How technology is changing the debt collection market

For obvious reasons, it's often easier for lenders to hand out loans than to collect them. On the flip side, for consumers, it's often easier to get your hands on a loan than it is to repay it. This tension offshoots into the lucrative debt collection business.

The debt collection industry is currently valued at $18.8 billion. According to the CFPB, around 28% of Americans have at least one debt in collections right now. As finance undergoes a technological overhaul, debt collection is also touched by it. New digital methodologies are opening the doors for lenders to build deeper and more profitable relationships with their customers while increasing the efficiency of their collection processes.

I sat down with Eddie Oistacher, CEO of Peach Finance, to understand what gaps exist in the industry’s current debt collection practices, and how technology is helping take it to the next level.

To start off, let’s first review how debt collection works today. There are three prevalent methods: the first is in-house debt collection – which is very limited in the current industry, as the task is very labor-intensive.

A more popular approach is outsourcing, whereby the loan originator outsources collection to a third party for a cut or predetermined fee. Such an entity can go about this task in multiple ways – by contacting the customer and working out repayment, or going to court and using the judicial route.

Thirdly, another popular practice is selling the loan portfolio off to a third party at a discounted rate, in which case the third party gets to keep whatever it can collect.

The first gap you will notice here is that lenders are more or less unable to effectively conduct first-party collections. This leads to a loss of revenue, as collectors end up receiving much less than what their loans are actually worth. Oistacher believes this is the result of aging technology and legacy servicing infrastructure.

Legacy systems also restrict lenders’ ability to leverage automation and intelligence to optimize their returns, streamline workflows, and minimize agent involvement.

Manual servicing processes and legacy technology are still prevalent in the industry. These processes have little flexibility. Lenders’ agents, who are actually working collections out, have a minimal ability to implement loan modifications to address customer needs. This is true regardless of whether their first-party collection efforts are outsourced or done in-house. As a result, lenders charge off far more accounts than they should, sending these accounts to third-party collection agencies.

“First, lenders must sell their delinquent accounts for pennies on the dollar, instead of keeping 100% of what they’re able to collect. And second, by outsourcing delinquent accounts to a third-party collections agency, lenders are effectively writing off borrower relationships that were hard-won and may actually be quite lucrative over the long term — especially in the case of extenuating circumstances like job loss or a recession,” Oistacher outlined.

Debt collectors have historically been unable to build the best rapport among customers. That’s natural – no one really likes someone who’s constantly reminding them of their loan payments. That does cost lenders, though. Not being able to build rapport causes the lender to lose many of the hard-earned relationships it has formed.

Lenders can, however, do their job while building good relationships with their clients. The solution here is full disclosure and cross-channel communication.

Cognizant of that, lenders are now being more transparent about their processes. This way, consumers feel more involved and comfortable with credit. This is also the need of the hour, as modern consumers are much more involved with their finances – regularly checking what their banks are charging them for, and raising complaints about things they see out of order.

Talking more specifically about omnichannel communications, the CFPB’s new policies have ensured that there is regulatory pressure to do so. Regulation F, brought into effect late last year, served to limit the number of interactions debt collectors could have with customers. It also granted customers the right to choose which channel they wish to be approached on.

This translated into two things for lenders and debt collectors: first, every interaction with a customer is now more valuable, as only a limited number are allowed. Secondly, they need to present across channels to be able to approach customers in the way that they prefer.

So, how are new systems helping lenders to progress in such an environment and fill in these gaps? By granting lenders greater control.

Modern cloud-native servicing platforms have learned from the rigidity of their predecessors. These platforms give lenders a high degree of flexibility to meet customers halfway when loan modifications are needed, and drastically reduce the need for manual involvement. Further, these platforms enable lenders to leverage their own operational insights alongside testing, refinement, and automation to deliver better results.

“Modern collections systems capitalize on a tight integration with the lender’s loan management system to unlock robust loan modification capabilities,” said Oistacher. “Agents can easily defer due dates, change or extend terms, create custom payment plans, reverse or backdate payments, and more — with completely configurable policies by geography and product.”

Such integration also helps automate the process and benefits from artificial intelligence. Lenders can use consumer data to help them continue paying on time. These solutions also come with automated communication programs. 

Predefined omnichannel communications can be made through consumers’ preferred channels of communication – all automatically. In the case that a customer does end up in collections, lenders can likewise enable automated campaigns to collect, only tapping agents when their involvement is additive.

“Some collections systems even have compliance built in, which helps lenders ensure that any actions taken by their system are compliant with applicable federal and state regulations. This is not a small consideration, since the risks of non-compliance during delinquency are substantial,” Oistacher elaborated.

Today's consumers demand more customized offerings than ever before. And with more and more financial products embracing them, they are almost an expectation in financial services today. This has given birth to a rising trend of self-service in debt collection.

Within this space, customization means that borrowers are able to make modifications to their payment plan, and customize their autopay schedule with a high degree of granularity — all in a self-service fashion.

Another version of this is when lenders’ own agents collect on delinquent accounts through their own CRM tool, rather than having to outsource to a third party.

“While outsourcing is often the right strategy, too often it happens out of necessity — due to inflexible infrastructure. When lenders do have infrastructure that’s sufficiently flexible, their customer experience and their economics can both improve,” Oistacher said.

It’s interesting to see how industries as old, traditional, and rigid as debt collection can change fundamentally once touched by technology. New, AI-enabled solutions and systems are making customers’ financial experiences feel more effortless while improving efficiency and profitability for the brands that power them.