subject: Debt Buyers: Discover Three Markets With Little Competition And Significant Potential For Profit [print this page] Debt Buyers: Discover Three Markets With Little Competition And Significant Potential For Profit
Debt buyers, usually comprised of public or private companies, private equity firms, hedge fund investors, individuals, and even collection agencies, typically buy portfolios of charged off, delinquent debt from banks, hospitals, municipalities, telecom companies, or other credit granters.
Debt buying activity has grown significantly in the past several yeras. This has caused increased competition, along with the rise in portfolio pricing.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 translates into smaller profit margins for bad debt buyers.
These purchased debt portfolios, which represent millions of dollars in unpaid delinquencies, are often large balance accounts.They are, usually, bought at a great discount.
Many debt buyers favor larger balance accounts because of the greater profit potential. Thinking similarly, most collection agencies also focus more of their collection activities on larger balance accounts.Many collection agencies also tend to favor and focus more recovery efforts on larger balance accounts for the same reason.
Other options are available, however. Because they're less competitive, they also offer greater profit margins. For example,
-Bank Demand Deposit Accounts, these are overdrawn checking/ATM accounts (DDA)
-Stafford Student Loans (government loans for college or vocation school), and
-Payday Cash Advances
Some advantages include:
Heavy Discount Prices
Most banks typically focus their in house collection attempts on the large balance accounts. There is greater risk in the event these accounts default. As such, and because of in house collection limitations, banks/credit unions usually don't spend too much time with smaller balance accounts. For this reason, these usually can be bought at huge discounts.
Debt buyers that outsource these accounts to outside collection agencies can reduce their internal expenses and overhead tremendously.
The important point, though, is locating collection agencies whose speciality is small balance DDA accounts. Most collection agencies dedicate most of their attention on larger balance accounts, due to the potential for greater profits.
For this reason, banks and other institutions usually price their small balance debts lower to make them more attractive to debt buyers.
Collection agencies specializing in smaller balance demand deposit accounts, can boast of collection success rates in the double digits, which is a great opportunity for debt buyers. Its not uncommon to see investment returns equaling 50% or better!
Debtors Generally Pay Off Smaller Balance Accounts Earliest
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.
For collection agencies with proficiency in collecting DDA accounts, this spells greater recovery results, as well as larger profits for bad debt buyers.
Limited Competition
At present, there seems to be little competition for debt buyers with respect to small balance DDA accounts, payday advances, along with small balance student loans. Because most of the debt buying concentration is on larger balance accounts, it is a great time to think about this market.
With the existing bad overall economy, together with continued high jobless rate, and increasing past due debt, banks along with other institutions are witnessing growing levels 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.
