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“Software is capable of delivering extensive gains before you need to even consider debt collection agents!”

Debt collection isn’t a media darling, and you rightfully may know very little about it. What’s probable is that you consider it sleazy or associate it with aggressive tactics. Regardless of what experience you may have had with debt collection, you probably know even less about the players in this segment. They have in years past remained fairly under the radar, and one can deduct why they don’t like to step out into the limelight much. You may even know some names in the industry, having seen something here and there, but you’d be hard pressed to distinguish one from the other.

What is clear is that their business model hasn’t changed much in the last twenty years. Further, in large enterprises, collections have been outsourced to subsidiaries or even completely to external third parties. Out of sight and out of mind. Large enterprises need to start addressing this as they no longer can afford to give away all the potential value generated via effective collection processes. Further, they can’t give away the customer relationship which is completely lost when outsourcing. Additionally, extensive data and insight are generated in the process, with the ability to flow back directly into the organisation and optimise core business processes.

What’s the Status Quo at DCAs?

When discussing a brand in the debt collections space, you will most likely speak of a debt collections agency (“DCA” for short). These are service providers, and their core business model is fairly simple. They either buy unpaid bills from their partners or act as a third-party service, working on behalf of their partners. Whichever structure they choose, their revenues boil down to collections fees. For the service they provide, they generally take a fee from those where they source their bills and on top of this fee, charge their own “collections fee” plus interest when recovering the unpaid monies. Obviously, the total cost of collection is passed on to the end customer, and is the reason that an unpaid bill of €100 can easily swell to €150 or even €170. The level of acceptable fees varies by geography and certain countries have already taken action to minimise the abusive fee structures. Additional regulation is also quickly making its way through various government avenues.

As the industry has matured, so too have the business practices. The largest players not only service debt collection but have grown into financial players themselves. Using their own or third-party capital, they purchase “portfolios” of debt which they thereafter service themselves, keeping whatever they can recover. These portfolios are, for example, non-performing loans (NPLs) from banks and financial institutions or pooled portfolios in certain industries where individual claims are tiny, but number in the millions. Due to the difficulty of recovery, billion Euro portfolios are at times purchased for a fraction of their face value. Consequently, due to the sheer size of these portfolios, you need an army of employees to do the necessary work to collect on them. The larger players in the segment can easily have ten to twenty thousand employees, and they work on a global scale.

Competition Has Heated Up in Debt Collection

Within the past ten years, the industry has done very little to digitalise their processes. Although the technology has existed for years, the majority of collections processes involve sending letters, fielding phone calls and maybe here and there interacting via email. With profit margins as high as 40% or more, there really hasn’t been much need to adapt. Honestly, were I in the shoes of senior management at many of these companies, I too would focus on maximising revenues. Being publicly listed or majority owned by private equity firms, this is exactly what is expected of management. Their businesses have not only grown because the number of claims has increased, a decade or more of cheap capital in the markets has fuelled expansion internationally via M&A. Unfortunately, the success of a few incumbents has led to an explosion of players in the business and competition has started eating into profits. You now have thousands of players in the segment,

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