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Why Debt Recovery is lagging behind the Lending Market

By Chan Hsuan
Thursday, October 28 2021

#Loans

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The lending market has exploded over the past 18 months or so. Fuelled by the onset of the COVID-19 pandemic, lending institutions—whether finance companies, personal credit institutions, or loan companies—are lending more money to more consumers across more channels. This is especially true in Western Europe.

Consider the following statistics:

  • It’s estimated that the global lending market will grow at a compound annual growth rate (CAGR) of 14.8% this year (from 2020 – 2021)
  • Figures suggest it will be worth around $8,809.55 billion by 2025
  • In 2020, Western Europe accounted for 35% of the global lending market—a larger percentage than any other region across the world

This rapid growth in the lending market has been fuelled by changing consumer behaviour, with digital devices providing easier access to finance than ever before in history. But despite the lending market evolving significantly in recent years, the debt recovery market has arguably been left behind.

This is creating a huge problem. Financial institutions must find ways to successfully recover the debts that they are owed, fast. Let’s explore how the lending market has evolved, paying particular attention to the role of digital technologies before diving into the challenges that the debt recovery market currently faces.

Digital-first lending

In the traditional lending market, consumers have to wait approximately three months before traditional banks reach a decision on their loan application. This is incredibly consumer-unfriendly especially when you consider that customers might encounter a financial emergency and require the loan immediately.

Digital lending channels have proven to be the ideal solution. Not only do they promise quicker approval processes, but they also require minimal effort from consumers. Like most digital services, they boomed in popularity during the pandemic—and their rise has even been quickened thanks to governmental intervention. For instance, in Thailand, the government recently encouraged loan providers to apply more digital technology for their operational processes.

In addition, smartphones and tablets are ever-present in our lives. In fact, it’s estimated that 80% of the global population own a smartphone. Digital technologies are reinventing every aspect of our lives. Consumers increasingly expect to be able to access all services via smartphones and tablets.

Digital-first applications have therefore quickly taken over the loan market. Figures from Intercontinental Exchange, Inc. (ICE) show that 61% of mortgage applicants in the U.S. used online applications, while 38% of companies surveyed said more than 80% of their applications came through online channels.

Lenders have clearly adapted to changing consumer preferences, developing cross-device, digital-first alternatives to traditional methods of applying for loans. Unfortunately, however, this same logic hasn’t been applied to debt recovery.

Why the debt recovery market is being left behind

It’s easier and more convenient than ever for consumers to access loans—yet it’s still just as difficult trying to pay them back. There are five main reasons that explain why this is.

1. No cross-device capabilities

Consumers can digitally apply for loans on a tablet, a smartphone, or a desktop. However, in many cases, they can’t repay their debts on their preferred device of choice. In fact, collections agents might not even communicate with them on their channel of choice. Many collections companies and departments insist on phone calls, sending out dunning mails or collections messages on one channel only which negatively impacts recovery rates.

Debt recovery is about meeting consumers in the middle—this means using their preferred communication channel if possible. Collections management software that lacks cross-device communication functionalities won’t be able to meet customers’ needs and will become obsolete moving forward.

2. Debt collection isn’t in real-time

Debt collection should be an ongoing dialogue that begins when consumers first lend money. Debt recovery departments or agencies should communicate regularly, highlighting how much past-due customers owe, when it’s due, and how customers can pay it back easily via a self-service portal. Agents need to respond in real-time to any relevant data. For instance, if they see that consumers have not opened their emails, they should change their strategy right away.

Real-time debt collection is the only way for lenders to stay on top of the dunning process and to encourage swift repayments.

3. Collectors are using overly aggressive approaches

Unfortunately, too many debt collectors revert to old-school, out of date approaches. They bombard past-due customers with threatening messages, outrageously high late fees, and they refuse to listen to what past-due customers are telling them.

Debt collectors should take into account customers’ specific personal and financial contexts before trying to agree on a way to move forward that benefits both parties. Financial institutions leveraging a customer-centric approach to debt collection processes will be more profitable and promising in the long run.

4. Siloed information across different platforms

The best dunning approaches blend all available data to identify which messages will work with which consumers, when, and on what channels. However, this is impossible if collections agents are operating with disparate, siloed data spread across multiple platforms.

Siloed information leads to disjointed and ineffective dunning strategies and operations. The only way to fix this is to introduce an all-in-one collections management system that acts as a single source of truth for all debt recovery data.

5. Poor customer experiences

When you consider the four previous points, it’s hardly surprising that collections departments are serving up poor customer experiences. According to Invesp, it costs five times as much to acquire new customers than to keep an existing one. Having a poor customer experience significantly harms your business and your reputation, meaning your sales team has to spend significant time and effort to acquire new customers.

Learn the key lessons from the lending market

Fortunately, the solutions are right in front of us. The lending market has adopted digital technology brilliantly, providing consumer-friendly, cross-device experiences powered by unified customer data sources. The debt collection market must quickly follow suit. If they do, the benefits will be astounding.

Pactum Collections, a subsidiary of Ferratum, implemented receeve’s collections management system to bring its pan-European debt collection under one roof. As a result, they unlocked a:

  • 68% decrease in outbound calls
  • 15% increase in cash collection
  • 3X increase in instalment plans

What sort of impact would this have on your business? Feel free to contact our team to find out more about receeve’s unique collections management software.