All of the largest credit card companies have access to the same tools within their toolboxes to manage receivables: pre-chargeoff call centers, contingency agencies, legal networks, debt buyers, bankruptcy servicers, etc. However, we have seen that credit card companies are choosing between these tools in much different ways in attempts to fix their recovery issues.

Over the past six months, Kaulkin Ginsberg has spoken with recovery executives within many of the largest credit card issuers in the United States about their strategies for improving recoveries in this recessionary economic environment. We are also in ongoing communication with their service providers, the largest contingency agencies and debt buying companies in the country. Without revealing confidential information from any of these companies, we have prepared this short whitepaper to highlight how credit card issuers are falling into two different camps: those who are bringing cash forward, and those who are waiting for cash. We have also identified two resources that are necessary to choose between these strategies: internal analytics and external knowledge of service providers.

Strategy #1 - Bringing Cash Forward

Some credit card companies have increased their sale of debt portfolios over the past six months to increase the pace at which receivables are converted into cash. This strategy is typically utilized only for the sale of certain buckets of debt. The decision to sell necessitates discontinued placements to a contingency network, so a card issuer must trade the longer-term cash flows of agency recoveries for the short-term proceeds of a sale. The success of a debt sale increases with a seller's knowledge of current market conditions and its ability to market a portfolio to the debt buying companies that are most
interested and most capable of purchasing the portfolio. Yet given the volume of portfolios currently on the market, many debt sellers have been challenged to generate expected returns on debt sales - in some cases, experiencing year over year price decreases of as much as 40 percent.

Strategy #2 - Waiting for Cash

Some credit card companies have responded to current market conditions by doing the exact opposite.
These companies have decreased the frequency of their debt sales or suspended them altogether. Forward flows have run out and spot sales have been discontinued as certain sellers decline to sell at lower prices.
In turn, these issuers have expanded their contingency networks, increasing placements to their current agencies and bringing more companies into their contingency network. Yet these agencies, which are all small- to mid-sized companies, have limited capacities and may treat their clients more or less favorably for a number of reasons. As a result, increased expectations from issuers do not always result in improved performance. By waiting for cash, card issuers also subject themselves to lower likely recovery rates on
the part of their collection agencies as these service providers struggle to improve recovery rates in a recession.

Diverse Approaches

It is interesting to us that the country's largest credit card companies have chosen between these two strategies in roughly equal numbers. It is also interesting that decreasing portfolio prices and poorer collectability make both of these two options less desirable today than they were between 2004 and 2007.

Finally, it is worth noting that portfolio theory and the time value of money are being applied to both of these strategies in different ways, leading to these different strategic choices on the part of issuers.

We do not believe that one of these two strategies will always produce the best results. Moreover, we do not believe that one strategy will even produce the best results for a single issuer. For example, a card issuer can very reasonably place accounts with a contingency agency at charge-off, while selling receivables that are 24 months old. At the same time, this issuer may choose to sell debt immediately at chargeoff if the right buyer offers the right terms in the right market conditions.

The recovery of delinquent receivables is a highly variable and contextual corporate function. This may explain why recovery executives of credit card companies have chosen such divergent strategies for converting their receivables into cash.

To maximize the performance of their recovery operations, we believe card issuers must draw on two resources on a case-by-case basis: internal analytics and external knowledge of service providers.

Resource #1 - Internal Analytics

Some credit card issuers have developed detailed and multifaceted financial models to evaluate recovery options by the net present value of cash flows associated with those options. In this way, an issuer's decision to bring cash forward in a debt sale can be modeled against the cash flows likely to be generatedby its contingency network. One challenge associated with these models is successfully forecasting future cash flows in an unpredictable economic environment: if the United States slips into a prolonged
recession, future recoveries through a contingency network will look much different than they would, for example, if the unemployment rate remains constant. Sales of certain receivables typically limit an issuer's ability to measure the liquidation of that portfolio through a contingency network. Still, these models provide issuers with a standardized tool for making otherwise less measured choices between collection strategies. Issuers that do not have or do not use such a model, in our opinion, are interacting with their service providers at a competitive disadvantage. With such a model, card issuers are making
decisions as part of a more holistic recovery strategy, at least as it relates to internally available data.

Resource #2 - External Knowledge of Service Providers

Card issuers with even the best internal analytics may lack the information necessary to create an optimal receivables management strategy. For the most part, each of the tools in the issuer's toolbox involve service providers that provide different value to different clients on different terms. By and large, these are privately held companies whose competencies, performance, and business practices vary client by client. Have you chosen the right partners? On the right terms? With the right practices? How do you know? Within less developed parts of an issuer's recovery operation, answers to these questions may be
wholly unavailable based on internal information. Even within the best established facets of an issuer's recovery operation, these questions are not best answered exclusively with internal data. Kaulkin Ginsberg works with credit issuers to provide external data, improving the performance and mitigating the risk of recovery operations.

Evolving to a Holistic Recovery Strategy

Bring cash forward, or wait for cash? It depends, issuer by issuer and bucket by bucket. Draw on internal analytics and external knowledge of your service providers to answer these questions. Given current market conditions for credit card receivables, many millions hang in the balance.

About Kaulkin Ginsberg

Kaulkin Ginsberg is the leading strategic advisor for the accounts receivable management (ARM) industry.
For ARM service providers, our value-add services focus on analysis, growth, and exit strategies. For credit grantors, our focus is on optimizing receivables management strategies. Kaulkin Media is the worldwide leader in providing timely news and insight on the recovery of debt in all industries. Through www.insideARM.com, we provide creditors and service providers with news, information, and analysis on the collection of bad debt. Our daily newsletter, blogs, or executive briefs, all are within reach and free of charge. Read more about Kaulkin Ginsberg at www.kaulkin.com.

Kaulkin Ginsberg
401 North Washington Street, Suite 450
Rockville, MD 20850
www.kaulkin.com
www.insideARM.com

Contact:
Jamie Welsh, Director
Phone: 240-499-3810
E-mail: jwelsh@kaulkin.com