Effective debt collection and delinquency management is a growing concern for banks and financial institutions. While all loan operations account for a certain level of delinquency, too much-unrecovered debt can damage the business and brand reputation, compound collection costs, and shrink profitability.
The lending industry globally is under serious pressure from delinquencies. The COVID-19 pandemic has only aggravated this disruption, with widespread layoffs, anticipated recessions, and an overall economic downturn. With delinquencies showing signs of stress and a rise in loan origination, banks and financial institutions (BFSIs) are asking pertinent questions:
- How do we minimize the cost of debt collection?
- How do we reach our defaulters faster and first?
- How do we measure the productivity and effectiveness of the debt collection staff?
A 2020 McKinsey report indicated that the debt collections industry worldwide is struggling at a time when most other industries are looking to BFSIs to recover customer debt. According to the IMF Global Debt Database, global debt rose to USD 226 trillion in 2021 as a consequence of the global pandemic. The consistent rise in debt and slow debt recovery will drag down global economic recovery, says the IMF and the UN. Meanwhile, the Buy Now Pay Later (BNPL) market is growing rapidly – expected to reach USD3.98 Tn by 2023 – and will soon be adding to the debt default problem; owing to the absence of in-depth credit checking and limits on spending levels as compared to credit cards.
Financial experts say that these losses in recovery can be attributed to financial firms and debt collection agencies continuing to employ legacy debt collection methods. The problem is that the impact of delinquent debt multiplies based on the amount involved in the default. How can financial firms prevent loan defaults, and in case of one recover debt faster? The answer lies in digitization.
How Digital Collections Help
Data Collection and Analytics
BFSIs can analyze preconfigured borrower profiles to better understand their mind set and spot delinquents even before they default. Historic data can be used to create an advanced borrower profile and forecast future repayments. Lenders can also use digital technology to streamline communication, moving away from canned scripts to custom borrower-centric offerings and empathetic communication that yields returns and encourages defaulters to repay. Early warning advanced analytics and data-led credit monitoring will improve risk models for identifying issues across customer segments. For instance, 34% of BNPL customers are behind at least one payment, resulting in a low credit score. Such data can be used to prevent future delinquency.
Digital Campaigns and Skip Tracing
In some cases, borrowers may genuinely want to pay back but could be facing issues like family emergencies, serious health issues, loss of job, etc. For such customers, lenders could run targeted digital campaigns via social media, encouraging them to repay their loans with easier payment options. In the case of borrowers who abscond, banks can digitally trace them via social media, job portals, and so on.
Field Agent Efficiency Management
Delinquency management software on mobile can also help automatically assigns collection cases to agents in real-time based on configurable rules, thus streamlining escalations, enabling timely action, and improving field agent monitoring. Lending firms can track agent movement, assign cases and better equip field agents with the right data to help them do their job better.
Although digitization will play a significant role for early buckets, calling continues to be an integral part of loan collection. It is also a challenging part of debt recovery as it involves sensitive human-to-human conversation. What can help is a platform with automated calling capabilities, like a cloud-based calling system that masks the borrower’s numbers and monitors the caller’s tone and language through call recordings available on the platform. Predictive auto-dialling can help increase the number of daily calls to 3X.
A delinquency management software will make it easier for field agents to collect payments on the move by facilitating faster, yet secure, digital payment options for borrowers. Collection agents can share customized payment links – even in remote locations – provide mobile receipts and deposit the collected money remotely. There is no need for cumbersome paperwork to maintain all collection records.
Cloud-based Debt Recovery Platform
BFSIs can also opt for cloud-based loan recovery agencies, where they can simply upload their defaulter list on a secure SaaS platform. An empanelled third-party debt recovery agency will track the defaulters and recover the debt. Cloud-based debt recovery services are especially useful in remote locations and are far less time-consuming. It has features like follow-up tracking, location tracking, monitoring, personalized reminders, pin code/address locator, complete and updated customer information, etc. An essential feature of this service is that it provides complete data privacy for both the borrower and the lender. SaaS platforms hold the promise of a digitally-driven, non-intrusive debt collection process that could even run without human intervention.
Digital Debt Recovery – The Way Forward
BFSIs must turn to digital technologies to strengthen collections capabilities and increase agent effectiveness. The shift to digital makes complete sense as their customers are primarily using digital channels to manage everything, even their finances, a trend that we can see across age groups and industries.
Unfortunately, history proves that the banking industry has been slow to innovate. New laws, mobility restrictions, smaller teams, and dispersed operations have made loan delinquency management even more difficult. But if we could enable banks with technology that helps them pre-empt and prevent delinquencies, or track and contact defaulters at the right time, repayment rates could improve dramatically.
What we’ve discussed in this article is just the tip of the iceberg. This is just the beginning of how financial firms can control the growing problem of non-performing assets (NPAs) and delinquencies. The potential for digital debt recovery and delinquency management is immense.