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InDebted / Resources / Debt collection software or debt collection agency? How
to choose

Updated 30 Mar 2022


DEBT COLLECTION SOFTWARE OR DEBT COLLECTION AGENCY? HOW TO CHOOSE

By InDebted

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For many businesses across many industries, overdue accounts are inevitable. And
unless you want to just let that money go and write it off as a loss, you’re
going to have to deal with it. 

But how?

Ultimately, you have a choice to make. Do you stand up your own in-house
collections operation, or do you partner with a collection agency? Let’s explore
some of the benefits and potential drawbacks of both.

Servicing overdue accounts in-house

When you service overdue accounts in-house, you retain full control over the
customer experience and, depending on your tech setup and integrations, may be
able to process payments and reconcile accounts faster, but you will be limited
to the capabilities of your software solution. However, full control over the
customer experience also means full responsibility for the customer experience.
You have to run the operation, build a skilled team, build in compliance, select
the right software solutions, and navigate software integrations, all of which
can add up in terms of operating expenses. 

Benefits

 * Full control of the customer experience. When you manage collections
   in-house, you maintain control over the customer relationship. Every
   touchpoint, from emails written in your brand voice, to payment options
   available through their usual account portal, to the simple fact that
   communications are coming from a business they already do business with, can
   impact recovery rates and customer retention.

 * Integration with ARM software. The debt collection software suite you select
   may be able to integrate with your accounts receivable management (ARM)
   software, or may even be an extension of it, which can help you automate some
   elements of your recovery operations. You may even be able to reconcile some
   overdue accounts without your customer’s direct involvement. 

 * Fast reconciliation. Reconcile overdue balances fast. This is particularly
   valuable for accounts that may need services restored quickly, such as
   utilities. Rapid response ties into customer experience. It’s also worth
   noting that debt collection agencies are also capable of fast reconciliation,
   but it’s a capability that varies from agency to agency. 

Potential drawbacks

 * Operating expenses. Running any kind of operation internally is going to
   incur operating expenses. Software licensing, integration, and upkeep. Costs
   related to the hardware or cloud instances required to host and run your debt
   collection software. Employee and contractor time. Even with automation,
   expenses can add up fast and make in-housing your recovery operations a
   losing proposition, particularly as overdue accounts age.

 * Software integration. Your debt collection software will most likely need to
   be integrated with your ARM software and other internal systems. It’s
   possible for this to go smoothly, but it’s also possible to end up with a
   system that’s held together with the tech equivalent of duct tape and chewing
   gum, adding to operational complexity and operating expenses, as well as
   extending the time to recover from and address any problems that may arise.

 * Risk. Servicing overdue accounts in-house gives you control over the
   collections experience, but it also means you assume full responsibility for
   that experience. Not just from a brand and reputation perspective, but also
   in terms of security and compliance. With governments increasingly regulating
   collections – such as the recent introduction of Regulation F in the United
   States – debt collectors have to tread carefully or risk penalties. 

 * Capability does not equal competency. Debt collection software is ultimately
   just a tool. With some software packages, it can be a very powerful tool. But
   you still need to dedicate resources to get the most out of it. Who will
   handle customer questions and concerns? Who will ensure compliance, who will
   write your email templates? Who will monitor their performance and optimize
   your outreach over time? And what are they not doing while they’re performing
   these necessary tasks?

Partnering

When you partner with a debt collection agency, you give up that direct control
of operations and of the customer experience, but you also relieve yourself of
the operational burden and the accompanying expenses. Placing overdue accounts
with debt collectors also provides a degree of insulation (though not immunity)
from certain types of risk, such as compliance.

Benefits

 * Little to no impact on operating expenses. Since a debt collection agency
   runs its own recovery operations, there is little to no additional
   operational expense required on your part. 

 * Limited software integration required. Instead of having to configure,
   integrate, and maintain your own debt collection software, your debt
   collection agency will handle their own. Expect to work with their
   implementation team to make the necessary connections. This can be a
   traditional CSV file and SFTP transfer, or increasingly, connection via API.

 * Contingency fee model. Most debt collection agencies operate on a contingency
   fee model, also known as a “fee for success” model. In essence, they only
   collect a fee based on the amount they are able to recover for your
   business. 

 * Insulation from risk. Insulation does not equal immunity. As a creditor, you
   do have a responsibility to provide oversight and conduct due diligence,
   including ensuring your debt collection agency partners can perform their
   services in compliance with applicable laws and regulations. But ultimately,
   it is the debt collection agency’s responsibility to ensure security and
   compliance, not yours.

Potential drawbacks

 * Forfeiting control of the customer experience. Most debt collection agencies
   operate as a third party, meaning they reach out to customers on your behalf,
   rather than reaching out as you. 

 * Selecting the wrong debt collection agency. There are thousands of debt
   collection agencies to choose from, and choosing the wrong one can cause a
   variety of headaches.

 * Delays in reconciliation. Some debt collection agencies have fully integrated
   collection platforms that can reconcile recoveries in a highly automated,
   near real-time fashion. But many don’t, and more traditional agencies may
   rely on a more manual reconciliation process, which can lead to delays.

 * Degraded customer experience. Debt collection has a lingering negative
   perception for a reason. While practices are changing and more and more debt
   collection agencies are adopting a customer-first approach, many still use
   incessant phone calls and intimidating communications as they attempt to
   recover past due payments, and this can put customer relationships at risk.

Considering digital debt collection

Another factor to consider between debt collection software and debt collection
agencies is the type of agency. Traditional agencies pursue traditional debt
collection methods like phone calls and mailed past due notices. Debt
collection, like opinion polling and other industries that rely on these “old
school” methods, has faced obstacles as people increasingly avoid phone calls.
According to the Pew Research Center, only 19% of US adults answer phone calls
from unknown numbers. 

On top of shifting consumer behavior, new regulations such as Reg F in the
United States are putting increased restrictions on how, when, and how often
customers can be contacted about their overdue accounts.

All of this is creating an environment in which debt collection is shifting and,
increasingly, going digital. 

Fundamentally, digital debt collection involves communicating with customers
over digital channels such as email, SMS, and social media messaging platforms,
as well as providing them with a convenient way of resolving their debt online. 

Digital debt collection provides a continuity of experience for customers who
originate their accounts online, and delivers superior recoveries to traditional
debt collection approaches. 

Debt collection software or debt collection agencies - which is right for you?

Ultimately, the choice between servicing overdue accounts in-house or partnering
with a debt collection agency depends on a number of factors, and there’s no one
right answer. Both approaches have their benefits and their potential drawbacks.

Many businesses actually pursue both, handling early stage accounts in-house and
then placing them with collection agencies after a certain period of time has
elapsed, often after the account has been past due for90 or 180 days. 

At the same time, several forward-thinking businesses are finding a lot of
success bringing digital debt collection agencies in far earlier in the
lifecycle of an overdue account. 

As you weigh your options, you may want to calculate where it makes sense to
move from in-house to third party operations. Typically, this tipping point
arrives when your operating expenses exceed the contingency fee paid to
agencies. To explore how to calculate your tipping point in more detail, be sure
to check out our white paper, Navigating the debt collection software tipping
point.

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