CEO, Machol & Johannes, LLC, AlmanacTechnologies, LLC | Board Member
Retail Debt Collection 101 (for my LinkedIn friends who aren’t in the industry)
The US economy is driven by consumer spending. More spending = more growth. To boost spending, retail lenders (primarily credit card companies) take a calculated risk loaning money to customers who offer their signature as a guaranty.
This segment of consumer credit is fueled by traditional credit card companies (think Samuel L Jackson Capital One ads), store brand credit cards (think “you can get a 10% by signing up today”), and more recently, Fin-tech loans (like Marcus, Prosper, Upgrade, and Lending Club).
More than a few people don’t repay their unsecured loans. My debt collection company gets called in to help reduce the cost of the loan losses.
If you’re interested in peering into the glamorous debt collection industry, then you’re in luck!...
This post is a high-level summary of a few key topics people often ask me about.
There are different ways to collect consumer debt.
Agency = Call (a lot), mail letters (a lot), text message (a lot - when allowed), and credit report. This works best when you think the customer has the ability and willingness to repay… they just need a reminder.
Sale = Sell the debt to a third-party. This works best when you think there is very little chance of repayment, or that it’s not worth the hassle of collecting.
Legal = Sue, get a judgment, put a lien on property, and garnish liquid assets (bank accounts and paychecks). This works best when you think the consumer has the ability, but no willingness to repay. [This is what my business does]
Warehouse = Report the default on the customer’s credit and wait. This works best when you think there’s a risk to collecting or selling the debt.
Not all debt is created equal. A lot is cookie cutter. Some is bespoke. 99%+ of credit cards follow the same formula. They have similar paperwork and a similar fact pattern. On the other hand, Neighbor Joe’s cash loan to Neighbor Jim is unique.
No matter which vertical is selected for collection, scale has a big influence on how it’s handled.
Companies that are great at handling large volumes are usually terrible at handling one-off work. Think of it like asking McDonald's to cook you the perfect filet mignon…
Large scale collectors use automation and have standardized process. Small scale collectors work accounts by hand. The approach is very different from both ends of the spectrum.
In the old days, debt collectors didn’t seem to care if systemic issues were impacting the consumers in unjust ways. Here’s a fun related read: https://en.wikipedia.org/wiki/Publican
Fortunately, debt collectors evolved to treat consumers (no longer called “debtors”) with dignity and fairness. Debt collectors were also highly regulated in the early-2010s by the government to do so.
Collectors of any scale now put as much emphasis on being compliant with government and client rules as they do on liquidating accounts.
They may still get the social reputation of being the bad guys, but those who survived the Dodd-Frank Act genuinely care about being compliant and treating people fairly.
How Debt Collectors Earn Revenue
For the most part, they get paid when they collect. It’s called a “contingency fee.” Many consumers we work with google “debt collection” and come up with the idea that agencies and firms own the debt, and that they paid “pennies on the dollar.” Nope. Unless it’s the original creditor or a debt buyer calling, the collector is almost always working the account for someone else.
Debt collection is akin to manufacturing. They invest a bunch of time and money into making a product before it can be sold (monetized). Each work step done by a collector is typically a “value add.” It costs money, but it gets them another step closer to liquidation.
The contingency fee system has been around since the beginning. Who wants to pay money up front to have a debt collected? You just LOST money. You don’t want to risk losing more. Naturally, it just makes sense.
Regardless, as the industry continues to evolve, it’s possible that the model will turn to a sort of flat-fee or fee-per-service model.
Like any industry, there are bad actors. Unfortunately, debt collection bad actors give the entire industry a bad name. When they misbehave, it typically becomes a news story. Tons of Americans fall into the collection system, so a story on the news about a bad debt collector always gets a reaction.
Bad actors are rare because the industry is heavily policed by state attorneys general, state regulators, and the federal government.
Regardless, the few bad guys out there still reinforce the negative stereotype.
Our economy is dependent on people spending money. Debt collection help keep the system flowing. It’s not a sexy industry, but it’s necessary. The industry has changed for the better since Dodd-Frank. As it continues to evolve, it will focus even more on customer service (or helping the consumer get back to a position to do business with the creditor again in the future). Lenders work hard to end customers. The last thing they want to do is create a negative customer experience, even if the customer didn’t repay them.