Competition within debt purchasing and debt collecting has traditionally been within national boundaries, ranging between friendly and fierce depending on national competition. During the last few years, in the wake of abundant credit with low risk premiums, this picture has changed as large and small debt purchasers have been venturing into new markets. Some of our competitors will excel at this strategic move, while others will probably find that betting on a new market was devastating.
We believe the three main criteria for successful international expansion within debt purchase are: in depth knowledge about individual customers’ propensity to honour their commitments; excellent knowledge of local market conditions; and long term access to sufficient funding.
We believe the debt collection and debt purchasing industry is in transition between relying on competent know how and efficiency in production to a more analytic approach to every decision within the purchase and recovery process. This requires a different skill set than five years ago, as well as a high degree of analytical approach to operations.
National markets vary tremendously depending upon many factors – these factors include the consumer’s cultural understanding of debt and payment commitments, legal environments, issuers’ prior communication with the customers, macroeconomic trends within countries and regions, management and employee benefit structures and the competitive environment. Some factors all markets have in common; some are different, and hence we need to depend on local historic collection data to predict the future. Vendors and issuers appreciate willingness to share collection data on the portfolios they sell, and all issuers require communication with the customers which is not in breach of their ethical standards.
New entries
Some debt purchasers, occasionally including Aktiv Kapital, have believed that one can purchase market share, through paying the highest price for portfolios within a local market. Without the true understanding of local market characteristics it is tempting to use cross-border references when purchasing a portfolio or developing the debt collection market. Our observations are that the ‘right price’ for two similar portfolios may differ more than threefold within different markets. If you’re using observations and projections from a high price, high collection environment when going to a low price, high collection environment it is exciting and rewarding. However, entering a low price, low collection environment with those assumptions is neither rewarding nor profitable.
We have two different growth strategies when entering new markets. The first model is to purchase or establish a debt collection company and use the knowledge built over years in the local market and transform this operation to a debt purchaser when we believe the time is right and the market for debt purchase has been developed. The second model is to purchase substantial portfolios in mature or immature markets and build an operation with sufficient scale based upon these portfolios.
The advantage of the first model is that one learns as time goes by, while the advantage of the second model is that we have been able to establish a significant presence quickly. The disadvantage of the first strategy is that it takes time, and the disadvantage of the second strategy is that it requires access to significant risk capital. We have succeeded and failed with both models, the latter being the most expensive.
New ventures vs known ventures
With the current credit crunch it is our belief that in 2008 and 2009 we will see more non-performing portfolios coming to market. We believe it will be rational for banks and financial institutions throughout Europe to offload more of the exposure towards non-performing consumer loans than ever experienced before. Our focus will be to expose our efforts and our capital in the markets which are known to us, and with issuers which are comfortable working together with us. We believe this will pay off in the long run.