Debt sale or collections agency? What to consider

When it comes to servicing overdue accounts, collections is an obvious choice - but it’s not the only one. Debt sale (or debt purchasing) is an additional option for creditors, and serves a key role in a diversified collections strategy.

While the two can often be pitted against each other, there’s a strong argument for creating a hybrid strategy that blends both debt purchasing and collections. With the devil in the details, let’s take a closer look at how debt sale works, how it can be used and where it can fit into your collections strategy. 

What is debt sale and how does it work?

Debt buyers are exactly that - they purchase debt ledgers from lenders at a reduced cost of their full value. Debt buyers will use proprietary data and modelling to determine the value of your portfolio based on how they think it will liquidate. Often, this includes algorithms that consider factors such as age of debt, volume of accounts and origin in order to determine the purchase value.

Once accounts have been purchased, a debt buyer has a few channels to generate a return on their ledger purchase. Most have their own in-house collections operations, but this can be bolstered with the support of an external agency, with many debt buyers opting to partner with agencies specialising in digital first or machine learning-led strategies. For example, InDebted partners with multiple debt buyers.

The regulatory landscape of debt sale has evolved over the years. Let’s take the United States, who saw the Office of the Comptroller of the Currency (OCC) tighten their guidance on debt sale in 2014. This included enhanced compliance management for both lenders and debt buyers to ensure that lenders maintained strong oversight over debt sale arrangements.

How does debt sale compare to debt collection?

The main difference between the two? Time. Debt sale provides an immediate liquidity injection that can be a welcome boost during times of pressure. Collections on the other hand, delivers a recurring (and possibly even greater) revenue stream over time. Perhaps what’s most interesting are the similarities between debt sale and collections:

Due diligence 

While there are differences in regulatory requirements, finding the right debt buyer or collections agency requires proper due diligence. Both often follow a structured RFP process as standard practice, enabling you to ensure your new partner has a well developed compliance, strategic and operating framework. Regulators expect you to conduct thorough checks on partners, as the relationship you establish with a buyer or a collections agency is not transactional - it’s for the long run.

Control over your reputation

Regardless of whether you’re selling accounts or outsourcing their servicing, the reputational risk remains the same. More often than not, customers won’t make the distinction between your brand and that of a debt buyer or a collections agency - they’ll see both as an extension of their relationship with you. This means that when selecting a new debt buyer or collections provider, vetting their outlook towards customer experience and consumer protection policies is vital.

Maintain oversight through robust management

When managing a third party financial relationship, it’s essential to have strict controls in place to enable a clear overview of how accounts are being handled, and how customers are engaging. With debt sale, your responsibility doesn’t end once the accounts are purchased. For example, it’s standard practice to conduct regular audits of debt buyers to ensure their compliance with laws, regulations and policies. This drives home the importance of having effective management processes and support mechanisms in place when navigating an active regulatory environment. 

Can you combine debt sale and collections in one strategy? 

Here’s where the magic happens. Depending on your organisational strategy and goals, there’s a place for both debt sale and third party collections. With the right modelling, you can determine the right mix to maximise returns and meet your organisation’s current and future needs.

In practice, it’s not a one size fits all approach. Carefully consider the risks and benefits of both in conjunction with your expectations of a partner. We see lenders implementing diverse strategies to get the most out of each option - using debt sale to generate immediate liquidity and collections to support customer rehabilitation. 

It’s also common to see debt buyers engaging third party agencies. This enables them to boost their liquidation by partnering with specialist agencies who invest in innovative approaches to collections, such as omnichannel strategies. This demonstrates that the two entities aren’t competitors, but can work in partnership to move the industry forward and achieve the best customer outcomes.

A combined success

While it’s understandable to think the choice between debt sale or collections agency is an ‘either, or’, it’s not quite the case. They each act as essential cogs in the financial services market to support customers who have fallen behind, each with their own advantages and specific requirements. One key commonality - both require the same level of care and consideration when determining if they’re the right partner for your business.