DDM's role in business and society
Over the centuries, credit has grown to play a key role in society. It enables people and organizations with capacity for development over time to gain access to larger sums more quickly than by simply earning those funds. In many cases, this enables individuals, companies and authorities to make investments that would not otherwise have been possible and thus to achieve greater development and thus greater capacity to generate earnings.
Credit is a matter of trust
Trust - in fact the very word derives from the Latin “credere” meaning “to believe”. In finance, a lender or “creditor” lends money to a borrower or “debtor” who the lender trusts will pay back that money in accordance with certain agreed terms. The lender earns on the transaction by charging interest on the loan. Consequently, interest is also sometimes referred to as “the cost of money”. The more reliable a borrower is considered to be in repaying loans, the lower the interest charged.
For some loans, the lender reduces its risk by requiring that it be entitled to certain property, “collateral”, belonging to the borrower if repayment is not made. Such loans are said to be secured, while loans for which no collateral is required are referred to as unsecured loans. Typically, a loan enabling a major purchase, such as a home, is secured by the purchased item being defined in the loan agreement as collateral.
Subsequent enhancements in the regulatory environment have sought to prevent such broad-scale loss of confidence in credit markets by tightening requirements on banks’ capital adequacy and imposing more stringent rules in approving credit.
When and why problems arise
The processes through which consumer credit is approved and provided have emerged over several decades and generally work well. For various reasons and often through no fault of their own, some consumers experience difficulties in meeting payments. As the use of consumer credit grows, sending reminders and monitoring and collecting late or missed payments imposes an increasing burden on retailers who often lack the resources to manage such cases.
Portfolios of distressed assets
Whether financing is provided internally by a retailer or through an external credit institution, over time portfolios of distressed assets are amassed. These consist of receivables where the end-customer, the consumer, has been unable to pay in part or in full. Generally, such receivables are not written off – financially there is more to be gained from pursuing special efforts such as debt consolidation, refinancing or ultimately legal measures, whereby some of the value of the receivable is recovered, even if this is less than original amount.
Increasing credit-based consumption
For retailers around the world, being able to provide credit at the point of sale is an increasingly important competitive advantage. Technological advances have made it possible for those selling goods and services to quickly ascertain the creditworthiness of a customer and on-line collaboration with credit institutions means that attractive payment terms can be approved on the spot thus ensuring that the sale is made.
Credit benefits consumers and retailers alike
For the consumer this means being able to buy that new bike, TV or sofa without having to save up over a period of months or years – by which time the desired model has been replaced by a newer, more expensive one. For the retailer, rapid credit services means not losing sales with potential customers leaving the shop to apply for bank loans or arrange other forms of financing.
In Western Europe and North America, such services have been around for some time, developing over the years as supporting technologies advance. Other regions, such as the former planned economies of Eastern Europe, are catching up fast. With western brands and retail chains growing in popularity and local players adopting similar business practices, consumer credit is growing steadily.
Decision to sell distressed assets
Following a period of collection activities, there will be a certain amount of cases still to be settled. The owners of such cases, typically financial institutions, will at some point decide whether to divest these to secure any remaining value and to focus on their core business. Regulatory measures, such as the Basel III directives also encourage financial institutions to sell their distressed assets.
Previously, by holding onto non-performing loans and simply extending their maturity, banks could pretend that the loans might still be repaid at their nominal value. This practice, known as “extend and pretend” enabled them to maintain artificially inflated balance sheets, underpinning the banks’ own credit ratings but resulting in misleading capital adequacy figures. New rules prevent this behaviour and many banks may find that they have no other option than to sell their portfolios of non-performing loans to shore up their capital adequacy and prevent future impairment losses.
Selecting a trusted partner
Banks and other financial institutions will sell their portfolios to a partner they know will be able to manage the underlying cases in an ethical and correct manner. Having approved the initial credits, or having assumed responsibility for them from retailers, the institutions remain connected to the portfolios by association. If receivables are managed poorly and if, for example, threatening collection measures are employed, the reputation of the financial institution could be harmed.
How DDM provides a solution
We acquire portfolios of distressed assets and apply our technology to manage the receivables profitably. We pool the receivables in the portfolios and match debtors (consumers) with appropriate collection agencies and methods. We systematically monitor payments and collection measures over time to maximize the amount collected and thus the return relative to the price paid for each portfolio.
We do not perform collection operations ourselves but enlist reputable specialist agencies that are skilled at performing certain types of measures in specific markets. This further enhances efficiency as it means we do not need to maintain our own collection agency and only need pay for the specific services we use.