Q&A with David Mcalpin: TCRS CEO
Q: TCRS' BUSINESS MODEL IS DIVERSIFIED TO SUPPORT ITS PERFORMANCE IN DIFFERENT MARKET CONDITIONS. GIVEN THE CHALLENGING ENVIRONMENT IN SOUTH AFRICA, WHAT STRATEGIC CHOICES HAS THE DIVISION MADE TO ACHIEVE GROWTH?
There is no doubt that the environment has toughened quite dramatically, as evident in many of our key indicators across poor GDP growth, unemployment and high household debt-to-income. This is impacting the ability of indebted consumers to service their debts, and the consumer economy is certainly feeling the pressure. With lower levels of consumer credit extension, there is a corresponding contraction in the volumes of contingency or FFS matters handed over for collection in South Africa by banks, credit retailers and specialist lenders – who are traditionally the core of our contingency business.
We are actively deepening penetration in these traditional market segments, with diversification across clients and mandates. Our ranking in South Africa in first or second place by our clients in 93% of 209 mandates supports our performance. This is further enhanced by our ability to leverage technology to drive efficiencies that benefit our clients in better yields earned on their outstanding debts.
Having identified the environmental risks in this segment a few years ago, we moved quickly to target adjacent sectors that are not directly linked to credit extension, particularly the insurance, telecommunications and public sectors. We have made strong progress here, with these sectors now contributing 38% of TCRS' local contingency and FFS revenue, compared to 27% in the prior year.
We continue to diversify in adjacent sectors, including in education, security and other specialist sectors, and are assessing opportunities for bolt-on acquisitions to support our strategy.
While the contingency business remains a key component of the division's earnings and has performed well, with revenue growth of 19% during the year, the highlight for the year has certainly been our successes in the book-buying business – where we acquire NPL portfolios as principal.
In South Africa, the economic climate and TCRS' data, scale and capital position favour the acquisition of NPL portfolios from risk averse clients who prefer an immediate recovery against their NPLs. Activity in this sector was higher than in the 2017 financial year, with opportunities to purchase loan portfolios emanating from traditional lenders, credit retailers and municipalities.
Whereas TCRS historically focussed on acquiring portfolios of written-off unsecured retail debt, we have extended our focus to non-performing consumer portfolios in alternative asset classes such as secured loans, debt review portfolios and consumer debt prior to write-off, with the latter typically not sold on a public auction basis.
TCRS achieved 22% revenue growth from principal collections. Estimated remaining collections (based on 120 months) experienced strong growth of 60% to R3.0 billion, from R1.9 billion a year ago, which will underpin future performance.
Since 2015, when we acquired books for R166 million, we have accelerated growth in this segment, with R184 million in 2016, R356 million in 2017 and R662 million in 2018. Book buying generates dependable cash flows, which translates into higher revenue and profit streams in our business due to our stringent focus on efficiencies, data and analytics, and managing cost structures. Also, given the economic climate, we can price for risk accordingly; should the South African economy improve, with higher collections on these books, we will see even higher returns.
However, diversification across the revenue models of contingency and acquisition of NPLs as principal ensure that we can weather the current economic environment by focussing on book buying, and be poised for further growth in the contingency business when credit extension recovers.
We also continue to assess additional bolt-on acquisitions to enhance penetration in specialist collection areas and specific mandates.
Q: WHAT PROGRESS HAS BEEN MADE IN RECOVERIES CORPORATION IN AUSTRALIA?
As detailed last year, the acquisition of Recoveries Corporation is part of TCRS' strategy to geographically diversify its earnings in contingency and FFS revenue. For a relatively small initial investment, the acquisition is providing an opportunity to gain a deep understanding of the Australian collections industry and participate in emerging opportunities.
Recoveries Corporation has made excellent progress in driving operational efficiencies by deepening its management competence and overlaying TCRS' technology and business information capabilities, including the dialer and workforce management. We continue to leverage TCRS' access to, and deployment of, leading collections technology to enhance its competitive position and margins.
The business is also diversifying its client base, across the insurance, telecommunications and utilities, banking and commercial, and public sectors. With the operational integration substantially complete, the business is expected to yield an enhanced return on future revenues.
We continue to be cautious as we apply our analytics, pricing expertise and capital raising capabilities to the niche purchase of NPL portfolios in Australia. In Australia's debt collection environment, an estimated AUD600 million is spent annually on acquiring NPL portfolios, which is many times larger than the South African market, and gives an indication of the growth opportunity for TCRS.
Considering the size of and competition in Australia's NPL market, we continue to assess bolt-on acquisitions in specialist collectors to build our data, capabilities and scale as we diversify Recoveries Corporation's revenue model.
We are exploring other synergies between Recoveries Corporation in Australia and Transaction Capital Recoveries (TCR), including running a pilot at the start of 2019 to assess the benefits of outsourcing some Recoveries Corporation call centre work to South Africa. We anticipate that this model will be more cost effective and easier to manage.
Q: WHAT STRATEGIC PROGRESS HAS BEEN MADE IN TRANSACTIONAL SERVICES AND VALUE-ADDED SERVICES OVER THE YEAR?
The transactional services segment includes Transaction Capital Payment Solutions and Transaction Capital Business Solutions (TCBS). Considering the tough environment for SMEs in South Africa, TCBS is being disciplined by intentionally curbing book growth to maintain risk tolerance and ensure high-quality earnings from its SME lending activities.
With tighter credit extension from financial institutions in certain specialist areas, we are assessing opportunities to leverage the division's healthy balance sheet and expand into new asset classes. However, given the economic environment, we will remain cautious as we develop opportunities without taking undue credit risk.
TCBS is developing an online client portal and technology-based origination system to enhance its offering to clients.
During the year, we acquired Accsys, which provides flexible human resource and payroll solutions to SMEs. We see synergies between Accsys and our payment solutions business, as a cluster of assets that we can build and grow.
In value-added services, Principa is transforming from purely a consulting business into a product-led and product solutions business with higher potential to generate annuity income. Road Cover has been fully integrated after the group acquired this business in 2016. Through the application of data and analytical skills to augment its offering, we see encouraging growth prospects for Road Cover, especially in direct sales of subscription-based products and insurance.
We continue to assess opportunities to grow the value-added service segment, but are approaching acquisitions and initiatives cautiously in the challenging market.
Q: HOW DOES TECHNOLOGY, DATA AND ANALYTICS, AS WELL AS TCRS' EVOLVING CAPABILITIES IN FINTECH, UNDERPIN YOUR DIFFERENTIATION IN THE MARKET AND ABILITY TO DEVELOP HIGHLY SPECIALISED PRODUCTS IN THE DIFFERENT BUSINESSES?
TCRS continues to invest in technology, data and analytics. In collections specifically, this allows us to collect more efficiently and effectively as we drive down costs and increase revenue. As mentioned last year, this puts us in a strong position in the market as we can buy more books, price them competitively and enhance the revenue per book. Our success here is evident in the increasing volumes of books purchased over the last four years. In the contingency revenue stream, cost control and efficiencies mean that we achieve higher collections for clients.
At a fundamental level in collections, technology, data and analytics are the science behind the business. It drives our ability to have the right people making a call at the right time to the right number, and then influencing the customer's decision to service their debt based on analytics that show how much they can afford and giving them access to convenient payment channels.
In addition, TCRS is expanding and enriching its proprietary database of South African consumers to include performing and non-performing credit-active consumers. We are also investigating commercialising the database to help prospective clients make better decisions across the credit lifecycle. While businesses can access credit bureau data, our data contains valuable additional information such as how much credit-active consumers are paid and when, and their preferred means of communication.
Our data management is overseen by actuaries and data scientists who maintain appropriate protocols and data screening to check its veracity, accuracy and usefulness, including approximately 500 validation checks to ensure data integrity. It is important to note that we will not compete with the bureaus; rather, we aim to provide our data and insights to help clients make better credit decisions.
Internally, the enhanced data set in the MDU will drive product development and targeted sales, especially in the value-added services segment.
In TCBS, data management allows us to accurately manage the book for our clients, even where we may not fund the whole book. Our core skill is in understanding the detail of exactly what is going on with every debtor of our clients, to the extent that we manage risk for our clients, and in so doing, manage TCBS' credit risk. While it is possible to automate risk assessments, TCBS is a niche business with strong capabilities in risk management. Importantly, it is also a business that relies on relationships, something which technology can support but not replace.
In terms of our evolving capabilities in fintech, we are looking to leverage technology, big data and analytics to develop optimised business solutions for South African businesses.
Q: TCR ACHIEVED A LEVEL 2 BROAD-BASED BLACK ECONOMIC EMPOWERMENT (B-BBEE) RATING THIS YEAR. WHAT CONTRIBUTED TO THIS SUCCESS?
Empowerment is important to us and our clients, and reaching level 2 reflects our ongoing focus across all elements of the B-BBEE scorecard. We have made strong progress in all areas, with the exception of ownership.
I am particularly pleased with our progress in employment equity, where we have a strong cohort of high-performing employees in, and moving into, management positions. This also gives us a strong pipeline of talent for senior management positions, supported by our focus on development and training programmes.
We have implemented a new initiative as part of corporate social responsibility, where we are assisting young entrepreneurs to enter the recoveries sector. TCRS is providing an office, system infrastructure and sharing intellectual property to support this entirely black-owned business. For TCRS, it will extend our market into new segments where we have previously not had exposure.
Q: TCRS HAS BEEN FORMALISING ITS EMPLOYEE VALUE PROPOSITION (EVP). WHAT ARE THE KEY BENEFITS FOR THE DIVISION IN DOING SO?
Internally, it is crucial that we define and communicate our EVP in terms of our position as a leading employer in this sector. It includes the benefits for our employees in ongoing training and development, and opportunities for professional growth in what is increasingly an intellectual property, data and technology-based business.
Also, as we augment our capabilities in data and technology, and increasingly in areas like advanced analytics and artificial intelligence, we are looking to increase our specialist skills base with data scientists, actuaries, mathematicians and statisticians, and technologists. We are already seeing good progress in the quality of candidates coming into our businesses, but we will continue to enhance the marketing of our EVP by demonstrating that the underpin of our business is truly data and technology.
We are also targeting good people managers. Our core business of collections is a challenging environment that attracts managers who thrive in delivering effective people practices. And given that adaptability and change is a feature of a technology-enabled company, change management skills are key.
Q: WHAT ARE YOUR PRIORITIES OVER THE NEXT FEW YEARS?
We will continue to implement the goals and plans that underpin our five strategic thrusts, being driving organic growth, providing bespoke capital solutions, targeting strategic acquisitions, leveraging technology, data and analytics, and engendering a high-performance culture in our people.
Australia is set to be a strong growth play for TCRS. We also anticipate great synergistic opportunities in the outsource model between South Africa and Australia.