Bits of Cents

We’re really excited about the investment we announced today in Convoke Systems.  Why?  Because it’s an unsexy industry stuck with technology that has not changed since it was born in the 1990s.

The domestic consumer credit industry is massive - approximately $1 trillion of revolving consumer credit is outstanding at any given time.  Yes, with a T.  What’s even more shocking than the $1T number is the amount of credit card debt that is charged off (meaning is written to $0 in value by the credit industry) each year; that number is close to $100 billion.  Credit card issuers, the Chases of the world, attempt to recover from these delinquent accounts by either “placing” the account (giving it to a 3rd party to collect on the debt on the issuers behalf) or by selling it (choosing cash today at a discount over the possibility of cash collections in the future at a higher price).  Ultimately, the majority of accounts that cannot be collected upon get sold.

In the 20 years since debt selling hit the consumer credit space, over $1 trillion of debt has been sold via inefficient and manual processes.  Portfolios of accounts are generally packaged up by issuers and sold to a set of approximately 10 national debt buyers (many of whom have grown into large, publicly traded entities), with little underlying analytics or business intelligence.  These debt buyer then collect upon some of the accounts themselves and resell others.  The cycle continues, with accounts trading hands up to 5 times or more.  Along with these accounts come mountains of sensitive consumer information.  And care to guess how this information changes hands from credit issuer to debt buyer and debt buyer?  This guy.

That’s right.  Boxes of paper-based sensitive consumer information pass hands through US Mail, UPS and Federal Express and the associated account-level information is often times lost or mistreated; part of the reason the debt industry holds the number one spot for consumer complaints at the FTC.  Viewed as a back office task, debt placement and sales has been neglected although the importance to the issuer’s financial performance has increased. 

Convoke brings the credit card debt industry into the 21st century, offering technology sorely needed to the debt buying / selling community and transparency to the consumer.  Replacing the manual, labor intensive task of physically printing and mailing account-level information (called media) with an electronic system, Convoke saves both debt sellers and buyers money and increases collections rates.  It’s dark ages no, more with the typical 3-6 month media lead time replaced with media on demand thanks to SaaS.

We’re really excited by the opportunity facing Convoke.  Besides bringing efficiency to a historically inefficient market, Convoke also has regulatory wind in its sails.  Legislation mandating that debt collectors possess detailed account information before collecting on debt first went into law in North Carolina in the fall of 2009 and has since spread to a number of other states.  The regulatory pressure is also being felt at the Federal level as well, with the US Government Accountability Office recently releasing a report highlighting the same issue and the Consumer Financial Protection Bureau taking note.  And for good reason - courts are backed up with collection trials and consumers are frequently confronted with confusing, misleading and incorrect information.

So can a boring, back office task with antiquated technology be revamped by a VC backed company who looks at the problem from a document management and data aggregation lens?  We hope so.

I’ve been meaning to blog about something I read in Gary Rivlin’s excellent new book, Broke, USA.

Products that aren’t intended to be used for extended periods of time have frighteningly high costs when used for lengthy periods.  The most commonly criticized examples of this are payday loans, where a $100 loan that costs $15 if paid back in two weeks amounts to an APR of 390%.  That means that if you kept that $100 out for a year at the end of it you would owe $390.

Payday loans are not the only example of this phenomena, however.  How about these examples:

a) a rental car in Boston would cost $25,904 if you rented it for 365 days.  Financing the same car for a year would cost $4,116.

b) a hotel room in New York would $118,022.75 if you stayed there all year.  Renting an equivalent sized apartment would cost you $22,440 ($26,964 if you include weekly housekeeping).

c) a jet ski rental in the Caribbean would set you back $876,000 if you wanted to rent it for the full year.  A new jet ski retails for $7,299.

When the cost of short-term products are annualized, many seem criminal.  Consensus is that the newly minted Consumer Financial Protection Bureau will have short term loans in its crosshairs.  I’m hoping they go after jet ski rentals next.