Debt collection is dead, long live debt collection!

4 min.

It’s 3000 B.C., the Sumer civilization in Southern Mesopotamia (modern day Iraq) invents the concept of ‘debt’. A new industry arose in its shadow: debt collection was born.

From its humble beginnings 5000 years ago, debt collection has evolved quickly: debt slavery was replaced by laws, creditors’ initiatives were supported by debt collection agencies and efficient credit management became the focus in the 21st century. With every step in this evolution, third party providers have adjusted to market needs, in order to provide the best possible outcomes for creditors. Until very recently…

Most debt collection agencies started between 1920-1940 and were majorly influenced by the Great Depression. Blood was on the streets, invoices weren’t paid and creditors did not have the tools, time, or the expertise to protect their cash flow. As debt collection demand outstripped supply, the industry experienced a massive surge in popularity, creating what we now know as the modern debt collection agencies.

Agencies sprung up at an astounding rate with virtually no legal regulations, often attracting shady individuals who seized the opportunity. Debtors were aggressively approached, ethics were questionable and client service barely mattered. Although this conduct is regrettable, it is also one which is understandable: by nature, a debt collection agency can only put informal pressure on debtors. This informal pressure includes a wide array of non-legal actions such as phone calls, letters and threats. However, whenever a debtor doesn’t pay and legal actions are the only step forward, they’re toothless – hence the reason for their upfront aggressiveness. For these reasons, misconduct was widespread and has left the symbolic negative stamp on debt collection: an industry of cowboys.

Almost 90 years have passed since the great depression and not so much has changed. Granted, laws have been adapted, debtors can be found more easily and corporate governance has improved ethical behaviour, but the core competence of the agencies remains the same: informal pressure. While this still makes sense in the Business-to-Consumer market (B2C), the underlying dynamics in the Business-to-Business market (B2B) have completely changed.

While debt collection agencies have been enjoying the status-quo, creditors have made enormous steps. In these competitive times, companies lack the luxury of focusing solely on sales and growth and the other side of the coin – credit – has become increasingly important. This steady increase in awareness started with the S&L crisis in the USA in the late 80s, and the dotcom bubble in 2000. However, the major breakthrough took place after the financial crisis in 2008. Companies – whether rich or poor – had an obligation to better protect themselves: modern credit management was born.

In their quest to limit exposure and manage risk, credit managers meticulously optimized their operations: risk assessment of clients, increased awareness among sales managers, credit insurance and especially important, scaling-up their in-house debt collection expertise. According to our data of over 9000 clients worldwide, over the course of 20 years, companies now hand over 80% less B2B claims to third party providers. In other words, for every 100 claims received in 1995, only 20 claims remained in 2015. And this is only the beginning.

What results is an odd combination. On the one hand, we have an increasingly professional creditor with less B2B claims and on the other hand we have traditional debt collection agencies. And here comes the kicker: credit management fights the debtor with the same tools as the collection agencies; informal pressure. To aggravate the situation, our research has taught us that the remaining B2B claims become more complex and international which leads us to an interesting paradox: companies continue to hand over claims to agencies who do not have the necessary tools to solve the problem. It’s like going to a general practitioner for cardiac surgery.

So, why do companies continue to outsource their B2B claims to non-value adding parties? Our research has shown three main reasons.

First of all, creditors often lack information on what abilities the third party has at its disposal. There are a massive amount of debt collection providers who claim to have all the competencies, including taking legal action, sadly this is often not the case.

Secondly, alternatives are time-consuming and usually costly. Although the best placed partner of the credit manager is a lawyer, they have the trait of being expensive and to only cover a specific territory. The credit manager in charge of the USA, Europe and the Middle East of a major multinational simply has no time to build partners in over 100 legal territories and pay an enormous amount of money. So it’s handed over to a ‘global’ debt collection agency, who pretends to work on a ‘No Cure, No Pay’ basis.

Finally, credit insurance companies generally oblige creditors to hand over their secured claims. This comes at a price: insurance companies have in-house collection agencies which – as shown above – are not equipped to handle those complex claims, resulting in a lower scoring percentage and higher insurance fee next year.

Anno 2016: we’ve reached a dangerous situation in which companies are continuing their path to credit management excellence and where traditional debt collection agencies fail to add any real value to the B2B environment. The current business model of ‘No Cure, No Pay’ will become unsustainable for many players which will lead to companies leaving the scene and further consolidation in the industry.

Agile law firms are in the pole position to fill the vacuum, as they’re the sole player who can truly add value to credit management in B2B claims. Nonetheless, they face serious challenges as the market requires an international scope, an in-depth specialised legal knowledge and they need to get rid of their dusty, expensive and high-nose mentality.

About the Author

Maxime Ampe is International Operations Manager at Bierens Debt Recovery Lawyers. In this function, Maxime works with a team of in-house lawyers from the 12 biggest European economies who share a specific ‘DNA’ based on three main pillars: integrity, the will to win and justice for the creditor. Being solely specialised in B2B debt collection, all international lawyers work on a ‘No Win, No Fee’ basis. In order to continue adding value to credit management, Maxime is working towards Bierens’ goal to have in-house lawyers from all European countries by 2025, enabling companies worldwide to have effective protection from debtors throughout Europe.