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The State of Collections: Trends and Insights for 2021 and Beyond

TransUnion
Blog Post05/17/2021
Business
The State of Collections: Trends and Insights for 2021 and Beyond

After a tumultuous year, collection agencies are looking to rebound in 2021

In 2020, the collections industry — like most others — dealt with unprecedented economic disruption amid the COVID-19 pandemic. The crisis sparked new changes and accelerated others already in motion.

In our report (prepared in conjunction with Aite Group) — The State of Third-Party Collections 2020: A Year of Pivots, Challenges and Opportunities — thought leaders noted three big areas in which the industry will keep shifting in 2021.

#1. The industry is contracting

The number of firms that comprise the third-party collections industry has steadily declined in recent years, and industry watchers believe this trend is continuing. Between 2016 and 2020, the number of third-party collection firms shrunk by 15% to 6,699 companies (Figure 1).

Figure 1. Number of third-party collections firms by year

Number of third-party collections firms by year

Some of the contraction over the past few years can be attributed to mergers and acquisitions. Most collections firms are still very small — 71% have fewer than five employees — which make them ripe for consolidation. But there was a dramatic fall in M&A activity in early 2020 due to the pandemic, with only a measured return toward the end of the year. Buyers are taking their time with due diligence, as valuing a company and assessing performance has been more challenging.

The upshot is the industry saw a sharp decline not just in the number of firms in 2020 but in the overall number of employees as well, as shown in Figure 2.

Figure 2. Number of debt collection industry employees by year

Number of debt collection industry employees by year

A significant drop in employment for the industry occurred in 2020, perhaps due to the pandemic. Employment numbers are not expected to begin a slow rebound until 2022.

#2. Profits are in decline for smaller companies

This contraction correlates closely with drops in company profits. While 73% of companies reported increasing or stable profits in the two years leading up to the coronavirus outbreak, a shift occurred as company operations experienced the effects of the pandemic. Only a quarter of respondents saw an increase in profit margins in 2020, and 42% are now reporting decreased profitability, as shown in Figure 3.

Figure 3. Profit margins before and during the COVID-19 pandemic

Profit margins before and during the COVID-19 pandemic

Here as well, the story is one of industry consolidation. As you can see in Figure 4, larger companies have fared far better than smaller ones since the COVID-19 pandemic began. The experiences of companies in which fewer than 100,000 accounts were placed almost identically mirror those of companies with 1 million accounts or more — with 60% of the former group reporting decreased profit margins, and 61% of the latter group reporting increased profit margins.

Figure 4. Differences in profit margin since the COVID-19 pandemic by company size

Differences in profit margin since the COVID-19 pandemic by company size

#3. Companies want to grow to survive — and need the talent to do it

As you can see in Figure 5, the two aspects of business debt collectors find most challenging are business growth (crucial as smaller companies struggle), and acquiring and retaining talent. However, the newfound ability to keep some employees remote (reducing office expenses) or recruit new hires beyond where a company has a physical presence may help to some degree.

Figure 5. Degree of challenge for various aspects of the collections business

Degree of challenge for various aspects of the collections business

Next on the list of challenges listed in Figure 5 are preparing for the myriad of state and federal laws and regulations, plus uncertain macroeconomic conditions, likely driven by the economic downturn, and restrictions and modifications mandated by various governmental entities to curb collections efforts or otherwise respond to the pandemic. As one collector says, the "tremendous number of orders by governors and regulators made for a very tumultuous time. Everything got local in a hurry."

Learn more about these challenges in the full report

The full report has much more detail of interest to collections professionals, so download the second annual report now. Takeaways include:

  • A deep examination of consumer financial trends and overall attitudes
  • How agencies plan to overcome consumer communication roadblocks
  • The technology investments organizations are making to increase collections

And to learn more about how TransUnion can help, visit transunion.com/solution/third-party-collections.

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