The Evolution of Third Party Collection Agencies

Throughout the past 30 years, third party collection agency management has received some bad press and a negative public perception. In all honesty, some of this reputation was earned and well deserved. However, in the past 10 years a significant transformation has taken place within the industry. This transformation has occurred for several reasons, including regulatory changes and oversight, consumer education, stricter work standards by their clients and to a large degree, out of self-preservation due to a litigious environment surrounding the collection industry. This transformation has forced agencies to significantly change their collection strategies, call monitoring, QA and compliance processes, use of technology and their overall behaviors towards consumers. These changes have benefited the consumer, but the creditors have also been impacted.

The perception of collection agency management operating out of a cramped call center full of associates dialing or being presented calls in a continuous and random manner and pressuring consumers to pay their outstanding bill is mostly an outdated one. This description was generally an accurate one for many years, existing to some extent through the early 2000’s. The underlying strategy was to letter every account, make as many phone attempts as possible to the individual consumers and in some cases their family members, neighbors and employers. Managers and associates may or may not have received training on collection laws, customer service training and were compensated to a large part on their dollars collected. Little to no compensation was tied to the quality of the interaction. This outdated scenario is one that lead to many complaints and ultimately the aforementioned regulatory changes.

It was also during this time period when clients were less strategic and knowledgeable about the value of their charged-off receivables. Contingency fees were high, potentially not standardized, vendor oversight was not formalized and the generally accepted measurement of success was dollars collected or liquidation rates. Clients were almost solely reliant on the agencies to receive information and data about the accounts they assigned out for collection. Relying on the agencies to provide you with data that you ultimately make decisions on is inherently flawed for many reasons.

The 2000s: What Changed?

Technology/Automation

It was during this time period that collection agency management began to recognize the importance of technology as much as it did the human element. No longer was it feasible to simply “smile and dial” every account and send multiple letters. There was a necessary movement towards analytics to decide the proper strategy to employ on each account to compensate for increased costs of letters, labor, technology and litigation costs associated with non-compliance of state and Federal regulations.

Heightened Attention to Vendor Management

There was pressure from marketplace competition and the introduction of professional and formal vendor management organizations and strategies that drove contingency rates down. The industry began to see a movement towards off-shore call centers, the introduction of debt sales, new communication options, increased regulatory pressures and a more educated consumer.

Change in the Collection Landscape

It was also during this time period that the consolidation of agencies began to escalate. Although the number of agencies was still greater than 6,000, the majority of these agencies were neither large enough or sophisticated enough to work with Fortune 500 creditors.

One of the major changes, which resulted in removal of many of the ‘bad players’ in the industry was the creation of the Consumer Financial Protection Bureau (CFPB) in 2010.  The CFPB’s creation of the consumer complaint portal created an opportunity for consumer to report their complaints and disputes directly to the regulator responsible for the industry.  This provided the insight needed for the CFPB to quickly determine the bad players.  They started taking action within the first two years after being created, and concentrated on the most egregious violations of consumer harm.  This resulted in the removal of many companies that called themselves collection agencies (but were actually just criminals), and gave a bad name to collection agencies.  

While the TCPA has been around since 1991, the use of cell phones really took off in the 2000’s.  That brought much more attention to unwanted phone calls to cell phones.  The number of TCPA lawsuits and class action lawsuits relating to the TCPA increased substantially.  This caused collection agency management to change their policies and procedures relating to calling cell phones.  Express consent had to be noted in the file, and calls to cell phones were largely done in a manual process rather than via an auto-dialer. 

The ACA’s lawsuit relating to the TCPA brought even more attention to how outdated the TCPA was.  In 1991 when it was created there were largely pay as you go plans with cell phones, and texting wasn’t a thing.  Fast forward 10-15 years, and most people in the US have a cell phone, and many use it as their primary mode of communication.  Collection agency management had to change, or be in danger of getting sued.

What Does a Successful Agency Look Like Today?

Modern collection agency management holds little resemblance to those that made up the majority of agencies from the 1980’s through the early 2000’s. Successful agencies have embraced a culture of compliance. They have invested heavily in technology, employee training, recognize the value of analytics and have long traded pressure-centric collection tactics for one of made of empathy and customer service. Typical characteristics of a modern, successful collection agency include:

  • A formal and ongoing employee training program
  • Compliance and Quality Assurance departments
  • Multi-channel communication options in addition to traditional methods
    • Email
    • Text
    • Chat
  • Sophisticated scoring, skip tracing and segmentation strategies
  • Technology that not only increases their effectiveness but includes safeguards to protect them from regulatory lapses
  • Financial stability
  • Multiple facilities with a formal business continuity plan
  • A diverse client base that is happy to be references

What Can Creditors Do to Promote a Successful Vendor Network?

Overwhelmingly, the one thing that impacts vendor management organizations the most and has the most influence over success, is data and information about the actions of the agencies themselves. It’s imperative to have unbiased and standardized reporting to accurately understand and interpret the actions of your collection vendors. Reports generated and supplied by the vendors often times have different calculations and definitions and thus shouldn’t be used to make allocation or strategy decisions. The best way to ensure that you have accurate and standardized information is to independently create your performance, compliance and QA reports.