Mike Ginsberg's Blog: The History of the ARM Industry

Mike Ginsberg

Winston Churchill famously proclaimed, “The farther backward you can look, the farther forward you are likely to see.”  For the accounts receivable management (ARM) industry, there may never be a time when this statement has rung more true.

During my recent key note presentation for DCS 2012, I traced the history of collections before addressing current market conditions.

In this first of a three-part blog series, I will look back at the evolution of one of the oldest professions: debt collection.

Before 1920, the U.S. farm barter system gave rise to the earliest form of debt collections.  Farmers frequently paid for goods and services on credit, settling their debts at harvest time. Lenders acquired farmers’ assets during years in which crops were not plentiful enough to repay obligations.

Consumer debt became popular as the U.S. economy entered the industrial age in the 1920s.  Mass-produced automobiles were purchased under installment plans. Consumers needed credit to purchase Model Ts, and the Ford Motor Company extended credit in order to sell cars.

Small collection agencies sprouted up throughout the United States in the 1920s and 1930s.  When creditors could not collect account balances on installments plans or retail accounts, collection agents were hired to recover the debts. These companies typically serviced a few clients, had relatively few employees, and utilized manual systems for servicing accounts.

By the late 1930s, U.S. retailers developed charge accounts that were expected to be repaid over extended periods. Preferred customers were given the option of paying by credit and settling accounts over time for a fee. Retailers soon found profits in this extension of credit, as well as the sale of more products and services.  The U.S. credit system began to take off.

The American Collectors Association was formed in 1939 as the industry’s first trade association.

After 1945, the practice of extending credit grew with the post WWII economy.  In 1951, Franklin National Bank released the first revolving charge card. This attracted customers who could borrow and repay funds without obtaining approval for each individual purchase. Hundreds of other banks followed suit. Before long, droves of Americans had credit cards in their wallets and pocketbooks.

The predecessors of Visa and MasterCard came into existence in 1959 and 1966, respectively. These bankcard associations allowed credit cards to be used regardless of the customer’s location so long as purchase transactions could be settled by participating banks. Soon afterwards, a nationwide system to process credit card transactions existed among banks, merchants, and customers. Creditors in other industries began to issue credit to consumers during this time.

By 1970, the modern U.S. credit industry was blossoming. The amount of outstanding consumer credit multiplied by a factor of almost seven during the 1950’s and 1960’s, from $19 billion at the beginning of 1950 to $127 billion at the end of 1969.

In 1977, the Fair Debt Collection Practices Act (FDCPA) was passed to eliminate abusive practices in the collection of consumer debts.

In the 1980s, debt buying began in earnest when the Resolution Trust Corporation (RTC) sold delinquent credit card debt to fund the government’s bailout of the failed savings and loans banks.

In 1990, the movement to off-shore collection jobs to India began with GE Capital.

The further proliferation of credit cards began in 1993 as mail boxes across the U.S were lined with applications, igniting the biggest boom market in collection history. The Debt Buyers Association was formed in 1997 and by the late 1990s private equity firms were investing heavily into ARM companies.

In 2003, the Federal Trade Commission started the National-Do-Not-Call-Registry, prompting large call centers to enter the collection industry to displace anticipated revenue reductions.

In 2006, the U.S. housing bubble burst, halting the use of home equity to pay down outstanding credit obligations and in 2007 the global financial crisis began. The government focused on regulation and in 2010 the Dodd-Frank Act was passed.  By 2011, the Consumer Financial Protection Bureau was formed to regulate banks and non-bank financial institutions.

That concludes today’s history lesson on the evolution of debt collection in the U.S. Next time, I will review the current playing field for debt collectors.

To view Mike’s full presentation, please visit http://kaulkin.com/expertise/publications/keynote_9112012.php.