In-House Collections: 3 Reasons to Optimise Debt Management

Consumers have been feeling the pinch over the last couple of years. COVID-19 wreaked havoc on the global economy, leading to businesses having to shut down and millions of people losing their jobs.

And just as the pandemic began to move into the rearview mirror, something else swiftly took its place: the cost of living crisis. Prices are rising at alarming levels—consider the following statistics:

1. Euro area annual inflation has risen from 5.9% in February 2022 to 7.4% just a month later, in March 2022. 
2. UK energy prices rose by a record-breaking 54% in April 2022. Across the Eurozone, the price of energy is expected to increase by up to 40%. 
3. The cost of food in the European Union increased by 6.7% in March 2022 alone. 

Unfortunately, the cost of living crisis isn’t going away anytime soon—and salary increases still aren’t keeping up with the ever-increasing pace of inflation. This means one thing: expect the number of debts and non-performing loans to increase going forward. 

Companies must therefore prepare for increased collections volumes as soon as possible, identifying how they are going to successfully collect what consumers owe. Most importantly, they need to decide whether to keep this process in-house or outsource it to external third parties. 

This blog delves into outsourcing versus collecting debts in-house. It examines the different stages of debt collection, digs into why so many companies consider passing their debts to debt collection agencies (DCAs) and outlines why they should instead handle this process in-house themselves. 

The different stages of debt collection

Collections process can be divided into 5 stages: pre-delinquent, early collections, late collections, recovery, and debt sales. 

Ideally, companies would collect their debts at the earliest possible stage. That’s because the closer debts are to the bottom of the funnel, the lower their value. But how exactly does this work?

Think about it. If companies collect their debts almost immediately, they need to spend virtually no time, effort, or money chasing past-due customers. They can also put this recently collected money to good use, accruing interest in a bank account or helping to fund profitable activities. 

On the other hand, collecting debts towards the bottom of the funnel is the least valuable approach. Companies spend a huge amount of time, energy, and money trying to collect their debts. Sometimes, they aren’t even successful, meaning they lost even more money than what they were owed. 

Internal collections agents spend their days contacting the same past-due customers repeatedly, to no avail. This ultimately costs the company money as they still have to pay their agents’ salaries. Worse still, the company might even sell the debt off to an external third party for a fraction of what it costs them—or partner with a DCA who will take a sizable fee for any sum they do manage to collect. 

Common reasons that companies consider passing their debts to DCAs

So, if it’s the least profitable approach, why do so many companies outsource their debts to DCAs or other third parties? There are multiple potential reasons.

1. Recruitment challenges

First, they might struggle to recruit the right collections agents. Perhaps their current staff is leaving en masse due to The Great Resignation. Maybe they operate in a region suffering from a lack of qualified candidates, or they use ineffective outreach strategies when contacting potential new hires. 

2. Limited knowledge about data collection

A lot of financial institutions do not know which data they should collect and which collections metrics are the most important and relevant to them. Many of them still use traditional methods like excel sheets or manually record collection data, which are barely scalable. Moreover, digital collections metrics such as dunning email open rate, landing page views, payment succeeded rate, and payment disrupted rate.

3. Manual effort

When companies lack the capabilities to automate or digitise the collections process, they often believe it will be quicker and easier just to outsource it. Otherwise, it will require too much manual effort on their part. 

Why outsourcing debts might go wrong

Unfortunately, outsourcing debts to an external agency can create more problems than it solves. Companies lose control of the debt collection process—which means their partners might act in ways that don’t reflect the company’s approach or values. 

For instance, DCAs can sometimes adopt overly aggressive dunning strategies. They might ring past-due customers all day, charge customers huge late-payment fees and even contact their friends and family. Many DCAs rely on intimidation when contacting past-due customers to pay up. Unsurprisingly, this causes the customers’ experience to plummet. 

And that’s not all. Customers who have been harassed by DCAs will likely tell others about their poor experience. The company will quickly gain a bad reputation, leading to diminished sales going forward.

Why collecting debts in-house is the best strategy

Fortunately, there’s a better approach: collecting debts in-house. 

1. Technology has made debt collection easier

AI-powered collections management software gives companies complete control over their dunning approach. Agents can create truly customer-centric messaging with easy-to-use drag-and-drop content builders without requiring any assistance from the IT department. 

2. Gain insights into customer behaviour to increase collections rate

By collecting debt in-house, collections teams can consult past-due customers’ behavioural data. This analysis will reveal if there were any internal errors in the dunning processes, while it can even be used to even to upsell products to customers that have good repayment rates. 

3. Decide your tone of communication 

Agents can A/B test different options, tweak the strategy, and craft messages that directly appeal to different segments on an ongoing basis. This increases the chance that past-due customers will pay them back at an early stage (therefore increasing profits) while simultaneously protecting the company’s reputation. 

Pick the right software for your needs 

Collecting debts in-house can be more successful, cost-effective, and customer-friendly compared to outsourcing. Except, it only provides these benefits if companies implement the right software. 

The best collections management software empowers agents to create targeted dunning strategies using drag-and-drop content builders. Past-due customers can pay back what they owe, at a time that suits them, using self-service repayment portals. Agents can dive into data-rich reports to understand how past-due customers are behaving, which strategies are (in)effective, and identify the best strategies going forward.

Talk to our employees to find out more about what features are necessary for you to transform your collections department into a profit center.