Debt Buyers:
Competition Expected To
Continue To Increase
Here Are Some
Untapped Growth Markets
To Consider

Debt buyers, which can include private equity firms, hedge fund investors, collection agencies, other public or private companies, or other individuals, usually purchase portfolios of unpaid and charged off debt from credit granters, such as banks, credit card issuers, telecom companies, etc.

Debt buying has increased significantly in the last few years, causing portfolio prices to increase. Prices are expected to continue increasing, at least for another two years or so, partly due to the decline in credit card charge offs, as well as a drop since 2008 in credit card originations.

This can mean smaller profit margins for bad debt buyers.

These purchased debt portfolios, which represent millions of dollars in unpaid delinquencies, are often large balance accounts. However, they’re usually acquired at some discount.

The conventional wisdom is that larger balance accounts can mean greater profit potential for the debt buyer. Many collection agencies also tend to favor and focus more recovery efforts on larger balance accounts for the same reason.

For debt buyers who are accustomed to purchasing portfolios of charged off credit cards, there are some other options to consider, that are both less competitive, and can offer greater profit margins.

These smaller balance distressed assets can include:

• Bank Demand Deposit Accounts, which are overdrawn checking/ATM accounts (DDA)
• Stafford Student Loans (federal loans for higher education), and
• Payday Loan Advances (short term cash advance loans)

Here Are Some Reasons Why Debt Buyers Should
Consider Smaller Balance Accounts:

Deep Discount Pricing

Banks and other institutions usually focus more of their internal collection efforts on larger balance loan accounts, because of the greater risk involved should these default. Because of limited in house collection personnel, banks don’t place much focus on smaller balance accounts. As such, these can often be purchased at great discounts. Its not unusual to buy these at $.05-.08 on the dollar.

Using third party collection agencies to collect these accounts greatly reduces internal expenses and minimizes overhead.

Of course the key is finding collection agencies with a specialty in small balance DDA accounts. Many collection agencies focus most of their recovery efforts on larger balance accounts because of the larger profit potential.

For this reason, banks and other institutions usually price their small balance debts lower to encourage collection agencies to collect these debts.

For collection agencies that specialize in collecting small balance DDA accounts, recovery rates average in the double digits. This can spell great opportunities for debt buyers. Investment returns of 50% or greater are not uncommon.

Debtors Tend To Pay Off Smaller Balance Accounts First

Actually, there is sound reasoning for debt buyers to consider smaller balance accounts. Typical debtor behavior is to pay off smaller accounts first, as this gives them a sense of accomplishment. This seems a more manageable proposition than tackling larger balance accounts, which can feel overwhelming. After successfully paying down their small balance accounts, they then tackle the larger accounts, such as credit cards, medical debt, etc.

This means greater both greater recovery success for collection agencies effective in collecting demand deposit accounts, as well as even greater profits for bad debt buyers.

Reduced Competition

Presently, there seems to be little competition for debt buyers with respect to small balance DDA accounts, payday loans, and small balance student loans. Since most of the debt buying focus is on large balance accounts, this can be a great time to consider this market.

Due to the present bad economy, with continued high unemployment, and growing delinquent debt, banks and other institutions are seeing increasing amounts of delinquencies, defaults and charge-offs of small balance accounts.

Competition is expected to greatly increase, as more debt buyers and investors become more aware of the profits that can be made. Also, growing competition will certainly mean increased portfolio pricing, reducing the profit potential.

Untapped Market Means Profit Potential for Debt Buyers

• Demand Deposit Accounts
• Stafford Loan Accounts
• Pay Day Loans

Banks and credit unions are experiencing a dramatic increase in overdrawn checking account, demand deposit/ATM collections because of the bad economy, and resulting job layoffs and unemployment. This is in addition to home foreclosures, auto and other bank loan defaults.

As discussed earlier, banks typically focus the greater effort on collecting the larger balance loans (auto loans, credit cards, etc.), because of the greater risk of loss should these default.

They are less equipped to recover on small balance accounts. Even though these are small balance amounts, they represent huge losses for the banks and credit unions. Overdrawn demand deposit accounts, while usually only a few hundred dollars, these add up to great losses for banks.

Capitalizing on a bank’s ineffectiveness to recover these small balance accounts represents a great opportunity for debt buyers.

Stafford Student Loans

Because of the ever-increasing costs of higher education in the United States, more students are borrowing to pay the costs for college or vocational school. Defaults happen when a student is no longer able to make their student loan payments. Banks are usually poorly equipped to service and collect these loans.

Unlike other forms of consumer debt, SSL debt is regarded as similar to delinquent IRS debt. Even if a student eventually files bankruptcy, their student loan debt never goes away.

Although the collection has a longer recovery cycle, liquidation rates are higher. Social Security checks can even be garnished to help pay for student loan debt. The loan will always liquidate when a debtor dies. State agencies usually pay within 60 days of receiving the proper forms.

Pay Day Loans

Also called cash advances, payday advances, or payroll advances, these are short term loans designed to cover emergencies, or between work pay cycles. These require that the applicant be currently employed.

As they typically come due the next time one gets paid, these are short term loans to cover emergency expenses. Lenders charge a fee for this service.

Usual requirements include a bank checking account to secure the loan with an ACH authorization, similar to direct deposit of one’s payroll check. Similar to obtaining a bank checking account, borrowers usually have to provide lots of information about work, home and references. This detailed information helps greatly to locate the debtor in the event of a loan default.

One of our consultants will contact you within 24-48 hours

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