In-House vs. Third-Party Collections: The Decision is Yours
By Justin Gann, Shaw Systems Account Executive
All lenders are faced with the decision of in-house vs. third-party collections with collecting on delinquent borrowers. Do you collect in-house or pay a third party to collect on your behalf? The fact that there is a decision to make implies that the answer isn’t the same for everyone. There are benefits and risks on both sides.
If your organization decides to pay a third party, it can give a percentage of the money collected to an agency, or sell an entire portfolio of delinquent accounts. Obviously, the sale of the portfolio would be for a fraction of the value of the debts. So why is this a difficult decision, and why hasn’t the industry found a clear advantage one way or the other? Well, the answer is because the risks associated with each method are ambiguous and have far-reaching downstream implications.
To help understand what factors need to be considered, let’s start by looking at the benefits of hiring a third-party collection agency to collect debts.
Many lenders feel like their core business is lending money, and anything that takes them away from their core expertise is bad for business. For lenders of this line of thinking, they would prefer to focus on new borrowers, as well as building the line of credit for current borrowers. Also, more established lenders may grow to understand what percentage of their accounts may become delinquent, and what the cost of collecting on those accounts will be through a third party. They can adjust their business model accordingly, and still remain profitable.
If there’s a model that suggests you need not worry about collecting in-house, and can still remain quite profitable, then why bother doing it yourself? Let’s take a look at why collecting in-house is the right choice for many borrowers.
The cost of hiring a third party to collect isn’t cheap. Lenders pay such agencies anywhere from 15% to 40% of the money they collect. That is money that was originally owed to your organization. Obviously there are substantial costs associated with collecting money yourself. But many lenders value keeping as much of their own money as possible.
Also, there is a less obvious benefit to collecting in-house. The idea of having direct oversight of how your customers are being treated is important. Lenders spend an incredible amount of time and resources promoting a trustworthy image to potential customers. A third-party collector will obviously have less interest in retaining a customer’s business; they’re only interested in one thing: collecting dollars. A lender collecting its own money might realize that just because a borrower is delinquent, it doesn’t mean they won’t choose you to meet their borrowing needs once they’re current again. Not knowing how their customers are being treated simply isn’t worth the risk for many lenders.
For legal and regulatory compliance, and to protect their brand and the goodwill they have built with customers, many lenders are turning to collection agency monitoring, reporting, and management services. These intermediary partners help keep collections moving forward, providing regular updates and analysis tools, and typically improving debt recoveries.
“Just because you’re turning delinquencies over to third parties for collection, doesn’t mean you have to give up control and oversight,” notes Ryan Neuweg, CEO and Founder of NeuAnalytics, a leading company in automated collections agency management. “Web-based tools for auditing and performance reporting help streamline the management process, provide greater transparency for the lender, and allow you to compare and optimize vendor performance. They enhance the efficiency of your collections effort and help third-party agencies remain more focused on your program.”
Often lenders settle on a hybrid of the two paths. They collect on accounts that are more likely to pay quickly, such as customers who are recently delinquent, and sell portfolios of more delinquent accounts to agencies for significantly reduced prices.
As you can see, the decision to collect in-house or through a third party is not straightforward. While it’s a given that every lending institution values their bottom line, that’s only the beginning of what’s at risk with either choice. An informed, thoughtful decision followed by careful analysis and communication will lead you down the path that’s best for your organization.