The concept of debt collection can be traced back to before the use of money, as debt collection was also applicable in the days of bartering. Traceable back to around 3000 BC in ancient Mesopotamia, initial forms of debt collection involved debt slavery and debtors’ prisons. The modern market for debt collection has evolved considerably at a global level, with expansion of first-party and third-party debt collection services.
The 21st century has witnessed rapid expansion and globalization, with costs rising and people relying on a series of loans and debts to keep up with the rampant commercialism. As the process of securing loans becomes easier, the percentage of people taking out loans that cannot be easily repaid is increasing, propelling the growth of the debt collection market.
The growth prospects for the debt collection market are immense, with potential across multiple verticals including healthcare, auto finance, mortgage lending, travel, technology, retail and more. The purchasing power of the common citizen is rising and easy loan options make loans accessible to people across a wide spectrum of society. Online shopping is adding further to the consumerism trends.
Apart from consumerism, the rise in entrepreneurship has also led to an increase in loans. Governments encouraging startups have made the loan process simpler; however, a firm debt collection process also needs to be in place to maintain the pace of loans.
First-Party and Third-Party Debt Collection
Forms of debt collection can be broadly divided into two types, first-party collection and third-party debt collection. First-party collection involves the company that provided the original loan to follow up on the debt collection process, while in third-party debt-collection the process is outsourced to a designated agency.
In the case of first-party debt collectors, there is pressure on the agency to maintain a constructive relationship with the customers which is not necessary for third-party debt collectors. In addition, third-party collectors have a procedural and timely manner of recovering debts and are aware of the concerned legislations.
The debt collection market has witnessed a growth in the outsourcing of debt collection to third-party agencies, with 10-12 percent improved recovery rates. The North American and APAC regions have higher outsourcing tendency. The ease of outsourcing the debt collection process has increased its popularity, despite the costs involved, which are generally based on a percentage of the amount collected in the debt recovery process.
Developed Versus Developing Nations
The potential of the debt collection market in a particular country is dependent on several factors. The presence of effective third-party debt collection agencies, the concerned legislation in place and the purchasing power of the citizens all influence the debt collection market.
In developed economies such as the US, and Canada, the purchasing power is higher and loans are also more common, leading to a rise in third-party debt collectors. The process of debt collection is more streamlined and rate of success is also higher.
In comparison, residents of developing countries have comparatively lesser loans due to lower purchasing power and a more stringent process to secure loans. The debt recovery process through third-party debt collectors is expensive, but is more cost-effective than each creditor setting up a first-party debt collection department. The expansion of global players in developing economies is simplifying the loan process, giving rise to the need for a backup debt collection process.
At a global level, purchasing expensive products and services is becoming easier with the help of loans. However, the rise in loans inevitably leads to the need of a robust debt collection setup, to enable cost-effective and time saving means for debt recovery at a local and global level. Third-party debt collection services are expected to lead the market, so that creditors can outsource the process rather than maintaining an in-house team for debt recovery.