The Impact of Digital Collections in Debt Recovery and Its Advantages

October 12, 2022

A McKinsey report published in early 2020 indicated that the global debt collections industry is struggling even though more industries than ever before are relying on its acumen to recover consumer debt. The report highlighted that in 2010, debt collection agencies were only able to recover $40 billion out of the total $150 billion dollars assigned to them for recovery. On delinquent debt, the industry averages a 20% collection rate.

Experts in the industry predicted that these losses in recovery can be credited to the reliance of debt collection agencies and lenders on legacy or traditional systems which rarely leverage the power of modern technology.

The report also emphasizes the fact that debt recoveries increased by an average of 65% across the board when lenders and debt collectors shifted their focus on using digital collection suites. This article aims to provide an overview of effective debt collection strategy by using a various digital channel.

What Are Digital Collections in Debt Management?

Digital collections in debt management can be understood as a practice wherein the lender or debt collector leverages the power of modern technology such as Artificial Intelligence and Machine Learning to create effective contact strategies to reach borrowers through channels such as email, text messaging, and online tools Establishing effective customer contact strategies via digital collections reduces customer delinquency and results in the creation of an overall positive cash flow for the business.

Challenges of Debt Collection

It has now become an industry wide consensus amongst lenders and banks that traditional debt recovery practices such as aggressive agents, automated calls, letters, and long dispute resolution, at times, end up frustrating and intimidating the borrowers, thereof impacting debt recovery rates. Debt recovery complaints comprises most of the consumer complaints which impacts the bank’s rating negatively.

Mckinsey1 issued a report indicating that most issuers still use traditional contact strategies based on customer balance, risk profile, and days delinquent. Some are beginning to integrate contact preferences and behavioral segmentation into their models. Yet lenders using digital channels such as email and text in early delinquency largely abandon them after 30 days, switching to traditional channels such as phone calls and letters.

Though issuers remain wedded to traditional channels, using them even more heavily in later delinquency, their customers expressed a general preference for digital contact, primarily by email, followed by text message, irrespective of the prevailing stage of delinquency. The digital preference is most pronounced among customers with a low delinquent balance.

Traditional Collection Process - Problems

To embrace the true power of digital collections in debt recovery, it is important for us to first understand the shortcomings of traditional collection methodologies. Mentioned below are the most significant ones:

  1. Analog Communication

In an age where the average borrower spends more than 5 hours per day on their smartphones, traditional collection methods employ analog communication methods which are outdated and lack efficiency.

  1. Manual Data Processing

Traditional collection practices heavily rely on legacy systems which leads to an increasing amount of time spent on manual data processing. Manual data processing is not only inefficient in terms of categorizing and assessing hundreds of borrower documents but also limits the lender in offering individual attention to borrower concerns.

  1. Lack of Integration and Complicated Data Exchange

A recent survey conducted among leading lenders in Europe indicated that more than 80% of them still relied on software created in the 90s, which lacked integration capabilities with modern technical infrastructure, thus leading to complications in data exchange. In an age where borrowers simultaneously communicate via multiple channels, these software’s can only capture and process limited signals at any given time, thus complicating the overall process.

  1. Inefficient Legal Options

Most of the times, lenders face paucity of credible information about borrowers which when combined with high attorney and court fees renders any legal options, they adopt highly uneconomical, thus leading to a drastic decrease in success rates of legal proceedings.

How Digital Collections Can Help?

The McKinsey report referred earlier highlights a section wherein a detailed survey was conducted on lenders who rely on digital collection methodologies for debt recovery. The results of the survey indicated that establishing contact with borrowers increased by 65% across the board, and lenders reported an 89% to 92% increase in repayment collection. The main proponents of this success can be credited to the following advantages of digital collection methodologies:

  1. Advanced-Data Collection and Analytics

Digital collection methodologies of omnichannel contact strategy enable lenders to collect multiple borrower signals simultaneously and automatically segment them using advanced algorithms, thus fostering the creation of custom contact strategies depending on the borrower’s profile.

Additionally, lenders can rely on historic data to create an advanced borrower profile and leverage predictive analytics to forecast future repayments and chances of delinquency. Both abilities not only limit the lender’s risk but also enables them to better prepare for the future.

  1. Optimized Communications

Effective use of digital collection processes enables the lender to optimize their communication across all channels and shift their focus from standardized scripts to customized client-centric offerings. Lenders can leverage the power of their preconfigured borrower profiles to better understand consumer’s mindset and employ an active change in their communication which relies more on empathetic concern rather than passive-aggressive collection notices.

Multiple lenders around the globe have reported success from these strategies, mainly due to the fact that this strategy enables them to reduce spamming and increase effective communication.

  1. Insight-led Solutions

Digital collection practices enable the lender to foster a system that captures 360-degree information regarding customers. Capturing an increased amount of data not only helps the lender to better understand borrower behavior but also create an insight-led approach, where lenders can rely on historic data to predict future changes and accordingly prepare for them.

Advanced custom analytics and single view borrower dashboards can assist lenders in actively managing their portfolios, minimizing their exposure to risk and fostering a positive cash flow.

Thus, to capture the collections opportunities issuers need to better understand their customers’ diverse preferences and then design a sensitive multichannel contact strategy to address them.

The strategy requires coordinated capabilities—in technology and infrastructure; in advanced analytics, machine learning, and automation; and in a well-orchestrated deployment. The object is to deliver tailored messages through the right channels in the right sequence to the right customers. The cost of implementing a true multichannel strategy will amount to a small fraction of the return to issuers, in more efficient and effective recoveries and happier customers.

Digital Collections – Way Forward

Environment of strong economic performance, low unemployment and generally positive customer behavior can easily mask the importance of robust process that needs to be implemented for debt collections. Banks and other consumer lenders must prepare to strengthen collections capabilities and increase capacity in advance.

Moreover, customers are primarily using digital channels to manage their all sort of finances and this trend is visible irrespective of age groups and businesses. Majority of the customers today prefer communicating via messenger platforms like SMS, WhatsApp, and iMessage.

Notwithstanding this massive shift in consumer behavior, consumer credit collections are often still highly focused on the outbound call center model, with optimization across alternative channels still limited. Traditional call center-dominated collections operations are unlikely to suffice in the future.2

To address and avoid delinquencies, lenders need to preemptively enhance their collection capabilities. This will improve their collection efficiency today and, in the future, – significantly increasing recoveries, containing costs, and sustaining returns. Lenders need to develop an omni-channel digitally enabled collections capability.

AllCloud’s digital collection process adopts a data driven approach to deliver superior financial performance and customer experience. As customers turn increasingly to digital channels to conduct their financial transactions, it is important for the debt collection process to stay in sync with evolving trends. A digital debt recovery solution can help businesses streamline their collection processes and stay compliant, while enhancing customer satisfaction and recovery. AllCloud’s digital solution transforms traditional debt collection practices by offering services such as

  1. Multiple digital collections capabilities such as Payment gateway, UPI, Wallets, etc.
  2. Automated and End to End Solutions for recurring payment channels – Standing Instructions, NACH & UPI 2.0
  3. Chatbot enabled interactive collections initiatives.
  4. Customer and Collection Agent Mobile applications for enablement of easy payments.
  5. Superior tracking and monitoring of Cash collection.
  6. Prioritization of task based on parameters such as EMI overdue, principal at risk, geography etc. and Realtime case allocations to collectors
  7. Management of Third-party collection agency.
  8. Establishment of NPA, Written offs and Delinquent account categories
  9. Monitor performance of debt collection at branch, zone, agent, and organization level with exhaustive dashboards and MIS          
Episode 09
How an Automated Loan Management System Can Maximize your Efficiency

Episode 09
Overcoming Loan Servicing Challenges with Unified Lending Technology

Unified lending technology presents a transformative solution for overcoming the challenges associated with loan servicing. By enabling seamless integration, data centralization, and automated payment processing, lenders can streamline operations, improve efficiency, and enhance customer satisfaction.