Certain collections businesses are undergoing a metamorphosis, becoming business process outsourcing (BPO) companies with an expertise in arrears management. Frank Horvath, managing director at Link Financial, explores an evolution
To understand why the change among certain DCAs is taking place, it’s worth briefly looking at the demand for outsourcing in general, and what drives businesses to seek third party assistance with collections. The first and most obvious demand driver is cost.
As with any outsourcing arrangement, there’s always a saving to be made in employing a specialist that can take advantage of economies of scale, rather than absorbing additional overhead within one’s own business.
The second major driver is regulation; most lenders would rather focus development resources and management time on acquiring new customers, rather than growing teams in the heavily-regulated field of collections and recoveries.
Non-related regulation, too, is prompting businesses to outsource further; incoming IFRS9 rules, for example, will change provisioning requirements for impaired assets, and may make it more desirable for businesses to sell on impaired assets, or contract specialists to manage them on a better basis.
The third factor driving collections outsourcing is the availability of staff skilled in the field. It can be hard to recruit a good operations or compliance manager given how in-demand such roles are at present, and hard to retain them in an organisation without significant scale. For growing or start-up lenders, it’s a particular challenge.
In theory, the factors above should drive demand for traditional contingent collections work and debt purchase, just as much as stimulating the need for “true” BPO work. But it is increasingly hard to square the commercial mechanism behind the contingent collections model, in particular with the FCA’s requirements around customer outcomes.
Simply put, the traditional theory of achieving the largest cash collections in the shortest time and at the lowest cost, is becoming obsolete in financial services.
Trials facing the ‘classic’ DCA model have been discussed at length, but the bottom line is this: firms looking to use collections agencies must accept significantly higher commission levels to keep DCAs alive in the new outcomes-based working environment – thus eliminating the cost advantages of outsourcing – or incur sizeable conduct risk by working with firms prepared to cut corners. For a serious player, neither option is attractive.
Debt sale remains a more attractive option, but compliance has changed this landscape too. In the modern climate, both vendors and purchasers have huge due diligence responsibilities in terms of understanding a purchaser’s suitability to manage sold portfolios, but ensuring they understand strategies applied to portfolios in the past.
There are also ongoing responsibilities upon the parties to ensure appropriate oversight of the post-sale management of the portfolio. From a seller’s point of view, this is to mitigate conduct risk – but buyers must also do their homework, as purchasing accounts which have experienced poor treatment in the past represents a potential risk.
This adds up to an effect on the administration time and costs of sales transactions – smaller, less experienced sellers will find the process more challenging if they don’t have the right debt purchase partner in place.
With the above in mind, it becomes easier to see why adapting to the operational and fee-charging structures of a BPO business would be attractive to any “traditional” collections house.
What’s more, when offering arrears management services of any kind, BPOs that were once collections businesses have a distinct advantage over their more generic competition. “Classic” BPO provision largely involves the offering of vast contact centre teams on a pay per-head basis.
This is precisely what is needed when it comes to simple customer service operations, for example, but it sits less well in a heavily regulated area such as financial services sales or collections, where customers may be in financial difficulties or potentially vulnerable.
A collections-heritage BPO business, therefore, offers a qualitative rather than a quantitative proposition, very different from that offered by generalist BPOs, and which comes from an experience of working debt on behalf of others.
From an operational perspective, a specialised recruitment and training system, plus an experienced management team and a robust platform, are the essentials, and not particularly different from what is required in a traditional collections business.
But there are differences too, stemming from the wider range of work a BPO business may be asked to perform.
For example, engagement in work much earlier in the product lifecycle than usually seen by a DCA brings with it the requirement for different skills – for example the ability to open an account, make a welcome call, or make an account servicing call.
Of course, there are areas where collections-heritage BPOs can’t compete with incumbents – for example on extremely large scale customer service work, or in work that demands a huge number of different spoken languages, performing similar tasks to scale.
Other than that, however, the evolution into a BPO not only frees it from some challenges facing the traditional DCA and debt purchase market, but allows it to service more of the clients’ needs than previously. This provides an opportunity to be a far more important partner to potential clients.
We may see a situation where BPOs that began as collections houses are pitching for work with little or no collections activity, for clients already using third parties for late stage or purchase work.
There are many contrasting ways the model could evolve, but for a business that has made the change, the prospects seem near-universally inviting.