According to a McKinsey’s 2020 report, the international faced many challenges, despite several industries relying on its expertise to collect debts from customers.
The report further pointed out that many debt collection agencies were only able to recover $40 billion out of $150 billion in 2010. The industry average collection rate was only 20%.
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 do not take advantage of modern technologies or tools for this purpose.
The report also pointed out that when debt collection agencies switched to digital collection techniques, it increased the collection rate by 65%. 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 harness the power of high-tech or modern tools, such as machine learning and artificial intelligence, to develop contact strategies for 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 default. Additionally, it can help businesses generate positive cash flow from their operations.
What are the common challenges debt collectors face
Before discussing how modern technology can help lenders and banks effectively collect on their debts, it is essential to understand their challenges.
It is now a collective consensus of banks, lenders and debt collectors that traditional collection methods are not effective enough. These conventional methods are robocalls, letters, aggressive agents and dispute resolution.
Frustration among borrowers
Most of these strategies often cause frustration among borrowers. Therefore, this has an impact on debt collection rates. McKinney’s latest report also indicated that many issuers still practice traditional strategies to contact customers based on their risk profiles, balance and average days past due.
Some issuers have just started incorporating behavioral segmentation and contact preferences into models.
Yet, there is a long list of lenders who use digital channels such as SMS and email at first, but often abandon them after a month. Most of them are switching to traditional channels, including letters and phone calls.
Although issuers like to revert to conventional channels, their customer base shows a preference for modern digital contacts, especially email and SMS, regardless of delinquency. That is, customers with low balances prefer digital channels for debt collection.
How digital collections help banks and lenders
Using digital debt collection can dramatically improve and streamline the collection of refunds. You can credit the leading proponents of success with the many benefits of high-tech debt collection methodologies.
Advanced analytics and data collection
Using digital collection methods or strategies to contact customers allows lenders or collectors to get many signals from borrowers at the same time. It doesn’t stop there as they can segment them automatically using advanced algorithms. It’s a great way to develop many personalized contact strategies based on the profile of borrowers.
On top of that, collectors can leverage past data to develop an advanced profile of borrowers while leveraging predictive analytics to predict future repayments and default risk. These abilities are a great way to reduce the risk of delinquency and allow them to prepare for the challenges of the future.
Optimized customer communication
Digital collection processes further enable collectors to optimize and improve communication across all channels. It also helps lenders focus on standard scripts to provide customers with a customer-centric approach.
Using preconfigured borrower profiles to learn about customers helps lenders understand their mindset. Lenders can make an active change in communication that incorporates empathetic concerns instead of just passive-aggressive debt collection advice.
This feature of digital debt collection methods has benefited many lenders working across the globe. This is because the strategy allows lenders to reduce the risk of spam and improve communication efficiency.
Insight Driven Solutions
Digital collection strategies and methods are a great way to strengthen the system that captures complete customer information. An increased amount of data helps collectors better understand borrower behavior. Additionally, it creates an insight-driven approach that allows them to use previous data to anticipate future changes.
Digital tools like single-view borrower dashboards and advanced custom analytics help debt collectors manage client portfolios. It reduces risk exposure while improving cash flow.
How is digital debt collection a driver of success?
In short, a digital environment not only improves compliance, but also responds to changing customer demand. It has become a proven way to optimize and contextualize interaction and communication with customers.
Some of the key benefits lenders get when deploying digital debt collection solutions that can lead to success are:
- Business results include high collection clearance rates and lower collection cost
- Better customer experience
Some features that lead to success include:
- Customer-centric collection
- Maintain regulatory and standard compliance
- Identifies customer needs and preferences to optimize collection effort using the best channels with a holistic approach
- Knowledge-Based Custom Solutions
- Develop compliant communication to meet debt collection regulatory requirements
- A 360-degree view of customer behavior and actions in a dashboard to implement recommended plans, reimbursement options, and streamline communication for better customer retention.
Debt collection agencies and lenders must harness the power of modern tools, such as artificial intelligence (AI), to collect debts. These modern digital tools allow creditors and customers to take advantage of several advantages.
Image credit: Mikhail Nilov; pexels; Thank you!