An old saying tells us that you get what you pay for. This is also true in the collection industry as well. Receiving debt collection services at the lowest contingency fee or cost might not be the best way to ensure the highest performance or overall debt recovery for your organization. While there are many factors to consider when selecting or evaluating collection agencies, in our opinion the most important factor is the overall net back dollars (net back) an agency will return to the client. The definition of net back is the amount of money, or dollars that is returned to the client after the collection agency takes or nets out their collection fee. This amount is the actual return a collection agency provides to the client. Too often an organizations selection criterion or their RFP/RFQ’s are weighted heavily towards contingency fee or cost. On the surface this makes sense because overall external collection costs to an organization could be less using an agency with a lower contingency fee. This school of thought has led many decision makers to look at account receivable management services as a commodity in the sense that all debt collection services provided are the same or interchangeable and that the agency offering the lowest cost should be the main determining factor for selection. However, in many cases a low contingency fee comes with negative consequences as well.
What are some the implications of an agency charging a lower fee?
Collection agencies are often quoting low rates to get initial business or help them break into a new market. Charging a lower fee does not allow for a collection agency to spend a lot of money or put enough resources to adequately collect your delinquent accounts while still turning a profit. Less resources will prohibit an agency to fully work your accounts. This will force them to cut corners or reduce overall expenses in order to make money from a client. In many cases this means ignoring certain segments of older or lower balance accounts, assigning larger number of accounts to each account representative or utilizing less technology platforms such as skiptracing to locate delinquent consumers. None of these actions will ultimately benefit the client.
Higher Fee = Higher Recovery Rate
Higher contingency fee usually means higher recovery rate since more resources are assigned to the accounts. Agency A charging a 25% fee and getting their customer a 15% recovery rate is better than an Agency B charging a 15% fee and getting their customer a 10% recovery rate. Using an example of a delinquent portfolio of $1,000,000 would yield the following results:
$150,000 Dollars Collected
$37,500 Collection Fee Paid
$112,500 Remitted Back to the Client
$100,000 Dollars Collected
$15,000 Collection Fee Paid
$85,000 Remitted Back to the Client
When reviewing or evaluating collection agencies consider net back rather than just price as an important factor for selection. In many states, legislation allows for the collection fee to be added on to certain types of government accounts. The fee is included in the outstanding balance and ultimately paid for by the consumer not the client. Add-on collection fees or costs makes the case of going with a lower fee of even less of importance in the selection process. Why shortchange the amount of work and resources a collection agency will put on your delinquent accounts? Start using net back as a true measurement of how well a collection agency is performing for your organization.