The writing has been on the wall for some time: The third-party collections industry has a profit margin problem.
For years, profit margins have been constricting, in large part because it’s grown increasingly more difficult to contact and communicate with consumers. Moreover, a host of secondary contributing factors like legislation, inadequate information from clients, increases in robocalls and scammers — and consumers’ ability to just ignore or block incoming calls — has hurt revenue. At the same time, the cost to run the business have spiked, as commission rates have dropped.
We wanted more insight on how the industry is responding to this challenge, so in conjunction with Aite, we surveyed a large swath of debt collection professionals for the “The State of Third-Party Collections 2019: Challenges, Trends and Innovations” report.
Here’s a bit of what we discovered, as well as recommendations on how to combat these industry-wide challenges.
Average Breakdown of Major Third-Party Collection Firm Expenses
1. Staffing is by far the biggest expense — and the cost is rising
On average, survey respondents reported that 41% of their total budgets went toward payroll in 2018, and the respondents confirmed that about half of their revenue goes to employee-related expenses. Furthermore, 43% percent expect their payroll costs to rise over the next two years.
Perhaps more challenging is that a chunk of that money isn’t going to employees who generate revenue through direct collection. On average, only 55% of FTE employees are either collection agents or responsible for direct collection and recovery work, and that number falls dramatically for smaller companies.
So, what can you do about your rising payroll costs?
Surprisingly, it’s not just about making cuts. Rather, it’s necessary to find ways to maximize your agents’ output so they can generate more revenue. That means providing them with the right tools so that they aren’t wasting time on wrong parties and uncollectible accounts.
A great place to start is TransUnion’s Account Prioritization solutions, which use predictive recovery scores and credit characteristics to help you quickly identify accounts more likely and willing to pay. You can also monitor your portfolio and be notified when positive or negative changes occur in an account. Bottom line: Your agents will find more success day after day.
Success story: An ARO cuts costs and boosts revenue with TransUnion’s help
Case in point, to capitalize on last year’s tax season, an accounts receivable organization (ARO) turned to TransUnion’s CreditVision® Recovery Score to rescore old, idle accounts to see if what — if any — accounts had changed from high to low propensity-to-pay and vice versa. (Download the full case study.)
It turned out that 90% of the accounts received an updated score. Roughly 86,000 accounts moved into a high propensity-to-pay group and about 94,000 dropped to low propensity-to-pay and out of target range. The ARO was able to take a more strategic approach to managing both groups, and focus collections efforts on the accounts most likely to use tax returns to pay down debt.
The strategy worked. The ARO saved thousands in data, postage and printing and generated more than $100,000 in revenue.
2. Lawsuits represent a major expense
Legal defense and settlements account for 10% of the budget, according to respondents — and while more than half of those surveyed expect their costs to stay the same, roughly a quarter reported that they saw an increase in their legal defense and settlement spending last year.
Scrub your inventory to help mitigate risk
TransUnion inventory segmentation solutions let you scrub inventory of those accounts protected by state and federal laws and those with litigious histories. It’s an efficient way to help lower your exposure.
3. Postage accounts for 9% of respondents’ total budgets
Sending letters is a cost of doing business that’s sure to rise with postage increases over time. In fact, 54% of those surveyed reported they spent more on postage in 2019 than in 2018, and the same percentage expects to spend even more over the next two years.
Lower postage costs with fresh contact information
TransUnion’s TLOxp® puts powerfudata at your fingertips — current phone numbers, addresses, relatives, associates, place of employment and much more — for an estimated 95% of the U.S. population. Options include a direct online interface, batch processing for handling high search volumes quickly, and API integration that allows users to call up and view search results using their current and familiar applications.
Robert Adkins, founder of The Olympia Organization, tracked a letter campaign he addressed with information from TransUnion. "My overall good address percentage on all those letters has been 89.9%, which I think is outstanding," he says. What's more, of the letters that still come back, after a second pass with TLOxp, he estimates approximately 50% of those also become deliverable, thanks to TLOxp's continually updated databases.
TransUnion can help
Improving your profit margins isn’t just about generating more revenue. Reducing your expenses can achieve the same results. TransUnion can help you do both. To learn more, contact us for a no-obligation evaluation of your collections strategy at 800-856-5599 or by visiting transunion.com/collections.
Source: Aite Group Study commissioned by TransUnion: The State of Third-Party Collections 2019: Challenges, Trends and Innovations