It’s no surprise: as the tech gap widens, the number of third-party collections agencies is shrinking. There are other factors at play, too, like the cost of human resources and the lack of forward flow from 2020 through early 2022. Charge-offs are creeping up, though, and lenders who don’t use a third-party agency, or haven’t made changes to that strategy in a few years, might be surprised by a lack of options.
But the third-party agencies who are succeeding right now are the best of the best.
“[Third-party collections] is an industry that is doing what it needs [to do] to be efficient, effective, and compliant. They’re investing to help satisfy the needs that lenders have when it comes to third party collections,” argue Jason Klotch, VP of Diversified Markets at TransUnion.
TransUnion’s recent whitepaper, Charting the Course and Steering Toward Success: The Collections Industry in 2022, outlines how the third-party collections industry is managing success, even after the adversity of the last two years, and what those agencies need to do to continue to improve.
Focus on Self-Service
Self-service is the key to collections & recovery as the cost of human resources increases, and 89% of the larger firms who responded to the survey reported using an online payment portal, while only 60% of smaller firms are doing the same.
However, far fewer agencies are using self-service capabilities, like a 24/7 automated self-service channel, or an IVR. To be successful in 2023 and beyond, agencies will need to invest in those tools. As the report notes, “improving operating margins…is becoming harder for many firms,” and it’s even harder for those who are averse to investing in self-service solutions.
Agencies are making gains in this area, though, with most agencies reporting that they will invest in chatbots, digital assistants, or other self service tools by 2024. Smaller firms are looking to invest at a higher rate, too, in order to play catch-up.
Invest in Diverse Communication Channels
Surprisingly, Reg F had “little effect” on the communication methods used in 2022, and letters and calls remain dominant in collections & recovery. Text messaging is becoming more common, especially at larger agencies, with 37% of all companies reporting that they use text/SMS messaging as of 2022.
This is a challenge for third-party agencies, though, and illustrates how much the industry lags behind other “debt-oriented” industries. For example, according to the report, about half of health insurers surveyed had pay-by-text as a payment option. In 2018.
Agencies are making plans to add SMS/text messaging to their communication channels in the next two years, though, which is promising.
Overcome Hiring Challenges
Most respondents reported that they expect to modestly or significantly increase the amount they are spending on payroll. Even though the labor market is cooling a bit, 67% of respondents say recruiting a collections agent is either extremely or very challenging compared to pre-2020, and 43% report retention for the same position as extremely or very challenging, too.
In order to combat some of those challenges, about half of the respondents are offering remote work as an option. It’s more difficult for smaller agencies to provide work from home or a hybrid environment, though, and that’s going to be a problem, as according to a McKinsey report, 58% of Americans work from home at least one per week, and many employers who have mandated a return to the office have faced significant backlash.
It’s not clear that working from home is going to remain prevalent in the financial services industry as a whole, but it’s clearly a benefit that employers need to offer, at least for now.
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