LONDON When Heli Vesanto’s Norwegian gym thought she had fallen a month behind on her membership fees, it did not contact her itself but called on one of Europe's largest debt collection companies instead.
“Of course you feel a bit of pain opening a letter like that,” she said, referring to fears that her credit rating would be affected, making it harder for her to borrow.
The overdue payment letter sent by Sweden's Intrum Justitia (IJ.ST) turned out to be a mistake by the gym - Vesanto had cancelled her membership - but it was also a window, for her, on an industry that has become familiar to many Europeans.
The growing use of debt collection companies in Europe has been a boon for investors in the major firms which have come to dominate the field. Continuing consolidation of the industry has also led regulators to seek to counterbalance their influence.
As well as selling debt recovery services to clients such as Vesanto's gym, Intrum and other big European debt collection companies Hoist Finance (HOFI.ST), also from Sweden, and Italy's Cerved Information Solutions (CERV.MI), buy unpaid loans at a discount and recover what they can.
They have benefited from the fact that Europe's banks are weighed down by almost a trillion euros of non-performing loans and under pressure from regulators to get those debts off their balance sheets.
Shares in Intrum and Hoist have risen by 17 and 30 percent in the last two years respectively. Cerved's share price is up nearly 50 percent over the same period, compared with a 16 percent loss for European banking shares.
“Specialisation works,” said Erik Forsberg, chief financial officer for Intrum Justitia. “We argue we will always be more efficient than a bank or telco or a utility."
Last month, however, Intrum's share price took a hit after it was forced to row back on its merger plans.
In the biggest of a series of tie-ups in the sector, Intrum plans to merge with privately-owned Norwegian firm Lindhoff, creating Europe's largest debt collection company.
The European Commission approved the merger on Monday, after Intrum proposed a string of divestments that has sent its share price down 17 percent since May 18. Intrum said they would cut the proposed cost savings of the merger by nearly a third.
Also in the regulators' sights is the extent to which the debt collection firms have been able to dictate prices of non-performing loans, to the detriment of Europe's struggling banks.
Italy's 350 billion euros of bad debt was one of last year's biggest market worries, with the Italian government forced to create a state-backed bail-out fund to tackle rising non-performing loans.
In December UniCredit, Italy's biggest lender by assets, estimated that the price of recent deals would allow it to recoup just 23 cents to the euro on its bad loans, far below the 43 cents to the euro average for Italian banks. It then went on to sell a large portion of its bad loan portfolio at just 13 cents to the euro.
Nicolas Veron, a senior fellow at Brussels-based think tank Bruegel, said low prices were a market reality and arguably reflected the low value of the loans rather than any fire-sales.
But regulators are keen to close the gap between what banks sell their loans for and what the debt collection companies are ready to pay. The European Union is considering plans to strengthen the secondary market for NPLs, which may boost demand and raise their sale prices.
On May 24 the European Central Bank said it is encouraging public-private partnerships to improve data quality and recovery processes to reduce asymmetries between buyers and sellers.
Veron said he did not think such measures would lift prices that much because their level reflected a tough political and economic climate. "Some of the initiatives are helpful but I don't think they will change the prices you get under current conditions."
The eurozone's bad debts are finally beginning to fall, according to ECB data released in April, but still stand at some 931 billion euros.
The three big debt collection companies' net profit margins, meanwhile, have risen, with Intrum at 24.1 percent, Hoist at 19.5 percent and Cerved at 12.9 percent, the first time the company, floated in 2014, has reported a double digit margin.
Intrum said in April it saw pricing pressure from increased competition in western Europe in the first quarter of 2017 hitting its margins slightly, arguing that boosting efficiency should compensate over time.
Cabot Credit Management, majority owned by U.S. firm Encore Capital (ECPG.O), plans to list as early as this year, according to Sky News, joining its UK-listed peer Arrow Global (ARWA.L).
"We are reviewing our strategic options, but no decisions have been finalised," a spokesperson for Cabot said.
Virginia-based PRA Group (PRAA.O) is also active in Europe.
In the United States, PRA and Encore have fared less well than their European counterparts and their share prices have fallen over the last three years.
Some U.S. Supreme Court Justices criticised the business models of debt collectors after a subsidiary of Encore tried to collect a decade-old debt from a woman who filed for bankruptcy in 2014. On May 15, the Supreme Court ruled by majority that the woman could not sue the firm.
The debt collectors say their success is not due to heavy-handed practices but rather a sophisticated analysis of borrowers' ability to pay.
StepChange, a UK charity that helps people with debt problems, said consolidation and stricter regulation meant conditions in Britain had improved in recent years. "There are larger, more reputable firms operating and the more unsavoury elements have exited the market," a spokesperson said.
But companies should keep the way they do business under constant review, Stepchange said. "There is still some evidence of poor practice, including some clients who report pressure to make unaffordable repayments."
(Additional reporting by Valentina Za in Milan, Francesco Guarascio in Brussels and Anna Ringstrom in Stockholm; editing by Philippa Fletcher)