Debt Outsourcing: Low Commission Rates May Result in Low Debt Recovery

While outsourcing of debt recovery has significantly increased in Australia, agencies which charge low commission rates may ultimately become uncompetitive if they generate a lower return for their clients, according to the latest IBISWorld Industry Report* into debt collection in Australia.

“The level of success of debt recovery is an important factor in competition,” IBIS says in its April 2012 report. “A firm may charge a low commission rate compared with their competitors, but if the amount of debt they recover is also comparatively low, then the amount of money (less their commission) they generate for their client may not be competitive.”

Recoveriescorp’s Managing Director and Chief Executive Officer, David Mond, says realistic commission rates for contingent debt recovery allow agencies to maximise the rate of return for clients.

“Ultimately it’s not about the cost, it’s about achieving a superior long term net return for clients if we have the ability to implement more intensive activities,” he says.

“At the individual debtor level, this could include additional correspondence, telephone calls and SMS, along with skip tracing work based on the value of the debt. At the client level, undertaking debtor profiling can yield a lot of valuable data which enables us to achieve efficiencies and maximise returns for the client”.  

IBIS says competition within the industry is based on the prices charged for services, image, professionalism, the methods used and the results obtained.

The report notes that the growth in demand for debt recovery services is the result of greater outsourcing by government, major utilities and businesses including private education, financial services and telcos.

The advantages of outsourcing have been recognised by many large corporations, particularly where customers make small infrequent purchases. Areas of increasing demand include payment of credit cards, mortgages, motor vehicle lease payments, council rates, water, gas, electricity and telephone bills, sometimes with a large mobile phone cost component.

The health and medical industries have also grown in importance, a trend which is expected to continue over the next few years.

Contingent fee services account for approximately 40% of revenue, and portfolio acquisition for 60%. IBIS* says commission rates for continent fee services are generally based on the degree of difficulty of collection, with debts that are placed earlier having a higher probability of recovery.

While portfolio acquisition now exceeds contingent fee services in value, the number of files is lower than the number of contingent collection files, suggesting that the value of debt purchase files is generally higher. Most originate from the bankcard receivables and retail markets, IBIS* says.

*Information is taken from the IBISWorld Industry Report ‘Debt Collection in Australia’, by Nick Sallmann April 2012.*