As Charge-Offs Rise Will Fintech Lenders Recalibrate Their Collection Strategy
For years, fintech lenders have focused almost exclusively on one side of the balance sheet, which is originating loans. Whether it’s buy-now-pay-later, point-of-sale lending, or peer-to-peer platforms, the mission has largely been the same, which is scale fast, onboard faster, and worry about risk later. And for a while, that worked, especially in a low-rate, high-liquidity world where capital was easy and consumer delinquencies were low.
But now the cycle has turned.
Charge-offs are rising. Consumer liquidity is shrinking. And fintech lenders, many of whom have never faced a serious wave of defaults, are running into a hard new reality.
If you’re going to lend at scale, you’d better have a plan to recover at scale too.
This is forcing these organizations to reconsider whether they should invest in building an in-house collections function or lean on outside experts to do what they weren’t built for.
The Temptation to Go In-House
There’s a logic to trying to handle collections internally. Fintech firms are, after all, built around margins. If they can reduce third-party fees and keep more of the recovered dollars, why wouldn’t they try?
Some already are. They’re hiring recovery leads, experimenting with digital-first messaging strategies, and trying to apply their data-rich infrastructure to collections. And in some cases, especially with early-stage delinquencies, this could work.
Fintech leaders often view this as a natural extension of their digital-first DNA. They’ve built internal tools for underwriting, servicing, and customer engagement—why not recovery too?
But there’s a big difference between nudging a customer back on track and recovering highly distressed, charged-off debt. Collection isn’t just a matter of automation or UX design. It’s a specialized, regulated business function with a completely different DNA than lending.
Why Collections Is Its Own Business Model
Collections is a world of its own, governed by complex regulations, sensitive customer interactions, and compliance risk that looks nothing like lending operations. While Fintech lenders are experts in acquiring customers, underwriting loans, and scaling origination pipelines. What they haven’t yet fully developed is the capability to manage large-scale recovery operations under regulatory scrutiny.
This is where the expertise of third-party agencies comes into focus. Debt collection agencies exist for a reason, specializing in:
- Compliance infrastructure tailored to federal and state regulations (FDCPA, Reg F, TCPA, and beyond);
- Skilled agents or advanced AI systems equipped to manage emotionally charged interactions;
- Escalation workflows for disputes, legal actions, and account-level customization;
- And perhaps most critically: institutional knowledge built from years (even decades) of hands-on experience with distressed borrowers.
They’ve built systems, trained teams, and fine-tuned processes for decades. Replicating that expertise internally is possible but it’s expensive, time-consuming, and risky. It means building new infrastructure, hiring subject matter experts, investing in compliance, and maintaining it all under scrutiny.
The Hidden Cost of Doing It Alone
It’s easy to think that fintech’s tech-first DNA is enough to modernize collections. But many fintechs underestimate the complexity and cost of running a full-scale collections department. Even if the goal is just to handle early-stage delinquencies, doing it well requires:
- Consistent regulatory training across teams;
- Call centers (or digital-first equivalents) equipped for sensitive conversations;
- Audit-ready documentation and dispute tracking systems;
- Secure communication platforms that meet FDCPA, Reg F, TCPA, and state requirements.
The hope, of course, is that internal collections will improve margins. But if the investment doesn’t pay off and if internal recovery rates fall short or regulatory issues emerge, then the cost could outweigh the benefit.
There’s also the question of opportunity cost. Every dollar and hour spent building a collections arm is time and resources not directed toward core growth functions such as product development, customer acquisition, or underwriting optimization.
Why Selling and Outsourcing Still Makes Sense
For many fintechs, continuing to outsource collections may still be the most rational choice. Debt collection agencies bring immediate operational capacity, expertise, and regulatory familiarity as they have already invested in the tools, training, and technology to operate at scale. They also tend to understand the nuance of working with financially distressed consumers and perform better at later-stage recovery, where the contact and negotiation strategies become more specialized.
Plus, today’s agencies aren’t all old-school call centers. Many have evolved into digital-first, data-driven operations that align well with regulatory requirements and fintech platforms. Some offer white-label or co-branded options, letting lenders maintain a degree of control without assuming the full burden of in-house operations.
“Debt buyers continually focus on their core skills using specialized data and analytics to achieve the objectives. Having worked on the creditor’s side for many years, I know it’s not as easy to be nimble and make quick changes to processes and technology, ” said Melissa Massey with National Credit Adjusters, a debt buyer based in Hutchinson, Kansas. “Debt buying has evolved into an art form and creditors are often best served by focusing on lending and servicing their performing portfolio.”
This isn’t an all-or-nothing decision. Many fintechs are best served by managing early delinquencies in-house, where customer relationships can still be preserved. But once an account hits charge-off? It may be smarter to hand the baton to someone who specializes in that field.
A Strategic Crossroads, Not a Binary Choice
The real takeaway here is that recovery operations, whether in-house or outsourced, are a core function for any lender with long-term ambitions. And there’s no clear winner here, but only trade-offs.
Some fintechs will choose to invest in internal operations and might succeed, especially those with the capital, scale, and technical sophistication to build robust recovery capabilities.
Others will realize that trying to become a recovery expert from scratch may not be the best use of their time, talent, or treasury. Those companies will naturally stick with third-party specialists who already know how to navigate collections with regulatory and consumer sensitivity.
The point is not to declare which model is better. It is to recognize that fintech is entering a new phase, one where recovery isn’t just a footnote. It’s a business function that demands serious, strategic attention.
For lenders navigating this transition, the smartest path forward may not be to choose one path and commit blindly. It’s to understand the limits of your organization’s core competencies and then decide how much of the recovery journey you’re truly prepared to own.
One possible solution is a hybrid approach, where early-stage servicing is handled internally while more challenging, late-stage accounts are outsourced to experienced partners.
Whatever route they choose, fintechs will need to shift their mindset, because collections today are no longer just about recovering losses but about building operational maturity in a credit environment that’s testing every assumption. Even with the right people and the right technology, making that shift is no small feat. It requires moving from a front-end growth mindset to a back-end stabilization strategy, and for many lenders, that transition may prove more complex than expected.
About the Author
Adam Parks has become a voice for the accounts receivables industry. With almost 20 years working in debt portfolio purchasing, debt sales, consulting, and technology systems, Adam now produces industry news hosting hundreds of Receivables Podcasts and manages branding, websites, and marketing for over 100 companies within the industry.
