In Arum’s latest blog, Account Manager Luke Dillon examines the undercurrents of market consolidation in the DCA sector.
The consolidation of the DCA market is one prevalent theme I expect to be analysed under the microscope when attending this week’s Collections Debt Sale and Purchase Conference.
The debt collection industry has been consolidating around a number of key industry players of late. We have seen examples of this with Arrow Global announcing the acquisition of “selected” assets from debt purchaser and DCA Tessera Credit Group. Arrow also purchased Capquest earlier this year.
The increased regulatory burden has fragmented the DCA market, with the smaller minnows struggling to swim in the new unchartered waters.
Amidst these undercurrents, we are witnessing the reduction of DCA panels, particularly in the banking sector, with the larger players tending to win out over the smaller companies, which in the conduct risk world is the safer ‘regulatory compliant’ choice.
There is an ongoing debate as to whether the additional cost of compliance should be supported by the creditor or absorbed entirely by the DCA/Debt Purchaser. This will have an impact on the level and speed of consolidation. Without commercial support the smaller companies will see their margins squeezed and be forced to join forces to create larger more robust entities, be bought by a larger market player, or in the worst case be forced to close.
In its study ‘The Consolidation Curve’ the Harvard Business Review (HBR) outlines four key stages that an industry will go through during the consolidation process:
Stage 1: Opening. The first stage generally begins with a single start-up or with a monopoly just emerging from a newly deregulated or privatised industry. But this 100% industry concentration quickly drops off. Soon, the combined market share of the three largest companies drops to between 30% and 10%, as competitors quickly arise to create the frontier of industry consolidation.
Stage 2: Scale. This stage is all about building scale. Major players begin to emerge, buying up competitors and forming empires. The top three players in a stage 2 industry will own 15% to 45% of their market, as the industry consolidates rapidly.
Stage 3: Focus. After the ferocious consolidation of stage 2, stage 3 companies focus on expanding their core business and continuing to aggressively outgrow the competition. The top three industry players will now control between 35% and 70% of the market.
Stage 4: Balance and Alliance. Here the titans of industry reign. The industry concentration rate plateaus and can even dip a bit as, at this stage, the top three companies claim as much as 70% to 90% of the market. Large companies may form alliances with their peers because growth is now more challenging. Companies don’t move through stage 4; they stay in it. Thus, firms in these industries must defend their leading positions.
Whilst this study may not reflect exactly what will happen in the DCA world, it is a good reference point and certainly provides some food for thought.
Ultimately, the HBR study concludes a company’s long-term success depends on how well it rides up the consolidation curve. Companies that evaluate each strategic and operational move according to how it will advance them up through the stages—that capture critical ground early and move up the curve the fastest—will be the most successful.
Slower firms eventually become acquisition targets and will likely disappear. Most companies simply won’t survive to the endgame by trying to stay out of the contest, or worse, by ignoring it.
The question for the DCA market is who is going to thrive and survive throughout this Consolidation Curve. Acquisitions can be just as positive for the smaller company being bought as it is for the larger company making the acquisition. However, no business wants to become a cost of compliance casualty by not protecting or preparing itself accordingly.
Smaller DCAs should be undertaking a strategic review of their organisation to determine both their current and future market position, ensuring they are ready for both the FCA and the wider market as it consolidates and merges.
Luke Dillon is an Account Manager with Arum specialising in the DCA market and will be attending the Collections Debt Sale and Purchase Conference.
If you would like more information on how to become FCA and Market ready, by undertaking an audit of the Collections ecosystem and identifying areas of high risk, contact Luke direct on 0870 383 1980.