Collector - March 2020 - 40

BUSINESSOPERATIONS

The State of Debt Buying and Financial Services
Current market conditions could bring lucrative opportunities for debt buyers.
By Mike Ginsberg

C

onditions for debt buying-
particularly within the financial
services sector-have not appeared
this attractive since the Great Recession. As
banks and other financial institutions have
expanded their lending operations, bad debts
and charge-offs have risen in tandem because
there is a broader array of borrowers who
may succumb to delinquency.
A rise in nonperforming loans should
pressure creditors to increase the supply
of portfolios for sale, especially if their
own internal collection departments are
less robust, thereby raising the volume of
transactions. In addition, average prices-
specifically on credit card debt-have
fallen over the past few years, significantly
lowering costs for debt-buying firms. These
trends have clarified opportunities for debt
buyers in the financial services space.

40

MARKET CONDITIONS
In 2018, net charge-offs-i.e., gross
charge-offs less the amount recovered-at
commercial banks and savings institutions
totaled roughly $47.5 billion, an increase
of 1.5% over the previous year. To dig a bit
deeper, credit card net charge-offs amounted
to nearly $32.1 billion, while auto loan net
charge-offs came out to $3.8 billion in 2018.
Both asset classes have seen strong growth
in net charge-offs in recent years, with the
former increasing at an average annual rate of
15.5% since 2015 and the latter rising at 15.8%
since 2012. These trends should continue into
the near future as consumer access to credit
expands, presenting lucrative opportunities for
debt buyers.
While commercial banks offer the most
substantial opportunities for debt buyers,
credit unions have begun to sell debt portfolios

as well. Navy Federal, the largest credit union
in the U.S., started selling to debt buyers in
the early 2000s, and in 2018 its competitor
Pentagon Federal entered the marketplace
as well. According to industry expert Mike
Chiodo, the presence of such major, heavily
scrutinized players should open the door for
many more credit unions selling their debt in
the near future.

PRICING TRENDS
Portfolio pricing is extremely important to
the debt-buying segment. Higher prices can
not only depress buyers' bottom lines but also
price out smaller buyers that lack the amount
of capital required to compensate.
Pricing depends a number of factors,
including the age of the debt, the number
of collection agencies that have attempted
recovery, and debtor characteristics such as

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