† 
Milliken & Michaels * Metairie, La. 974 951
Outsourcing Solutions ** St. Louis, Mo. 840†† 770††
Mid-Continent Agencies Rolling Meadows, Ill. 375 380
Vengroff, Williams Sarasota, Fla. 350 320
American Bureau of Collections Buffalo, N.Y. 319 230
STA International Westbury, N.Y. 212 180
National Commercial Recovery Calabasas, Cal. 158††† 150†††
Kaplan & Kaplan *** Crofton, Md. 153 99
United Mercantile Agencies Louisville, Ky. 150††† 150†††

†Includes other services such as outsourcing.    ††Estimated pro formas.    †††Estimates. * Now owned by H.I.G. Investment Group. ** Includes Payco American, A.M. Miller. *** Part of NCO Group Source: Credit Collections Directory
1997 Collections & Credit Risk Entire contents of this article
1997 Collections & Credit Risk, a publication of Faulkner & Gray, Inc., 300 South Wacker Drive, Chicago, IL 60606.

Collections & Credit Risk's Website can be reached at: http://ccr.faulknergray.com

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© 1998 Dun & Bradstreet, Inc.
July 31, 1998 - JAS