As interest rates and inflation edge upward – and a little edgier than expected – expect household distress levels to increase and the $2.5 billion-a-year debt collection sector to get busy.

“It doesn’t take a rocket scientist to work out there will be more recurring work,” says Andrew Smith, the head of the ASX-listed Credit Clear (ASX:CCR).

In the Covid era, consumers benefited from programs such as Jobkeeper and the enhanced Jobseeker payments, while lockdowns crimped their usual spending.

This encouraged companies to increase credit limits and relax eligibility, while banks and utilities went easy on Covid-induced delinquencies.

Now, attitudes towards tardy payers are hardening, as rising interest rates not only increase distress but increase the time value of the arrears.

The listed debt collectors should be in clover, but that’s not necessarily so: the troubled Collection House (ASX:CLH) this week called in the voluntary administrators after losing its battle against – irony alert – too much debt.

The industry has also suffered the regulatory wrath stemming from dodgy collection practices, resulting in organisations such as Telstra ceasing the sale of their delinquent debt books to collection companies.

Under the common purchased debt ledger (PDL) model, a debt collector buys the past-due (but still recoverable) loan book at a steep discount to the face value of the debt.

The buyer than uses its skills – with sophisticated algorithms, not baseball bats – to recover as much of the book as possible and pockets all of the proceeds as reward for risk, effort and capital outlay.

Fair enough. Increasingly, though, lenders prefer a fee-for-service model that emphasises customer-friendly arrangements such as a repayment plan, with the heavy legal stuff used as a last resort.

Some fee arrangements are even contingent on an acceptable net promoter score, the vogue customer satisfaction metric that is often linked to executive remuneration.

Credit Corp (ASX:CCP), the leading ASX debt collector, works mainly on a PDL model – and has done so very successfully. Collection House used the same approach, but evidently with far less joy.

In its April update, Credit Corp noted that PDL sales volumes were at only 55 per cent of pre-Covid levels, albeit recovering. Apart from lenders being scared of reputational damage, impaired loans have been scarce because credit card delinquencies have been at record lows.

In contrast, Credit Clear (market cap $100 million) operates on a fee-for-service basis on behalf of high volume utilities, insurers, government bodies and – you guessed it – buy-now-pay-later providers.

Initially Credit Clear focused on the ‘upstream’ leg of receivables management, which means helping clients to manage their accounts due so problems don’t happen in the first place.

Last December the company acquired debt collector ARMA Group for $46 million in cash and scrip – a gambit that increased its revenue overnight by 140 per cent.

The purchase was accompanied by a $29 million capital raising, backed by Bell Potter and Credit Clear’s biggest holder, the Pratt Family’s Thorney Investments. Last month the company followed up with a $7.5 million whip-‘round and management reports that it made a small profit in May.

With a circa $130 million market cap, the offshore-focused but low-key IODM (ASX:IOD) focuses on the upstream receivables management, such as automating universities’ fee collection.

Valued at $1.4 billion, Credit Corp remains the industry gorilla in a fast-consolidating sector that is being forced to lift its game.

Credit Corp shares have lost 40 per cent of their value calendar year to date, despite management affirming expectations of a net profit of $92-97 million for the year to June 2022, 10 per cent higher than previously.

The company also does its own unsecured consumer lending here and in the US – and no doubt has the right tools to keep its borrowers in line.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.