I may have addressed this indirectly in the past, but I thought it would be good to summarise a bit. My cofounder and I have been in collections directly for at least 8 years. Having both come from a background in venture capital, we’ve been confronted by collections issues for even longer via portfolio companies or businesses we have been involved in. One way or another, one could say we have seen our share and there have been many learnings about debt collection along the way. I’ll focus on the ones I find to be most relevant.
Let me start off with one of the most surprising discoveries from the past 10 years. No one really understands debt collection. Sure, you have a ton of people involved, but it doesn’t seem like anyone truly focuses on collections as a discipline alone. Everyone who claims to know how the industry ticks has been involved in some aspect of it, but hardly ever does anyone understand the complete value chain from front to back. This makes it extremely difficult to innovate and drive change moving forward. Debt collection as a category of business doesn’t even have clear verbiage. It can be called anything ranging from “debt solutions” to “receivables management,” occasionally “debt resolution,” or even “pre-delinquent servicing”. The industry only became “a true industry”, as we heard the CEO of one of the top three largest players in the space say, in the past five years. The large incumbents are mostly focused on debt servicing and aren’t thinking about customers and how the landscape has changed. Hence, a key takeaway is that we are just now at a point where it could even be posited that there are individuals who can talk about all the intricacies of this highly lucrative yet overlooked segment, especially when it comes to the technological aspects.
Another key takeaway from our time in the industry is that a lot of lip service is paid to technology being implemented but reality is far removed. I am shocked at how often you read about large players implementing AI and being fully automated when the reality is that collections still remain mostly call centers and operations, where at best letters are generated and some emails are sent. Sure, there are pockets of innovation and some companies have done a wonderful job of embracing available technologies like artificial intelligence. These remain the outliers though. In connection with this takeaway is the misperception by senior management about what really is going on in the industry. At C-level you will often hear how sophisticated the debt collection processes in-house are. They believe it because this is what they have been told. Yet if you really dig deeper, and talk to the people on the ground of collections, you see how little innovation has taken place in even the past five years.
A third lesson learned is that no one greets transparency. Software, and more broadly technology, clears up a lot of the dust cloud that now envelopes collections processes. It’s an industry that is more regulated in some geographies and less in others. By avoiding the implementation of technology, you can remain behind the shroud of manual processes. This will all be regulated away but no one wants to really believe it. Or probably more accurately, the getting is good so why bother changing unless you have to. As mentioned above, some players are proactively getting ahead of this curve but the industry in general is very slow to adapt. There are also too many cash cows which would presumably be slain, leading first to lower margins. Sure, you ultimately end up being able to make more money, but senior management, who are usually short-term incentivised, aren’t really ready to take any risks.
Let me end with a lesson which is not necessarily so hard to see but which led to us launching receeve. Customers are important. Further, they come in many shapes and sizes. What in the past was easily categorised as a “bad customer” no longer exists in that form. You now have good customers and less good customers. Sure there are bad apples but you have to treat every customer like your best customer. The market is completely transparent. If you are a bank, a retailer, a public utility or a telco, you are easily replaceable. The lock-in you had years ago, cemented by high switching costs has disappeared with the implementation of technology. The customer who had to stay with you previously for life can now switch away with the press of a button. Getting that customer can cost you thousands of Euros in certain industries yet the lock-in is gone. You can no longer afford to lose a customer because you don’t offer them the options they expect. You also can no longer treat them like a criminal because they forgot to pay or misplaced a bill. To be competitive you have to offer your customers the easiest, most applicable technologies even in the worst of times and make sure you wow that customer even when they expect you to come after them with a hammer in hand. Only that way can you differentiate and build lifelong loyalty in a highly competitive world.
I will end on this point: your customers deserve and expect the best treatment in both positive as well as negative situations. They want to have a dialogue with you using the channels and technology available to them. You can streamline the process by implementing technology, and just as we have learned, you can and must catch up as well as innovate forward as soon as possible.
The economic fallout of COVID-19—coupled with the new IFRS 9 requirements—has accelerated the need for digital transformation within collections. This article explains why. ...