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!
Fees must go up!
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{ 4 comments… read them below or add one }
Hey Phil..Amen. Great question, not sure what the answer is but have some ideas. I think it depends on your market. Verticals such as health care and municipalites(cities, counties and states) will be really tough to raise rates because their margins are lower than ours, but industries like debt buyers, banks and utilities sometimes are more reasonable, but also have the higher requirements, such as SAS70.
I have thought about an across the board rate increase but know that won’t fly with the big clients, so that is what is holding me back. Other than just taking the position of getting higher volumes with a lower margin, I think the answer is to get our Clients on board to help us with positive regulation changes. If we can email, text and call cell phones without worrying whether we are the law then I think we can deal with lower rates, it really is the only answer because I don’t think Clients will start paying more across the board. Having some of our big name clients in all industries step up would be huge because we know that the legislators don’t love our industry but I worry that our Clients don’t see the urgency to influence regulation. Low rate quotes from agencies that really want business will always be a temptation unfortunately, I don’t see a way to change that behavior unless a lot of those go out of business.
With the proper use of technology we can create win/win/win, we need them on our side to influence regulation to significantly increase our chances for positive changes and most younger debtors would prefer to be contacted in this manner anyway.. It just makes too much sense. It is much different when a someone like Duke Power, or UNC Hospitals or the City of Charlotte contacts legislators vs. the ACA or a randon agency. How do we get them to stand up and realize these issues and the potential impacts to their bottom line? I don’t think enough agencies discuss these issues with their clients.
Just my 2 cents
Geoff Miller
President, PRC
Durham, NC
Just an idea I find useful to increase net back. Most original creditors as well as debt buyers now insist that the court awarded attorney fees when the law firm collector belongs to the judgment creditor and the judgment creditor pays the collection law firm on the contingent rate (usually 20 % to 25 % rate) on collection of those attorney fees. Since the allocation of all debtor payments on a judgment is normally first to fully reimbursed to creditor court costs (i.e., the attorney has yet to be paid a dime to pay the attorney’s payroll and other costs); next to principal; next to prejudgment and post judgment interest; the finally to the court awarded attorney fee, the creditor will not receive 100 % of what the grand total amount to which it is legally entitled to. It doesn’t make any difference if the attorney is on a gross remit or a net remit, the dollars remain the same.
If the attorney is permitted to retain (or bill and get paid on a gross remit client) the court awarded attorney fees in inverse proportion to the contingent fee case (if the contingency is 20 %, attorney gets 80 %; if a 25 % contingency, the attorney gets paid 75 % of the attorney fees) the total dollars collected and the net back dramatically go up. The only difference I use is on a contested court case that results in a judgment in the client’s favor my firm normally gets paid 100 % of the court awarded attorney fee collected rather than the 75 % or 80 %.
Since on a particular file no attorney fees are paid by the debtor UNTIL all court costs are reimbursed to the client as well as all principal, pre judgment and post judgment interest are Paid in Full or Settled in Full the client almost always gets more money back at a lower cost (the legal fees a client pays to outside counsel are most likely to be a tax deduction, less FDIC cost or some benefit – at least my firm receives a form 1099 form from the client) those court awarded attorney fees are a great investment in the client’s own future.
More and more collection law firms and collection agencies are finally figuring out there is more distressed debt than all of us could put together could possibly handle and that we really aren’t competing with each other – we are all only competing against ourselves – can we do better today. As I see it, more and more law firms, collection agencies original creditors and debt buyers are really partnering with each other to achieve a common objective – getting the client as much of its money back to it today in an economical, honest, ethical, and profitable way so we can do the same thing again tomorrow.
Hope this is helpful to you and your clients.
Derrick E. Mc Gavic
Phil, great subject for discussion. I must be older than you but your sequence is generally correct although missing a few unique approaches agencies and credit grantors have used under creative direction to whip this subject. The fee does not necessarily need to be increased but the unit yield does or unit cost decreased. There are ways to do that which my “tribe” at American Express and other consulted clients did worldwide in 34 markets and domestically for 30 years. Put your thinking caps on or call K & G and/or Michelle Dunn for hints. If you want some answers, contact the COLLECTION GURU regardless if you are a creditor, agency, debt buyer, debt seller or just want to hang with the CG. Guru has a shingle too. John
John,
I also have answers but that is what I get paid for. I like to get people thinking and hopefully they will react. I am familiar with the consultants you mentioned but I prefer myself as a consultant for obvious reasons. But I am happy when anyone reacts to my postings and then something positive happens, Thanks,
phil