How does a debt buyer decide which collection agency gets which accounts?

Where debt buyers send their accounts

A debt buyer can collect in house, place accounts with outside agencies and law firms, or do both. The Federal Trade Commission’s study of the debt buying industry (2013), which covered nine of the largest buyers, found all three. Of the debts those buyers bought, they sought to collect 29.2% only through contingency collectors and 31.9% both in house and through contingency collectors.

Many accounts have been placed before the buyer ever sees them. The same report describes creditors working accounts internally, then placing them with a primary agency, then a secondary agency, and selling some at each stage. Accounts in a creditor’s portfolio usually share traits such as the kind of credit, how long ago they defaulted and how many agencies they were placed with before the sale.

Most of what is published about splitting accounts between agencies comes from creditors and government programmes that run agency networks, and it is general practice rather than a description of any one buyer. In our view a debt buyer running several agencies faces the same choices.

Champion and challenger agencies

The common set-up is a champion and challenger model: the incumbent agency is tested against one or more challengers, each gets a share of placements, and the shares move with results. IC System, a collection agency that takes part in these models, describes it in a 2023 article:

• Placements are split between competing agencies, often as a share of the portfolio for each.
• Each agency is scored on a scorecard and the shares are reallocated, which IC System recommends doing quarterly.
• The account owner sets the measures. Its example scores collections (dollars collected divided by dollars placed) separately from service: audits of account work against agreed standards, reviews of a sample of calls, and complaints.

The Department of Education’s agency programme, as insideARM reported it in 2010, worked the same way at scale: placements were allocated in proportion to a weighted performance score, with dollars collected carrying the most weight.

Rebalancing and recalls

Moving share is one lever; recalling accounts is the other. A 2009 insideARM piece by Paul Legrady setting out best practices for managing collection agencies, drawn from the consultancy Kaulkin Ginsberg, says the strongest recovery managers recall accounts that have not been collected after a set period, place them with a competing agency, and repeat. It notes that most agency contracts are guaranteed for only 30 days, and argues that cancelling an agency that underperforms is usually in the account owner’s interest. It also warns that agencies specialise by kind of account and stage of delinquency, so one agency rarely fits every placement.

Performance is not the only test. RMAI, the receivables management trade association, requires its debt buying members to hold its certification, whose standards include vendor management alongside account documentation, chain of title and credit bureau reporting. The compliance record of each agency belongs on the same scorecard as its collections.

Measuring like with like

A scorecard is only as fair as the accounts behind it. An agency handed fresh primary placements will beat one handed accounts two agencies have already worked, whatever their skill. Experian, which sells collections analytics, makes the measurement point in a 2012 post: a recovery rate across a whole inventory misleads because it blends old and new placements. It tracks each monthly batch placed with competing agencies and compares liquidation month by month until the accounts are recalled, weighting the whole life of the batch so that an agency which collects fast early and then stops is not rewarded.

In our view a fair comparison between agencies needs:

1. The same kind of accounts. Same stage (primary, secondary), similar age and balance, from the same portfolios.
2. The same weeks. Each batch split between agencies at the same time, ideally at random.
3. One measure. Dollars collected per account placed, over the same months from placement, with each agency’s cost and compliance record beside it.

That is the same test as any change in who works an account, explained in how to prove a change in routing worked. The same problem repeats inside each agency: a collector ranking mixes the collector with the accounts they were given (fair collector scorecards), and collectors convert at different rates on different kinds of account (why collectors convert differently).

Sources

• The Structure and Practices of the Debt Buying Industry: Federal Trade Commission report, January 2013, on nine large debt buyers.
• Champion-Challenger Collections Model: IC System, a collection agency, on splitting placements between agencies and scoring them (2023).
• Dept. of ED Releases Important Collection Performance Report: insideARM, April 2010, on performance-based allocation between agencies.
• Recovery Management: Best Practices for Managing Collection Agencies: insideARM, Paul Legrady, February 2009, practices drawn from the consultancy Kaulkin Ginsberg.
• Best practices for improving agency performance: Experian, a collections analytics vendor, on scoring agencies by placement batch (2012).
• Receivables Management Certification Program: RMAI’s page on the certification its debt buying members must hold.