Where Does the ARM Industry Go After the Credit Card Bust?

Is the credit card sector of the accounts receivable management industry ever going to recover? Probably. But it’s almost assured to never provide the kind of work debt collectors came to expect from the early 2000s to 2011. So after an industry-wide period of expansion, where do ARM executives look now?

The consumer credit bubble of the mid-2000s is most closely identified with mortgages. But credit card debt outstanding grew more than $200 billion from the beginning of 2005 to mid-2008. And after the financial crisis of fall 2008, banks began to charge off a lot of that debt. In a four quarter period from the third quarter of 2009 through the second quarter of 2010, the Federal Reserve estimates that nearly $100 billion in credit card debt was charged off by banks, credit unions, and other member institutions that granted revolving credit.

So the ARM industry had been flush with work. With accounts in plentiful supply in a familiar asset class, it would seem that an expansion in the third party debt collection industry would have been inevitable. But economic headwinds kept hiring flat (at a time when most industries were contracting).

As more accounts became available to work, collection managers had to shift strategies to properly allocate recovery resources. With more accounts to work, and relatively flat staffing levels, individual collectors had to work more debtors. From the top, executives attempted to offload this work into the legal collection channel, since a lot of the credit card accounts were young enough to pursue in courts. But then the credit card accounts dried up.

Banks clamped down on credit card lending as they were charging off bad accounts creating a two-front battle for credit card ARM firms. And the trend has not turned around. TransUnion recently reported that credit card delinquencies are at their lowest point since the firm began their tracking18 years ago.

ARM executives are now faced with a decision. The legal collection channel, while under a fairly dire public relations and regulatory threat, has proven to be profitable. So many credit card accounts are going straight into legal. There are still plenty of seasoned collectors, though, with much less work. Faced with the prospect of mass layoffs, new markets are being evaluated.

But just how big are the other market sectors of the ARM industry?

Student Loans

Student loan debt is now the largest single consumer debt class outside of mortgages. The Consumer Financial Protection Bureau (CFPB) recently estimated that at the end of 2011, there was a little more than $1 trillion in outstanding student loans in the U.S.: $864 billion in federally-backed and direct loans, and $150 billion in student loans from private lenders. This places current student loan debt at about the same level as credit card debt at its peak in mid-2008.

But the most staggering figures of student loan indebtedness aren’t necessarily tied to total market size. Instead, the astounding recent growth in outstanding education debt has given ARM executives plenty of reason to consider this market.

The Federal Reserve Bank of New York in May reported that since the peak in household debt in mid-2008, student loan debt has increased by $293 billion, while other forms of debt fell a combined $1.53 trillion. And that growth seems to be accelerating.