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For Immediate Release: (OH - 11/04)
BAD DEBT IS GOOD NEWS FOR THIRD-PARTY COLLECTIONS
Collecting bad consumer debt has become big business. In the 90s, Americans borrowed as much as $930 million a year. And nearly $40 billion of that ended up at collection agencies. The collection business is booming, and it's growing in sophistication too.
In recent years, federal laws put restrictions on the activities of debt collectors, changing the perception and approach to the business. Today, debt collectors employ sophisticated tactics as opposed to the phone-call-in-the-middle-of-the-night approach of previous decades.
But they are still persistent. Collectors have turned to such modern techniques as powerdialing, and are renting tools from credit-reporting companies to aid them in tracking down debtors.
Who makes contact first? Banks generally, but should they fail, they turn to collection agencies. These companies can receive from 25 to 50 percent of the amounts collected. The range is indicative of a "tiering" that takes place due primarily to the age of the accounts they're trying to collect.
Primary Collectors
Primary collectors try to collect on loans that are only a few months behind schedule. They have six months, and receive about a third of what they collect. That leaves the bank with a return of around 12-15 percent on the overall bad-loan portfolio.
Secondary Collectors
Secondary collectors pick up where primary collectors leave off. They too are given a six-month time period to test their merit. The bank receives a 4 percent return, and the collection agencies garner a commission that can hover around 45 percent.
Tertiary Collectors
Tertiary collectors are given another six-month time period. Debts collected at this stage yield a smaller percentage than secondary collectors for banks, and an even higher commission for collection agencies.
From Top to Bottom
No matter what the tier, debt collection is a booming business. Nicole Buhr of TekCollect has experienced a steady increase in revenue and doesn't see the trend changing.
In Buhr's case, a bank typically contracts with TekCollect after an account is 60-90 days past due. The agency then employs a number of services to collect on those accounts. TekCollect leads the industry with their "Binary Program" based upon a two-phase strategy. Once the agency locates the debtor, a series of contacts are made to encourage payment while still preserving business relations; professional approaches that reduce the risk of "customer alienation" for the company. If these first phase efforts fail, the secondary phase includes processing litigation. TekCollect has relationships with bonded collection attorneys across the country.
TekCollect is but one of thousands of collection agencies. However, it is one of a handful that operates nationally.
Multiple Agencies at Work
Banks typically rely on more than one agency to work their bad debts. In fact, the larger the bank, the greater the number of agencies at work. By giving a batch of accounts from the same region to different agencies, banks can compare recovery rates to judge performance and results.
Success rates among collection agencies vary due in part to the variety of strategies implemented. Powerdialing and other tactics have increased the efficacy of reaching debtors. And the development of software programs has aided agencies in determining which debtors are most likely to pay. And then, there is also vast potential in online services, a distinct advantage TekCollect offers its clientele.
Working from Home
Of course, most banks do as much in-house work as possible before seeking assistance from outside agencies. Depending upon the size of the bank, an in-house collections staff could number in the 10s to 50s. And software programs available to the banking industry are improving their internal efforts as well.
Typically, banks approach agencies to collect on the most difficult accounts. But by keeping a significant portion of the collection work in-house, banks have the advantage of setting a standard by which to measure the performance of the agencies they employ.
Debt, Debt and More Debt
Where is all this consumer debt coming from? Credit cards play a significant role, accounting for a large percentage of all debt placed with agencies. And beyond that, medical bills, student loans and bounced checks top the charts.
The result is a collections industry that's busier than ever, with big client bases and even bigger returns. With advances that make banks' and agencies collection efforts more efficient and effective, the industry may be working harder, but it's undoubtedly working smarter.
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