According to a McKinsey’s 2020 report, the international was facing numerous challenges, despite the fact that several industries rely on its expertise to recover debts from customers.
The report further highlighted that many debt collection agencies could only recoup $40 billion out of $150 billion in 2010. The average collection rate of the industry was only 20 percent.
Heavy Reliance on Lenders
Many industry experts predict that the high losses are due to the heavy reliance of lenders and debt collection agencies on conventional systems that don’t leverage modern technologies or tools for this purpose.
The report also highlighted that when debt collection agencies switched to digital collection techniques, it increased the recovery rate by 65 percent. The article shows the effectiveness and importance of using digital channels for debt collection.
What is Digital Debt Collection?
Digital debt collection refers to a practice in which debt collectors or lenders leverage the power of hi-tech or modern tools, such as machine learning and artificial intelligence, to develop contact strategies to approach borrowers.
These strategies can include text messaging, email, and other online tools. Note that using effective contact strategies through digital means can reduce the risk of customer delinquency. Plus, it can help businesses generate a positive cash flow from operations.
What Are Some Common Challenges Debt Collectors Face
Before discussing how modern technology can help lenders and banks effectively recover debts, understanding their challenges is essential.
It is now a collective consensus of banks, lenders, and debt collectors that traditional recovery methods are not effective enough. These conventional methods are automated calls, letters, aggressive agents, and dispute resolutions.
Frustration Among Borrowers
Most of these strategies often cause frustration among borrowers. As a result, it impacts debt recovery rates. The latest report of McKinney also indicated that many issuers still practice traditional strategies to contact customers based on their risk profiles, balance, and average days delinquent.
Some issuers have just begun integrating behavioral segmentation and contact preferences into the models.
Yet, there is a long list of lenders that use digital channels such as text and email in the early stage but often abandon them after a month. Most of them switch to traditional channels, including letters and phone calls.
Though issuers like switching back to conventional channels, their clientele shows a preference for modern digital contact, particularly emails, and text messages, regardless of prevailing delinquency. That is to say, customers with low balances prefer digital channels for debt collection.
How do Digital Collections Help Banks and Lenders
Using digital debt collection can drastically improve and streamline repayment collection. You can credit the primary proponents of the success to the many advantages of hi-tech debt collection methodologies.
Advanced Analytics and Data Collection
Using digital collection methods or strategies to contact customers allow lenders or collectors to obtain numerous borrower signals at the same time. It doesn’t end here as they can segment them automatically by employing advanced algorithms. It is a great way to develop many custom contact strategies according to the profile of borrowers.
In addition to that, collectors can rely on previous data to develop an advanced profile of borrowers while leveraging predictive analytics to predict future repayments and the risk of delinquency. These abilities are an excellent way to reduce the risk of delinquency and enable them to prepare for the challenges in the future.
Optimized Customer Communication
Digital collection processes further allow collectors to optimize and improve the communication on all the channels. It also helps lenders shift the focus from standard scripts to offering customers a client-centric approach.
Employing preconfigured borrowers’ profiles to know the customers helps lenders understand their mindset. Lenders can bring an active change in the communication that incorporates empathetic concerns instead of just passive-aggressive debt collection notices.
This characteristic of digital debt collection methods has benefitted many lenders working across the globe. It is because the strategy enables lenders to lower the risk of spamming and improve effective communication.
Insight-led Solutions
Digital collection strategies and methods are an excellent way to strengthen the system that captures comprehensive information about the customers. An increased amount of data helps collectors better understand borrowers’ behavior. Plus, it creates an insight-led approach that allows them to use previous data to anticipate future changes.
Digital tools such as single view borrower dashboards and advanced custom analytics assist debt collectors in managing customer portfolios. It reduces the exposure to risk while improving cash flow.
How does Digital Debt Collection Drive Success?
In short, a digitally enabled environment not only improves compliance but also addresses the evolving demand of customers. It has become a proven way to optimize and contextualize interaction and communication with customers.
Some of the major advantages lenders get when they deploy digital debt collection solutions that can drive success are:
- Business outcomes include high collection liquidation rates and lower cost of collection
- Compliance
- Better customer experience
Some features that lead to success include:
- Customer-eccentric collection
- Maintains regulatory and standard compliance
- Identifies needs and preferences of customers to optimize collection effort by using the best channels with a holistic approach
- Customized insight-led solutions
- Developing compliant communication to meet the requirement of debt collection regulations
- A 360-degree view of behavior and actions of customers in one dashboard to implement recommended plans, repayment options and streamline communication for better customer retention.
Summing Up
Debt collection agencies and lenders need to harness the power of modern tools, such as Artificial intelligence (AI), for collecting debts. These modern digital tools allow creditors and clients to reap several benefits.
Image Credit: Mikhail Nilov; Pexels; Thank you!
