Dicky Davies, business development director at Lowell, explains how further work behind the scenes could help bring a cross-industry change to the traditional commission structure for debt collections agencies (DCAs).
There is a belief in some quarters of our industry that, in terms of changing the commission structure for DCAs, the ship has already sailed.
However, I don’t believe this is the case. While a Financial Conduct Authority-driven change is perhaps now unlikely, there are still many reasons why the traditional payment method that sees companies receive a percentage of cash collections generated, cannot continue.
The primary one is compliance. DCAs are now often viewed as an extension of a creditor’s core business – rather than as an outsourced supplier. With the level of scrutiny today, creditors are so involved in the strategies and compliance adherence of their DCA partners that it can almost appear as if they are sat in the same office. For example, the level of management information reviewed in order to evidence that fair customer outcomes are being achieved.
Another strong driver is commercials. I don’t think there can be any DCAs that are profiting from early stage collections. Indeed, the view within the industry is that for many DCAs it is only the income derived from paying portfolios that is keeping them in business.
Compared with three or four years ago, the commission model has yet to move to reflect the increased cost of compliance, evidencing fair outcomes and call times are increasing in prevalence. The continued trend of selling in situ paying portfolios, with no indefinite requirement to keep the accounts with the incumbent DCA, are all impacting profitability.
One welcome move by some creditors is that they are offering the incumbent DCA the opportunity to either provide a price to buy the portfolio, or select a purchaser they wish to have a long term relationship with. This will help to ensure a smoother transition for the customers involved.
Fear of the unknown
Having been a hot topic in the industry for some time now, views remain divided on where and how the current model doesn’t work.
There is also no clear view about what the future should look like. Having said that, we are aware of a number of creditors who are actively considering alternative commercial models.
The general view is that the main stumbling block is a fear of the unknown. Inevitably it will be a big change, and it will take someone to pioneer that change. As it stands, there remain a number of models under discussion – i.e. costs plus some extra as commission, payment based on outcome, payment based on contact, payment for placement, or a hybrid. Current signs indicate that a combined approach is most preferred.
Whilst some of the models being discussed make a cash flow difference in the short term, the aim should be to ensure there is no impact on the balance sheet by ensuring that future collections/commissions are accounted for properly.
To summarise, the catalyst for change is already there – the work that is currently going on behind the scenes just needs further development and then it will become reality.