Sep 14, 2023 MicroBilt News
During the first three years of the pandemic, there was a sharp decrease in the number of delinquencies in the U.S. However, as the world continues to recover from COVID-19, the number of consumers who fail to pay their debt has risen at an alarming rate.
According to the Federal Reserve, the delinquency rates have steadily increased since 2021 and are expected to reach the levels only seen post the 2008 recession. As a result, many organizations will have to collect from their delinquent customers at a much higher rate. And who better than a third-party debt collection agency to help bring in some of the outstanding money owed? Right? Well, maybe not always...
Continue reading to gain a deeper understanding of the pros and cons of third-party debt collection agencies, why in-house may be the right option, and some tools to help businesses no matter which route they take.
Pros and Cons of Third-Party Debt Collection
It can be difficult to know if bringing a debt collection agency on board is the right direction. Although getting a delinquent to pay what they owe can be challenging, and an outside professional debt collection agency may streamline the process, it's not the right move for every business.
Below are the three pros and cons of using a third-party debt collection agency that may help companies narrow down whether or not this strategy is right.
Pro: Focus on Core Business Activities
Debt recovery can be time-consuming, diverting valuable resources from core business operations. Outsourcing debt collection tasks to a specialized agency frees internal teams to focus on strategic initiatives, client service, and revenue-generating activities.
Across the industry, the likelihood of write-offs increases by approximately 1% with every passing week after the past due date. Simply put, the recovery rate of accounts past due for over six months statistically drops in half. This makes timing all the more important.
Pro: Improved Success Rates
Third-party debt collection agencies bring a higher success rate to the table. Their expertise in negotiation and collection strategies often leads to better results than in-house efforts. By tapping into their proven techniques, businesses can maximize debt recovery while maintaining customer relationships.
The typical recovery rate for debt collection agencies in the country varies from 20-30%. While this may seem lower than expected, the success rate is based on accounts with a low likelihood of recovery, according to financial institutions.
Pro: Regulatory Compliance
Navigating the legal and regulatory landscape surrounding debt collection can be challenging. Debt collection agencies are well-versed in the Fair Debt Collection Practices Act (FDCPA) and other relevant regulations. Their familiarity with compliance requirements minimizes the risk of inadvertently violating laws while pursuing debt recovery.
The cost of violating FDCPA is upwards of $1000 and often requires little to no provocation. The court can award these damages if the consumer proves the collector violated the FDCPA. The consumer does not have to prove that the violation caused any harm.
Con: Expensive Solution
Third-party debt collection efforts can incur significant costs. Some agencies work on a contingency basis, meaning they only earn a fee based on the successfully recovered debt, but a majority will require payment in advance alongside a percentage of the debt collected.
Some agencies will ask for 75% to 80% of the debt collected to go towards the cost of hiring. In other words, depending on the amount of debt, paying for a collections agency may not be worth the price tag.
Con: Damage Client Relationships
Strained relationships can result from third-party debt collection efforts, particularly when dealing with long-standing clients or partners. While third-party agencies provide a buffer, this can also damage what might otherwise be a professional and amicable relationship with debtors.
The right agency will emphasize training, research, and quality control while respecting the organization's brand and your client. But it varies from organization to organization.
Con: May Require Additional Management
While collection agencies are experts in debt recovery, there's no guarantee they will successfully recover all outstanding debts. Coordinating with a third-party collection agency can add a layer of complexity to your operations. Managing the relationship, sharing information, and resolving issues can take time and effort.
Advantages of Remaining In-House
An in-house debt collection department, often called a first-party debt collector, can offer numerous advantages over a collection agency. With an entirely in-house team, financial institutions can act rapidly on delinquent accounts, better manage customer relationships throughout the recovery process, and provide a better opportunity to retain their customers - provided they are worth keeping. Plus, they can save money if they are efficient at getting the job done.
Unfortunately, it's not easy to have a streamlined in-house collection agency, as it requires time and a decent amount of infrastructure to create. Below are six simple tips to either get started or continue developing a first-party debt collection department:
- What's the goal?: Make sure the purposes of your debt collections department are in harmony with the company's goals overall. If this balance doesn't exist, your department will be in trouble with the sales and management teams.
- Motivation: The sales team is motivated to sell and move products, sometimes even when they know the customer is struggling. Don't point any fingers. Just look at the company's systems and make it impossible for anything to slip past a credit hold.
- Set Target Figures: Establish debt collection targets for all in-house debt collectors. Create targets that are realistic and measurable. Targets will help motivate your collectors and give you a good performance indicator.
- Prioritize Problem Accounts: Make sure problem accounts get special attention. Prioritizing debt collections should be an everyday occurrence but sometimes can be overlooked, especially during busy periods.
- Establish Expectations: Expect to be paid in full from every customer. This mindset is critical to success; every collector should have it for every collection call they make.
- Remain Flexible: Keep your commitments as well as your threats. An effective collector must have the authority to make commitments, not just issue threats on behalf of the company.
In addition to the starting steps above, businesses must support the team's efforts by providing enough information. Skip tracing software from MicroBilt can be instrumental if an in-house team needs to locate debtors and identify assets. Learn more about the benefits of using skip tracing here.
It's also crucial to be aware that laws concerning debt collection efforts are subject to change. The Consumer Financial Protection Bureau (CFPB) constantly modifies standards for debt collection activities known as the Fair Debt Collection Practices Act (FDCPA).
How Can MicroBilt Help?
Debt recovery is critical to maintaining a healthy financial ecosystem within any business. On one hand, enlisting the services of a third-party debt collection agency offers numerous advantages. On the other, internal efforts can be time-consuming and challenging, but they may be the right move for your organization financially. In either situation, MicroBilt understands the challenges presented to organizations and can provide the support needed. Learn more about our suite of products and contact one of our helpful representatives today.