The lending system is a two-way street involving offering a loan and then recovering it. But the ground reality is a long way from being a two-step process. Technological intervention and advanced tools can ease debt recovery challenges businesses face.
Recovering unpaid debts is not an easy feat. From obsolete information to gaps in communication, a myriad of reasons affect debt recovery and make it a difficult business to manage. Financial institutes and lenders have to face the consequences of delinquent loans, despite stringent credit evaluation and approval processes. And if these defaults are left unaddressed, their bulk can gradually impact business operations and leave lenders fighting to stay afloat.
Now that household debt is at an all-time high, lending agencies and debt collectors are reconsidering options for handling delinquencies. For debt collectors, this re-evaluation means taking into account the ever-evolving borrower landscape. Take, for instance, today’s customers increasingly prefer to engage with financial services providers through emails and text messages, as opposed to aggressive, repetitive phone calls, which further complicates the recovery process. So, how can lenders and debt collectors improve resilience against credit defaults?
The solution lies in reinforcing collection capabilities and adapting to digital communications!
Implications of going digital in communication and collection
A McKinsey survey from 2019 found that 73 per cent of customers in the advanced stages of delinquency engaged and made a payment when they were contacted digitally, especially through SMS and emails. Now, in 2023, with digital firmly embraced as the new normal rather than a bonus, it is ideal for lenders and debt collectors to do the trade with a digital-first, customer-centric approach, backed by personal interactions and contact centers.
Classification of borrowers
In recent times, as mobile phones and laptops have become mainstream, digital nudges through SMS, WhatsApp, and emails will prove to be less intrusive, cost-effective, and improve user experiences. Using updated data and the right tools, debt collectors and lenders can identify the communication channels customers prefer, and accordingly create personalised and targeted messaging, all with the intent to strike a connection and enhance the chances of a better recovery.
For example, not every borrower will like a direct message; some are comfortable with an email. Here’s where leveraging digital solutions can help. Moreover, since each of these touchpoints is automated, collection agencies would not have to invest time in creating an omnichannel strategy. This is supremely important for lenders and collectors who have a diversified clientele and need to track & recover their dues.
Credible source of information
Poor data quality is the biggest challenge in debt recovery. This is a great concern because inaccurate and outdated information can disrupt the credibility of collections and wane the possibility of the borrower cooperating. By using a unified and integrated digital solution, those involved in the recovery ecosystem can collate customer information extracted from multiple sources under a common umbrella, which can be accessed by one and all. This approach lends a singular, clear customer view, enabling lenders and debt collectors to know their profile in-depth and generate better recovery.
Most importantly, digital systems eliminate the risk of mishandling or permanent loss of data. Moreover, automation facilitates the upgradation of customer contact information. This ensures the debt collectors do not dial up the wrong person. Also, tracking untraceable borrowers or those on the brink of defaulting, and collecting outstanding payments becomes possible.
Say, one of the customers who took a car loan paid two installments and missed the third one. With the fourth instalment at risk of being missed, loan providers, along with debt collectors, can design a strategy beforehand and initiate reminder, whilst keeping an eye on debtors and their preferred time & mode of communication. This gentle yet targeted approach can result in higher recovery rates and better customer relations.
Modern technologies like AI and ML have time and again proved their role in enhancing loan collection and receivables management. In addition to identifying and analyzing data sources, ML algorithms can anticipate the credit risk of borrowers to a great extent of accuracy. When combined for usage, AI and ML ensure debt defaults get reduced.
Let us say, for example, a 33-year-old startup entrepreneur has repeatedly failed to pay his home loan EMI. His professional history shows that his business faced considerable losses due to the pandemic. Using this data, lenders and collection agencies can take proactive measures, instead of waiting for him to default. This includes engaging with the borrower from time to time and offering modified repayment options that his existing financial situation can afford. In the end, you will retain a customer, meet their needs without causing disappointment, and incur some settlement, if not all.
The bottom line
After recent few years of economic uncertainty prompted due to the pandemic, coupled with changing customer expectations from the financial services sector, digital debt collection is an absolute must-have. It is high time for both lenders and debt collectors to equip themselves with tailor-made solutions to not just boost recovery rates and combat costs but also maximize efficiency and retain customers.
Views expressed by: Siddharth Agarwal, Director, Mobicule Technologies Private Limited
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