InDebted / Resources / Capability doesn’t equal competency – the limits of debt collection software

Updated Mar 30, 2022

Capability doesn’t equal competency – the limits of debt collection software

By InDebted

Debt collection software gives companies the capability to collect overdue payments, but it’s important not to confuse capability with competency. The experience and expertise necessary to support an effective collections operation? That’s not included.

It’s tempting to equate a tool with a skill. We (as in humans) do it all the time. The average golfer spending lavishly on fancy clubs utilizing the latest materials science. The would-be painter buying the best brushes. If you already have the skill and experience, these tools can amplify them. But buying a Kolinsky sable brush won’t magically confer skill with different brush strokes or color theory. A tungsten-cored, carbon-faced driver won’t fix your swing.

The same is true of debt collection software. You can find some pretty powerful tools and features, but they take skill and experience to use effectively. And in a business setting, that goes way beyond a few golf lessons. It typically involves hiring a team, training up staff, establishing processes, and more. With many teams understaffed and overworked already, it can quickly become a huge task to take on.

If you’re shopping around for debt collection software, by all means, carry on. But make sure you know the skillsets you’ll need, and the work you’ll need to put in, to take full advantage of your expanded capabilities. 

Such as…

Duct tape and chewing gum

The first big hurdle you’ll face is software integration – making sure that the debt collection software can properly interface with your accounts receivable software, plus any other applications that need to come along for the ride. Email client? CRM software? Payment processing? There can be a surprising amount of pipes to connect on the back end, and you’re going to need developers who know what they’re doing to pull it all together.

“A bad email is better than no email”

Wrong! Traditional debt collection practices may have leaned on harassing and shaming customers to recover past due payments, but that approach won’t do your brand any favors and can drive customers away. You’ll need writers to write the emails, data analysts to study open rates and optimize email flows. If you want to expand into data science and bring machine learning along to improve engagement and recovery, you’ll need data science engineers. 

Operators are standing by

Where will your customers turn if they have questions? Or if they were incorrectly flagged for collection, which can happen with subpar integrations, you’ll need a customer support team who can field questions and provide useful assistance. Depending on your business, you may be able to tap into an existing customer support team, but will still need to provide them with the training and scripts to support debt collection customers specifically. 

If you think compliance is expensive, try non-compliance

Debt collection is highly regulated, and those regulations can shift from jurisdiction to jurisdiction, even down to the level of individual states, provinces, and municipalities. Ensuring compliance entails not only understanding this myriad of regulations and staying on top of regulatory changes, such as the recent Reg F in the United States, but also building compliance rules into your collections process. 

Failing to ensure compliance can result in legal action, financial penalties, and reputational loss. Through 2020, the U.S. Consumer Financial Protection Bureau enforcement actions have resulted in $12.9 billion in customer relief and $1.6 billion in civil penalties.

It all adds up

All of the skill, expertise, and effort required to properly support debt collection software also contributes to your operating expenses. Everything you spend on debt collection – software licenses, hardware, cloud deployments, staff time, training, customer support – all of it reduces your net recoveries. 

With a well-designed, highly-automated system and a large volume of overdue accounts, deploying debt collection software and managing recoveries in-house can make financial sense, particularly in the earliest stages of an overdue account. 

But as accounts progress through their lifecycle and recovery rates decrease with time, your in-house operating expenses will at some point exceed your recoveries. When that point is crossed, it makes no sense to put any internal effort into collecting debts. It’s quite literally a losing proposition. 

This is when many companies turn to debt collection agencies. Because agencies typically charge a fee only on the amount they’re able to recover, there is very little impact on operating expenses. This means they’re able to keep pursuing recoveries well after it’s no longer viable for a company to do so on their own.

Of course, there’s no reason a company has to get right up to that tipping point before they partner with a debt collection agency. Bringing in a debt recovery partner earlier in the lifecycle of overdue accounts, such as when operating expenses outpace agency fees, can help optimize your collections. 

Debt collection software can certainly extend your capabilities, particularly if you already have the required skillsets on hand. But if you have to stand up a team and an operation, the work to develop operational competency may not be worthwhile.

To dig a bit deeper, check out our white paper, Navigating the debt collection software tipping point.

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