The key to success is "net back returns".

1. ATTENTION CREDITORS: By Tom Gillespie
What Ever Happened To “Net Back” Returns
Over the past 25 years the collection The goal, in the end, is to get the best business.
industry has undergone significant change. The possible “net back” return. Prime Example
most noticeable transformation: the concept of Once agencies know you are willing to pay In this scenario, by paying the agency 5%
working every account to achieve a maximum for quality, they will make every effort to more, they return 5% more, and the creditor
return. impress and get you the highest possible increases its “net back” by 17%.
While the goal of most collection agencies recovery rate. Ask potential and/or current
is to achieve the best possible return for every agencies to supply a work plan and staffing Current New
client, it is becoming increasingly difficult to proposal based on performance (i.e. they are Recoveries Recoveries
achieve the best returns in the current paid a higher percentage if they return a higher Average Balance $1,500.00 $1,500.00
atmosphere of rate-cutting. percentage, but need to commit more resources
On the surface, it would seem creditors to your file); and set your base recovery rate at Recovery Rate 20% 25%
today are getting a great deal. With commercial the current 12-month return (in this case 20%). Amount Collected $300.00 $375.00
and consumer rates for collections falling as At the end of the day if you pay the
agencies battle for business, rates are becoming agencies 5% more and they return 5% more Fee Percent Charged 20% 25%
significantly lower than those traditionally you will be the big winner.
Unit Yield $60.00 $93.75
charged in the collection industry. Predictive Historical Prospective
dialing, IVR technology, scoring, and lower Back in the early 1980’s, The JC Penney “Net Back” to You $240.00 $281.25
long distance rates have enabled collection Company was faced with a problem. As a
agencies both large and small to compete with national creditor, they typically utilized large,
the largest firms on a national basis. national agencies. However, these agencies had Final Analysis
Fundamentally, however, it is a good other, larger, national clients including All the technology in the world will not get
collector on the other end of the phone that is American Express and Citibank, among others. a company the best possible return unless the
necessary to bring home the money. But good The JC Penney paper had a lower average person on the other end of the phone is a highly
collectors cost money – and that is where the balance and was tougher paper to collect. The trained and effective collector.
biggest challenge lies for collection agencies key to success for large national creditors is to Every agency has them. Why not make sure
today. Rates are so low, it is all but impossible get their agencies’ best people working their they are working your accounts.
for agencies to staff their business effectively files.
enough to get the best possible return for all Knowing this, JC Penney paid its agencies a About the Author: Tom Gillespie and his wife
clients. 40% rate across the board. The net result — Debra are the owners of ACCESS Receivables
The competition in our business is so great JC Penney got the best collectors, had lower Management in Towson, Maryland. Prior to
that many agencies will sometimes charge agency turnover, and consistently higher ACCESS, Tom was a principal at National
whatever they can get. In fact, one large recoveries. Credit Management Corporation from 1986-
government contract is commanding a 4.5% The reason? 1997, and Vice-President of Sales and
rate. And the client only requires one collection Agencies could afford to put more effort Marketing for Financial Collection Agencies
attempt per month. into every account, and coveted the JC Penney (FCA) from 1980-1986.
They call that a collection program?
When selecting an agency, it is vital to
decide what is more important to your Why the lowest bidder isn’t always the best
business, the “net back” return, or the rate.
Analyze Your Business In a recent conversation with a credit grantor who placed their business with several agencies,
In order to receive the highest “Net Back” they revealed they were dropping all but two agencies because those two agencies had agreed to
return, you first have to figure out how much charge a rate of sixteen percent.
your business is worth. Use the following The average balance of the client’s accounts was $200.00. Their top agency’s recovery rate
was 38% and charged a respectable 27% fee; while the two agencies they were retaining were
example to analyze your business:
averaging a recovery rate of 20%.
The creditor seemed very excited about the low Agency Agency
Average Balance $1,500.00 rate, adding to our conversation, “They do every- One Two
Current Recovery Rate 20% thing for this price including in-depth skip tracing
Average $200.00 $200.00
and litigation.”
Amount Collected per Account $300.00 Balance
Although well intentioned, these agencies could
Agency Fee Percentage 20% not possibly give the creditor a great “net back”
Recovery Rate 38% 20%
return on accounts at that rate, because the rate
Agency Unit Yield (Fee) $60.00
would not support any kind of real effort. Amount $76.00 $40.00
Net Back to You $240.00 After looking at the math (see table) the client Collected
would be receiving a forty-percent higher return if
they paid a higher fee ($55.48 vs. $33.60). And, Fee Percent 27% 16%
In this scenario, the agency has a $60.00 even if an agency off-shores its accounts, how Charged
unit yield, which means it has a good margin many phone calls, letters, and skip tracing attempts
with which to provide a high level of can they provide if they only earn $6.40 per account Unit Yield $20.52 $6.40
experienced collection work, along with placed?
in-depth skip tracing.