Why Don’t Some Debt Collectors Give Larger Discounts Off the Balance?

This is a question we sometimes receive. Although it might sound strange, there isn’t always any rhyme or reason to why creditors give the deals they give. Sometimes there is a reason, but other times there simply isn’t. If accounts aren’t scrubbed they are typically settled on a case by case basis and each and every case can be different from the next.

I’ve never worked in the debt collection industry but from my general understanding of the industry and the limited knowledge I’ve acquired from working on the opposite side, there seems to be a few different ways debt collection companies operate. The way in which a debt collection company is run and the accounts the company choses to service tends to play a big part in the negotiations.

Servicing for the original creditor

Many debt collection companies simply act like the arm of the original creditor and try to collect debt on their behalf. In this scenario the debt collector usually has parameters and guidelines they can operate within. In order to make an exception they may or may not need to go back to the original creditor to ask for exceptions and the like. This can really vary from creditor to creditor and from debt collector to collector. The main point here is that if the debt collection company is only servicing the account on behalf of an original creditor, they might not have the full authority to change guidelines or go outside of parameters they are instructed to follow, although this may not always be the case either. In a way the debt collection company is like a buffer between the original creditor.

Higher payback rates with higher turnover (less total accounts paid)

In some scenarios there are creditors that—for the most part—want to acquire a reputation for being tough and unrelenting on negotiations. These companies will typically collect more money per each account but they will have a much higher turnover rate and a lower percentage of total accounts collected on. A higher turnover meaning they will just not get paid on certain accounts since consumers cannot afford their terms or don’t want to pay. In this case, they will get paid more money on fewer accounts so they won’t have optimized economies of scale within their organization. Moreover, they will ultimately have more accounts go dormant and less total accounts settled. Meaning more resources are ultimately wasted trying to collect on bad debt. This isn't always the case but it's something worth mentioning.

Lower payback rates with lower turnover (more total accounts paid)

In some scenarios. There are debt collection companies that are willing to accept better negotiated settlements and are much more flexible for consumers. These companies are actually often times more successful at generating revenue based on the accounts they’ve purchased. So, they may collect a lot less per person and per settlement but they will actually collect more in total revenue and generate higher rates of return on the debts they’ve purchased. These types of debt collection company can tend to have better economies of scale.

Taxes

Let's give an example of taxes on a given population. If you tax your population at a certain percentage you will get a certain percentage back based on your population and the income they earn. Makes sense right? So it should make sense that the more income your population earns the more tax revenue they'll generate. It should also make sense that the larger your population the more tax revenue you'll generate. Now like with anything else, there needs to be a middle path, in order to optimize revenues.

If you run a country and you tax your people at 25%, you’ll receive revenue per person based on that amount. Now in this example, this lower amount might appear to be too low for the government to effectively operate. However, you will also have much higher levels of economic growth. Your total revenues in the long term may be much higher than previously thought and your economy should boom.

Now if you tax your people at 45%, you’ll have higher tax revenues per person but your capital expenditures will be lacking, you’ll severely hamper economic growth and worse of all you’ll severely punish your people. Due to this they’ll most likely be angry at leadership. This in turn can cause the population to leave and move away and is usually not so good for business.

Middle Path

Finding that middle path is not always an easy thing but it’s often something that is required to achieve equilibrium. Equilibrium tends to be great at generating the most profits per debt account purchased just as it is in our tax scenario. As the business continues to grow you should see your employees generating more income per debt for the business. So being nice to people and giving larger discounts off debt could actually pay off in the long run. This isn't a certainty but things can sometimes play out like this.

Like with everything in life there is a golden medium that they we all need to strive for, these economic principles can help guide us in both life and business since they are pertinent to both. It should go without saying, you cannot tax the people too much or too little since you will just be hurting yourself at the end of the day.

If you tax too much the population will start to get angry at you. It’ll also hamper economic growth and activity leading to less economic output and slower growth. If you prevent economic growth you’ll lose out on future tax revenues as well. Both of these factors play into each other and all of them have a positive feedback loop. It’s often times hard to find that “goldilocks zone but it is something that is achievable!”

Since most debt collection companies can be often times be hated finding one that isn’t too harsh on people and is more forgiving will undoubtedly help them become a better business.

Moreover, if accounts are purchased for pennies on the dollar, if you give out better deals to your customers you will surely be able to generate more profit in the long term. So being the first one to get a good reputation by doing right by people is a great way to grow your business.

There’s a whole of reasons debt collection companies might not necessarily give you the debt reduction you want but at the end of the day we try our best. It's usually not the fault of the person you're speaking with on the phone, sometimes this is just how things go.