How Do Collection Agencies Work? Using Third-Party Vendors to Collect Debt

The US economy is generally considered to be credit driven. This allows the consumers to receive the benefits of goods and services and pay for them over time. Unfortunately, many of these transactions go unpaid. It is at this point that creditors and lenders often outsource the task of recouping these outstanding receivables to debt collection companies. The debt collection industry not only serves a vital role recovering outstanding debts owed to creditors and service providers, but it also provides a level of confidence to lenders to make credit available to a wide range of consumers. It also employees a significant number of people in the U.S. and worldwide.

What Does It Mean to Send an Account to Collections?

When a creditor places accounts with a 3rd Party agency, they are tasking the agency with managing the day-to-day activities of the account. This includes the majority of communication and collection activities associated with these accounts. The status of placed accounts within the originating creditor’s billing or collection systems should indicate that the account is closed/placed. This helps drive communication between the 3rd Party agency and the debtor and limits the client involvement except when necessary. Real time or near real time updates (balances, credits, debits) between the creditor and agency are important. Accurate and reconciled balances and statuses reduce the chances of FDCPA and other regulatory infractions.

How Do Collection Agencies Do Their Work?

Upon receipt of accounts from creditors, collection agencies will perform a series of actions designed to ensure that the account is eligible to be collected upon, secure the most accurate or available data about the account holder and load the accounts into their data base. Recovery techniques include sending letters and emails, telephonic communication, and credit bureau reporting to name a few. Acting as a middleman between the creditor and the consumer, agencies will try to obtain a payment in full, negotiate payment arrangements, agree on a settlement amount (if authorized to do so by the creditor) or help the consumer work through the process of disputing the debt for various reasons. Agencies are typically contracted to work the accounts for a specified time period. Accounts not successfully resolved within this time period will be returned to the creditor where they may replace the accounts with a different collection agency.

What are some advantages of using a collection agency?

  • Operational efficiency at contacting consumers
  • Highly trained in consumer protection compliance
  • Invested in specialized technology
  • Strong financial incentive to recover debt
  • Simplifies staffing, retention and training of the creditor’s employees

How to Hire a Collection Agency

Collection agencies are an extension of your own organization. They should embody the same values that are meaningful to your company. Prior to engaging in a relationship with an agency, you should take the following steps to ensure that they are set up for success.

  • Align the prospective agencies expertise with the type of accounts you have
    • Commercial vs. consumer collection
    • Characteristics of your accounts: balance, volume, industry, etc
    • Geography – are you placing accounts nationally or regionally
  • Interview each prospective agency or initiate a formal RFI process
  • Visit their facilities
    • Would you work there or ask your employees to work there?
    • Is the building physically secure? Cameras, badge requirements, etc.
    • Do they employee the number of people that they claim
  • Ask for references and check them

Why Outsource Recovery to an Outside Collection Agency?

Simply stated, collection agencies provide services to creditors and lenders that allow them to outsource recovery processes to a third party. Collection agencies are specially tooled for recovery operations – they invest in sophisticated telephone dialer technology, template letter generation and mailing, and staff like a call center. Additionally, because there are so many compliance issues and legal rules for collections, an agency typically has very targeted training for its employees. Because these businesses are designed to operate so efficiently, often it makes financial sense for a large creditor to outsource this work instead of making the significant investments in the people, process and platforms that efficient recovery operations require. One downside to this, of course, is that collections is an extension of customer service – at the end of the day, the collection agency is trying to get your customers to resolve an unpaid account. Therefore, if you do engage with a collection agency, it is very important to maintain a tight relationship with them, be able to understand how these customer interactions are handled, and perhaps most importantly, have a complete financial picture for each and every outstanding account.  

When Should I Send My Portfolio to a Collection Agency?

Each creditor has their own process and timing for engaging a collection agency to collect on unpaid receivables, but generally speaking this occurs when a debt becomes 60 days or more past due and internal efforts to satisfy the debt have not worked. At this point, the creditor can write off the debt as an accounts receivable asset on their balance sheet because the account is unlikely to be paid. The creditor’s balance sheet looks better, yet the creditor still maintains the ability to collect on an outstanding asset. Collection agencies work on behalf of the originating creditors and try to recover unpaid balances by reaching out to the consumer via mail and telephone. Reputable agencies follow the myriad of governmental regulations and their client’s work standards while trying to recoup these unpaid debts. Agents try to get consumers on the phone to make payment arrangements with them, either as a lump sum to resolve the account or through a series of recurring payments. Collection agencies generally receive a commission percentage on the amount of money they successfully collect. This commission can vary by the age, balance, type and the number of times the account has been previously work, to name a few. Generally, the older an account gets, the more difficult it becomes to collect it. For this reason, later stage collections tend to have a higher commission rate, because less accounts are likely to pay.

Should I Use a Collection Agency?

The bottom line is the bottom dollar. When a creditor assesses whether to continue internal recovery attempts versus outsourcing collections to a third party vendor, the creditor must have a firm grasp of the estimated net yield of each method, and compare that against the cost of paying commission versus the cost of operating a highly specialized, intensely trained team of customer support specialists. Often, bringing on a managed service like a collection agency simply makes more sense (and also more cents) so lenders can concentrate on their core business. But in order to run a successful operation with outside vendors, the lender must have detailed systems and processes to continually measure productivity, compliance and monitor consumer interactions. For a large portfolio, this almost assuredly means some kind of automation – a technical solution to help manage account movement, measure and monitor vendor performance and compliance, and safely store consumer information.