When selecting a third-party collection agency, one of the most debated topics is pricing. The temptation to choose the lowest contingency fee is strong—after all, higher fees cut into your bottom line. But is the lowest cost really the best value? The answer lies in understanding the balance between cost, performance, compliance and expectations.
The Illusion of the Lowest Fee
It’s natural to gravitate toward the agency offering the lowest contingency rate. The assumption is simple: the less you pay per dollar collected, the more you keep. However, this approach can be misleading. But don’t be fooled with low ball or come-on pricing. Lower fees can mean fewer resources allocated to collections, new or less experienced agents, and ultimately, weaker recovery rates.
Worse yet, compliance risks could increase when agencies operate on thin margins. Agencies need sufficient revenue for essential training, investments in technology and ensuring regulatory adherence. Costly compliance failures, complaints, lawsuits, and reputational damage far outweigh any upfront savings.
Performance vs. Cost: What Really Matters?
Rather than focusing solely on fees, it’s important to understand and communicate expectations to determine appropriate rates, and to evaluate performance. Consider this example:
- Agency A charges a 20% contingency fee and recovers 30% of your placements.
- Agency B charges a 15% contingency fee but recovers only 20%.
Which is the better deal? Despite the higher fee, Agency A delivers significantly more dollars back to your business. For every $1000 of placements, Agency A collects $300, and charges $60. The creditor receives $240. On the same $1000 of placements, Agency B collects $200 and charges fees of $30, so the creditor gets $170.
The fee is half what you’d pay with Agency A. But, a lower fee is meaningless if it results in lower recoveries. In this example, the creditors with the higher rate actually received $70 more dollars for each $1000 collected. Higher rate meant higher recoveries and higher return.
Beyond raw recovery rates, agencies that invest in better technology, compliance programs, and skilled collectors often provide additional value—offering insights, detailed reporting, and better treatment of consumers. These factors contribute to long-term brand reputation and regulatory security.
The Cost of Compliance Failures
Compliance in collections isn’t optional—it’s a necessity. Agencies need more than razor-thin margins to maintain proper oversight, training and retention. A single compliance violation can result in:
- Regulatory fines that far exceed any savings on fees.
- Lawsuits and settlements that drain financial resources.
- Reputational harm, making future placements more challenging.
A well-balanced agency pricing model that considers performance expectations with appropriate pricing ensures investment in compliance infrastructure, such as call monitoring, employee training, and robust policies that mitigate legal exposure.
Two Big Questions – Too High? or Too Low
There are two very key questions the Recovery Manager would be wise to consider in the process of deciding what commission rates to pay, “What will it cost me if my rate is too high?” and “What will it cost me if my rate is too low?” Both are equally important. Paying too high a rate once you have exceeded the effectiveness threshold will only increase expenses unnecessarily and expense control is one of today’s most often heard demands from senior management.
But, paying too little actually costs you money. If the boss has praised you for negotiating a low rate with the agencies, have you considered what it might be actually costing you. Yes, staying within your fee budget expectation is a nice goal, but not when it costs your company money. Or, even worse, one creditor who negotiated a low rate later learned that the agency closed their doors without warning. They lost immediate cash flow of their collections, but getting the account back was a lengthy process. Then, getting the accounts placed with a second agency created more work, and those accounts were eventually placed as seconds instead of first placements, at a much higher recovery rate. That “low rate” agency was a very costly experience for the creditor.
Evaluating True Value: What to Look For
To determine if an agency’s fee is justified, consider:
- Expectations – Clear communication on what you expect the agency to do.
- Performance Metrics – Recovery rates, liquidation percentages, and speed of collections.
- Compliance Standards – Investment in training, technology, and regulatory adherence.
- Strategic Fit – Does the agency tailor its approach to your portfolio, or is it a one-size-fits-all operation?
- Transparency – Does the agency provide detailed reporting and actionable insights?
Finding the Right Balance – It’s Not Just the Fee
Rather than choosing an agency based solely on the lowest fee, opt for a fair pricing model that enables strong performance and compliance. Strategies to balance cost and value include:
- Tiered fee structures, where rates adjust based on debt age or performance benchmarks.
- Performance-based incentives, rewarding agencies for exceeding recovery targets.
- Regular agency reviews, ensuring pricing aligns with value delivered.
At the end of the day, a well-structured fee ensures agencies have the resources to maximize recoveries while protecting your business from compliance risks. The goal isn’t just to pay the lowest fee—it’s to achieve the highest net return while safeguarding your organization.
The best collection agency is one that balances cost, performance, and compliance —– ensuring long-term success.
Don’t fall into the trap of chasing the lowest rate — Invest in value, and your results will reflect it.
Resource Management Services, Inc. provides consulting on vendor management topics.
With expertise and experience in collections, oversight and compliance, we understand the challenges faced by creditors in managing collections and recoveries while adhering to ever-evolving regulatory standards.
That’s why our team of seasoned experts is dedicated to providing tailor solutions that address your unique collection and compliance requirements.
From comprehensive consulting services to specialized training programs and meticulous oversight of third-party vendors, we offer a comprehensive suite of services designed to empower your team and optimize your compliance strategies.
Contact our blog authors or Write to us at info@resourcemanagement.com for more information.
www.resourcemanagement.com
Author: Judy Hammond
judy.hammond@resourcemanagement.com
Judy Hammond is founder and President of Resource Management Services, Inc. The corporation was founded in 1986 and specializes in auditing and consulting, serving the collection and recovery industry. As President of Resource Management Services, Inc., she has more than 35 years of experience with an emphasis on operational reviews for compliance and operational effectiveness of collection operations, both for creditors’ internal collection and recovery operations as well as collection agencies and attorneys. She has worked with top banks and financial institutions, utilities, credit unions and telcoms, (and their vendors) and has conducted many Best Practices projects. She is author of various industry publications: “Comprehensive Agency/Attorney Usage Study,” “Comprehensive Agency/ Attorney Usage Study II” and “Collect More From Collection Agencies”. Her work with creditors who were looking to sell debt for the first time, and subsequent Buyer/Seller research was the foundation for the second corporation, The Debt Marketplace, Inc. She worked with Dennis Hammond as co-founders of the Debt Buyers’ Association, (now RMAi), building the foundations for industry standards, as well as the original code of ethics. She developed and produced two industry conferences, Collection and Recovery Solutions and Debt Connection Symposium & Expo, from their inception in 2002 and 2006, respectively, to 2022. Prior to starting her own company, she worked with two large collection agencies.
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