As a consultant to many Law firms and collection agencies as well as debt buyers I am aware of most of the difficulties being experienced by my clients and most of them are based on small profit margins.
The debt buyers and creditors have gotten smarter and smarter over the past decade and by slowly reducing the contingency rates while increasing the reporting, interaction and compliance requirements the returns have declined. Many of my clients are operating on single digit returns. So this means the liability is very high based on the returns and if a large lawsuit is filed against the firm those profits may disappear and leave you working for nothing.
Many of the issuers are not only becoming more complex to work for as the requirements are constantly increasing, between SAS70 and constantly changing FDCPA issues the cost to run a collection company are skyrocketing daily.
How can we all survive if the returns do not increase or the requirements do not decrease?
The trend is towards regulation and it will likely be years before this trend is reversed or changes direction. With this being said the returns will just continue to plummet.
So I guess the question is how do we get the debt placers to man up and give a higher fee? Many have done so and they have seen the results in increased profits.
The collection agents have been reduced to only working a portion of the accounts placed with them with any intensity. We all know most of the collections come from 20% of the portfolio but now many agents are only working the top scoring 20% of the file and will only call the other 80% once or twice. They score the portfolios placed and often will not even send a letter on 50% of the files. This has all been brought about by the reduced budgets the agencies have remaining after paying their clients high contingency rates and meeting their compliance requirements.
I have seen a few agencies and law firms that have had clients increase fees in order to allow the staff to dig in deeper in the portfolio. In every case where the fee was increased the netback has increased to the debt owner!
So if the netback increases as you empower the agency to spend a little more money on the portfolio why is this not the current trend?
Most of you are too young to know how fees have changed and how multiple placement levels were created so I will tell you. When I began collections in the late 70’s virtually all fees were at 33.3% and an agency kept a file forever, there were no recalls. Agencies were measured against each other for market share and the liquidation rate was the only factor considered.
Around the same time a agency owner in Long Island was working some smaller balance files and getting beat badly by the competition and slowly losing his market share. This owner realized he needed to spend more money to out collect the competition but he also realized it would cost him his profit margins and therefore was not a smart idea. This led him to create the industries first credit score and that led him to make a crazy suggestion to his disgruntled client.
He had a meeting with the national credit issuer who was displeased with his performance already and told them if they paid him 40% fees he could collect more money for them and their netback would increase. That took balls to tell your client, I can make more money for you if you pay me more!

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