Debt collection is going digital. In recent years, the mainstay of traditional debt collection outreach – the phone call – has been rendered less and less effective by changes in technology, customer preferences, and regulatory environments.
- Over 90% of U.S. households had a landline phone in 2004. In 2020, that number dropped to just 36.7%, per the Centers for Disease Control and Prevention.
- According to the Pew Research Center, only 19% of US adults answer phone calls from unknown numbers.
- In 2019, McKinsey studied customer communication preferences, and found that credit card customers resoundingly prefer to be contacted via email or text message.
- Preference for digital channels has been on the rise for years, and has increased sharply during the pandemic.
On top of shifting consumer behavior, new regulations such as Reg F in the United States are putting increased restrictions on how, when, and how often customers can be contacted about their overdue accounts.
Combined, these various pressures are pushing the debt collection industry to move past phone calls and embrace digital and omnichannel communications.
Fundamentally, this move toward digital debt collection involves communicating with customers over digital channels such as email, SMS, and WhatsApp, as well as providing them with a convenient way of resolving their debt online.
However, it is important to recognize that there is no rigid standard for what constitutes digital debt collection, and that different agencies claiming the digital mantle may have wildly different capabilities and competencies. For example, a legacy debt collector that’s bolted an email client onto their debt collection software can claim that they do email, but that’s going to be a much more limited capability than what you’ll get with an intelligent debt collection platform that uses data science to optimize communications and collection strategies.
Let’s take a look at some of the major differences between the “buy” and “build” approaches to digital debt collection, and then introduce some questions to ask prospective partners as you evaluate their offerings.
Buy vs build
Broadly speaking, there are two major approaches to standing up a digital debt collection offering. One route is to buy the capability, in the form of a piece of debt collection software that can be added to other pieces of software. So in addition to being able to reach out to customers via phone calls and letters, a debt collector can add email, text, and other forms of outreach.
With the buy approach, a legacy collector may add an email client, or a payment gateway, or other piece of debt collection software to their existing systems. But adding a functional capability does not necessarily equal an operational competency.
Huh? Let’s dig a bit deeper.
Having the ability to send emails only gives you the ability to send emails. It doesn’t write those emails, or optimize which emails it sends to which customers over time. It may not even be able to claim attribution, so when a payment comes in, tracking whether the customer responded to an email, a letter, a phone call, or a telegraph message can be difficult to gauge.
Integration can also be dicey with the buy-and-bolt-on approach. Does the email client talk to the autodialer to prevent a customer from being targeted two different ways simultaneously? How is compliance assured? Is reconciliation automated, and are recoveries attributed to the right channels? How is customer data kept secure as it moves through different applications?
Another approach, more commonly seen with newer, “digital-first” debt collectors, is to build out fully integrated debt recovery platforms. These are designed to work as a cohesive whole, from the front end user experience to the operational back end. Rather than adding a digital capability to a traditional debt collection model, these platforms are built specifically for digital debt collection.
The most advanced of these are intelligent debt collection platforms. These utilize data science to analyze every transaction and interaction, select personalized collection strategies based on a customer’s behavior, and continuously optimize performance. They can feature fully integrated back ends, with compliance and reconciliation baked into the platform code. In platforms such as this, manual tasks that are prone to errors and delays can be automated and scalable to any number of accounts.
Key questions to ask prospective digital collection partners
Ultimately, debt collection is a numbers game, and recoveries are the main measure of success. But that’s not to say they’re the only criteria you should use to evaluate a debt collection agency.
Here are five additional questions worth asking as you evaluate debt collection partners:
**1 - What is your outreach strategy? **
How an agency will go about contacting your customers can be critical to both successful recoveries and to maintaining your valuable customer relationships. Seek to understand how they reach out, how they determine which customers to contact through which channels, and which channels they prioritize.
2 - Do you use data science to inform and optimize your recovery efforts?
The most intelligent recovery platforms employ data science technologies such as machine learning to analyze communications, responses, and transactions to determine the best way to engage with any single customer. These platforms actually get smarter with time, as they recognize that customers in a certain age range, or of a certain product, or a certain number of days past due respond to one style of messagel better than another.
At InDebted, for example, our machine learning algorithm studies how customers respond, and applies one of more than 4,700 data-informed collection strategies.
3 - How do you ensure compliance?
Ensuring compliance is a critical piece of debt collection, especially as new, more stringent regulations go into effect. Calling too often, or at the wrong time of day, or harassing customers can lead to legal action, financial penalties, and reputational loss, not to mention harming customer relationships. The surest way to avoid slipping out of compliance is to integrate compliance rules directly into the debt collection platform, taking human error out of the equation.
4 - How is your customer support team evaluated?
Debt collection representatives have traditionally been evaluated based on how much money they collect. This can lead to some less than pleasant interactions, since reps are incentivized not to help customers, but to recover overdue payments. With digital debt collection, customers can resolve their debt online in most cases, so when they reach out to customer support, there’s likely some issue they need help with. In these cases, look for agencies that evaluate their customer support teams on successful outcomes rather than dollars collected.
5 - How do you handle reconciliation?
Reconciling recoveries from the customer back to the client is a key function of any debt collection agency. It’s also a function that’s prone to a lot of variability. For agencies that lean toward the “buy” approach, integration across the operational and financial back end can sometimes be wanting, and require a substantial amount of manual work to properly calculate fees and reconcile recovered amounts. This opens the reconciliation process to both human error, and delays.
A fully integrated reconciliation process, on the other hand, will be capable of automating the financial functionality to pass payments directly from the customer to you, the client, with no manual stopgaps and no delays. In addition to reconciling payment in real-time (or very nearly so), this also allows you to update customer accounts and restore service or standing without lengthy processing delays.
Digital - an invitation to dig deeper
Debt collection is going digital, but that doesn’t mean that all digital debt collection is the same. A digital-first debt collection agency built around an intelligent debt recovery platform is going to offer a different degree of integration and automation than a traditional collection agency adding pieces to its debt collection software stack to keep up with a shifting industry.
As you evaluate your debt recovery strategy and the potential benefits of partnering with a third party agency, be sure to ask questions so that you can get a sense of which flavor of digital debt collection you are dealing with.