How Covid-19 Changed Third Party Collection Agencies

How Covid-19 Changed Third Party Collection Agencies

At the start of 2021, there were only 6,724 third party collection agencies left in the United States. By contrast, there were over 9,000 in 2011. There has been a steady decline in firms, since 2011 and a larger decline between 2016-2019. Much of the decline is due to mergers and acquisitions, but Covid-19 is also now playing a part.

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The decline of small collection agencies and rise of larger ones not only reflects trends in many industries, it can greatly impact those industries and individuals as well. 

Revenues Are Down

IBISWorld (an industry market research firm) estimates that revenue for agencies declined around 3% annually on average in recent years, but had a more dramatic decline of nearly 14% for 2020. One might expect that a downturn in the economy would be good for collection agencies. As jobless rates increase, so does debt. At the end of 2019, nearly 83 million consumers had one or more account in collections. That was a 5% increase over 2018. In all, collections totaled around $203 billion. Healthcare related debt was over half of that total. 

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However, for the first time since 2014, total household debt fell in the second quarter of 2020. Consumers are responding to the economic crisis by spending less. The CARES Act mandated that forbearance programs be offered for many mortgages and federal student loans, further reducing the number of accounts in active collections. Many lenders and billers proactively offered their own accommodations to consumers in need, or simply chose not to send accounts to collections. What’s more, collection agencies generally work on contingency, meaning that they only make money when the debt is paid. If people simply don’t have the money to pay bills, agencies are less likely to make money.

Agency Sizes and Locations

Most collection agencies are located in New York, California, and Texas. In 2018, over 70% of companies had fewer than five employees, according to the US Census Bureau. Firms with fewer employees are more likely to be bought out, and also less likely to have the resources to withstand an economic downturn. Between 2013 and 2018, small firms declined. However, firms with 250 employees or more actually increased. 

Bigger agencies are not necessarily safe from closure. Employees are the biggest cost for collection agencies. Being a successful collection agent is a highly complicated and trained position. Office space, legal training, tools, and equipment all add up in terms of cost. Because of the sensitive nature of their business, many agencies cannot rely solely on employees working remotely and utilizing remote servers. The sensitive and legal nature of the work also explains why collection agencies cannot move operations overseas as a cost-saving measure. Only 17% of agencies currently conduct any functions outside the US. The most common operations to conduct overseas are call centers and back-office operations, such as accounting and payroll. 

What’s more, not all collection agency employees can be tied directly to revenue. This makes it even more difficult for smaller agencies to compete with larger ones. Over 15% of collection agency employees are involved in regulatory compliance, as opposed to direct collections. Regulations surrounding collections vary from state to state, and continue to become more complex. 

The rise of larger agencies means that if you are being contacted by a collection agency, it is highly unlikely that the agent is located in your state and familiar with current conditions in your area. 


Another possible reason for the decline in small collection agencies is the rise of technology. Larger companies are more likely to embrace a wide range of debt collection tools and technology. 

Innovative strategies, such as predictive dialer, IVR capabilities and speech analytics can all make collections more efficient. Actual payment is also becoming more dependent on technology. Online payment portals are growing in popularity, since many consumers prefer to handle their obligations without having to talk directly with a collector. 

This efficiency may eventually reduce the number of collection employees, even at large firms. It may also mean that it takes longer for an individual debtor to make contact with another person who can help set up a payment plan.

Areas for Growth 

Although Covid-19 has reduced the number of individual accounts in active collections and increased investing opportunities like silver, it is unlikely to destroy the industry. Over 60% of firms collect on healthcare claims and approximately 79 million Americans have some form of healthcare debt. Twenty percent of companies also collect private student loan debt. Over 2 million Americans carry private student loan debt, averaging over $48,000. While healthcare and student loan reform are likely to change these numbers, for now these areas are still growing.

The Federal Debt Collection Practices Act (FDCPA) applies to individuals or businesses attempting to collect on debt, not third-party debt collectors. As this article from a collection agency explains, the law is expanding. This may make collection agencies a more attractive option for smaller businesses. 

Covid-19 caused an economic downturn felt in all sectors. But in many industries, the pandemic simply speeded up changes that were already in place. This is definitely true of the collection industry. Covid-19 sped up the decline of smaller collection agencies and the adoption of technologies that will make collections more efficient going forward. Collection agencies may look different in coming years, but they will still be there. 

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