For decades in the collections industry there was a tendency and a perceived strength in specializing your recovery expertise in a specific market or vertical. It was a feather in the cap of your organization to say, “We only collect medical debt. It is our priority and specialization.” In many respects that is a platform upon which you can still market your firm in 2018 but there is a popular and often-preferred trend to diversify the client base and spread out perceived industry risk.
Diversification, from an investment perspective, is defined by Investopedia as, “a risk managementtechnique that mixes a wide varietyofinvestmentswithin a portfolio. The rationale behind this technique contends that a portfolioconstructed of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” Collection organizations invest in client relationships. We are always interested in relationships that yield respectable profits, however, a large part of the decision to march into new markets has to do with perceived risk relative to compliance. It is often escalating risk in a firm’s market of expertise that serves as the impetus to look at greener pastures. Those pastures may look lush and beautiful but if you see some cows (regulators?) around, you better watch your step as you wander there!
From a business perspective diversification is defined as, “the process of a company enlarging or varying its range of products or field of operation.” Even the old adage, “Don’t put all your eggs in one basket,” tells us that there may be some sound reasons to consider other markets, but the pathway can be fraught with pot holes requiring us to navigate carefully and thoughtfully. Although diversification can spread your business risk in some fashions it can create unforeseen needs to not only understand the underlying culture of other markets but to comprehend the compliance, regulatory and business environment of those sought-after opportunities.
For example, recently an agency owner that specialized in financial collections approached me about expanding into the medical market. Those that have focused exclusively on the medical market have a different perspective, however, due to the evolution of hospitals. Many firms are losing decades old relationships with small to mid-sized hospitals that are being acquired by mega hospital conglomerates that already have their large collection firms in place. The bad debt recovery models are now moving upstream toward early out and extended business office models. Thus, many in the medical vertical are moving into new approaches or to completely new markets to “escape” the difficult dynamics of the medical arena.
Where should you be? Let’s consider some of the pros and cons of particular markets:
There is still a mountain of business to be had. However, the large agencies are getting larger and the smaller players are being pushed out. Physicians are selling their practices and joining the hospitals on salary. There is a huge movement toward the extended business office models. Be ready to understand and implement the important HIPAA standards that will be required.
Many firms still engage in credit card recoveries and service banks and credit unions. There are respectable volumes of accounts available but since the creation of the CFPB, players in this space must maintain impeccable compliance standards. Many believe that the smaller players don’t have to comply or are at least not in the cross hairs of the CFPB, but that culture is changing. Many small firms are encountering increasingly stringent compliance demands in this segment. Creditors are aggressively auditing vendors and requiring infrastructure as well as operational changes to meet growing compliance mandates.
This market had seen a huge level of growth 15 years ago. Today, many buyers and servicers have left the market. Very few opportunities exist and the compliance mandates are enormous. To partner with respectable issuers and servicers the hurdles are significant thus keeping many players out of this vertical.
Some firms have seen significant growth in this segment. A sole focus on the education industry is embraced by some, with high liquidations and student payment assistance programs that help secure payment via loan consolidations. Servicers get credit for these arrangements that result in payment of the debt. There are enormous concerns about the Perkins Loan program sun setting that may reduce volumes significantly. I have been surprised at the lack of vendor auditing and oversight in this vertical and feel the future holds much more required agency management.
Many agencies have serviced a local municipality or two within their array of clientele. Today, many firms are looking to develop this vertical as it offers collection leverage and is not as large a focus by regulators. The down side is that the heightened interest has increased competition and has driven down the commission structures.
If you are thinking of heading in new directions be sure to engage in thoughtful planning and interact with specific industry trade associations and support networks. Be sure that the greener pasture you perceive is not just a mirage. Talk to other colleagues to determine the pit falls and challenges of a chosen segment and be ready to develop training programs to bring your staff up to speed!
No matter what segment may draw your attention, pay special attention to this month’s Collection Advisor’s focus on Skip tracing. Each of the verticals addressed above require unique levels of need to find consumers. This function is probably more vital in 2018 than ever before due to the transient nature of our culture!
We welcome ideas and best practices from our readers. Feel free to send your ideas for possible inclusion in a future column. Until next time, I’m in a collection office hear you!