The lending industry has long been rewarded for growth. Less focus has been given to profitability and performance — particularly for venture-backed firms that are all about growing their underwriting. As a possible recession looms and as investors start demanding better returns on their deployed capital, some lenders are starting to get serious about collections.
Ohad Samet has spent his career working on lending analytics — first, at a firm called FraudSciences, which got bought by eBay. He ran analytics at Analyzd, which was acquired by Klarna. As the chief risk officer at the pay later lender, he became aware of how antiquated the debt collections industry was. Call centers, dialing for dollars, it just hadn’t kept pace with the front end of the business.
So, in 2013, he left and with two co-founders started TrueAccord, which is essentially a nearly-automated marketing and sales campaign for debt collection. Based on consumer data and data from the lender, it can determine who to call, what time to call, what communications channel — phone, text, email, chat — and what message to use. It purports to be a much better experience for consumers.
The antiquated collections industry
The majority of the industry is contingency-based servicing. It’s a glorified call center. Think of it like a telemarketing campaign. If you’re a lender and you need to collect, you contract with a collections agency. They do predominantly what’s called third party collections, which communicates with and collects from consumers under their own brand. The lender gives a file of late loans to the collector, what it’s owed, and contact and contractual information of the borrowers.
The agencies are told to go after borrowers and that means calling four times a day per phone number until they capitulate. The collections guys aren’t bad guys — they’re just trying to run call centers efficiently. They compete on razor-thin margins. They pay low salaries and high commissions. At the end of the day, they’re dialing for dollars.
There’s no way of doing this in a consumer-friendly way. You are pitting debt collectors who make low wages against debtors who make low wages. You are pitting misery against misery.
It depends on a lot of factors but average recovery rates can be as high as 20 percent and as low as three percent of the dollars that were written off.
Today’s lending rewards growth
Fintechs have always been focused on growth. Their houses were on fire and they had to figure stuff out. When you deal with that, you care more about onboarding and underwriting than you do about profitability and servicing.
At some point, you get to a size where you have to think about profitability. You’re starting to attract private equity investors and you have to think about unit economics and servicing. We have several of these more advanced fintech clients that realize they need to have this servicing capabilities.
There is no direct benefit to a marketplace lender by being better at servicing. It means better returns for investors, but doesn’t change the revenue structure for the marketplace.
On the flip side, I’m hearing from asset managers that they want better returns or they’ll divest. They go to their providers and prod them to think about their servicing better. That’s how we’re brought in sometimes — when the discussion turns to servicing and investment returns. If we’re collecting 30 to 50 to 100 percent better than a traditional agency, that makes a big difference to returns.
A more consumer-friendly version of collections
We flipped the model. Our job is make the machine handle as much interaction as possible and only kick a case to a human when the system doesn’t know how to automate it. Consumers get a better UI/UX experience on their mobile phones without pressure and they deal with people who are making a good wage and aren’t incentivized by how much they collect. They are focused on customer experience. We’re turning this into a financial service.
You can think about our main product, Heartbeat, as an almost completely automated marketing and sales campaign for debt collection. Based on consumer data and data from the lender, it decides who to contact, when to contact, what channel to use — text, letter, phone call — and what message to use. We have a content strategy team creating different messages using different voices: an empathetic voice, aspiring voice, friendly voice and an authoritative voice. It also determines what payment offer to put in front of the consumer.
It then tracks the consumer’s behavior in real time on our assets — every communication they open, every link they click, and their browsing activity on our website. It then crunches everything in real time and decides how to follow up.
The cool thing is that it collects better. Consumers pay more with us because they can do everything on their mobile phone whenever they want. And they’re more satisfied. Our Net Promotor Score is high. Our complaint rate is a fraction of traditional agencies. It’s just a better experience, like in ecommerce.