As interest rates and inflation rise, expect household distress to increase and the $2.5 billion-a-year debt collecting industry to get busy.

As interest rates and inflation rise – and seem a little sharper than likely – households expect emergency levels to rise and the debt-collecting sector to hit $2.5 billion a year.

“It doesn’t take a rocket scientist to figure out that there will be more recurring work,” said Andrew Smith, the head of the ASX-listed Clear credit (ASX:CCR

In the Covid era, consumers benefited from programs such as Jobkeeper and the improved payments for job seekers, while lockdowns curtailed their usual spending.

This encouraged companies to increase credit limits and ease eligibility, while banks and utilities took it easy on Covid-induced arrears.

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Now attitudes towards late payers are hardening as rising interest rates not only add to the distress but also increase the time value of the delinquents.

The listed debt collection agencies should be in clover, but that is not necessarily the case: the restless Collection house (ASX:CLH) called in the voluntary administrators this week after losing the battle against – irony alert – too much debt.

The industry has also suffered regulatory wrath from unreliable debt collection practices, which have seen organizations like Telstra stop selling their delinquent debt books to debt collection companies.

Under the common purchased debt (PDL) model, a collection agency purchases the overdue (but still collectable) loan book at a steep discount to the face value of the debt.

The buyer then uses his skills—with advanced algorithms, not baseball bats—to recover as much of the book as possible and pocket all the proceeds as a reward for risk, effort, and capital expenditure.

Reasonable. Increasingly, however, lenders prefer a fee-for-service model that emphasizes customer-friendly arrangements such as an installment plan, using the heavy legal issues as a last resort.

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Some compensation plans even rely on an acceptable Net Promoter score, the popular measure of customer satisfaction often linked to executive pay

Credit Corp. (ASX:CCP ASX’s leading debt collection agency, operates primarily on a PDL model – and has done so with great success. Collection House took the same approach, but apparently with much less fun.

In its April update, Credit Corp noted that PDL sales volumes were just 55 percent of pre-Covid levels, though they were on the mend.

Aside from the fear of reputational damage to lenders, loans were scarce as credit card delinquencies were at an all-time low.

By contrast, Credit Clear (market cap $100 million) operates on a fee-for-service basis on behalf of large-scale utilities, insurers, government agencies, and—you guessed it—buy-now-pay-later providers.

Initially, Credit Clear focused on the ‘upstream’ leg of accounts receivable, which means helping clients manage their outstanding accounts so that problems don’t arise in the first place.

Last December, the company acquired collection agency ARMA Group for $46 million in cash and scrip — a gamble that boosted its revenues by 140 percent overnight.

The purchase was accompanied by a $29 million capital increase, backed by the Pratt family’s largest holder of Bell Potter and Credit Clear, Thorney Investments.

Last month, the company followed up with a $7.5 million cleanup, and management reports it made a small profit in May.

With a market cap of approximately $130 million, the offshore-focused but low-key IDDM (ASX:IODfocuses on upstream credit management, such as automating university collections.

At $1.4 billion, Credit Corp remains the industry gorilla in a rapidly consolidating sector that is forced to up its game.

Credit Corp shares have lost 40 percent of their calendar year value to date, despite management’s expectations of net income of $92-97 million for the year through June 2022, 10 percent higher than before.

The company also does its own unsecured consumer loans here and in the US – and no doubt has the right tools to keep its borrowers in line.

This story is not financial product advice. You should consider seeking independent advice before making any financial decisions.

Find more from Tim Boreham at: stockhead.com.au

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