Debt Collection in 2019 – From Recovery to Retention

December 27, 2018

MONTHLY ANALYSIS

In October 2018, the total outstanding consumer debt in the US surpassed $3.96 trillion – a continuously increasing volume (in Q1 2018, the total outstanding consumer debt in the US was at ~$3.86 trillion) that could make debt collection one of the hottest businesses of 2019. Q3 2018 delinquency rates for consumer loans is at 2.28% (credit card loans at 2.49%) – a number that represents an opportunity for companies operating in the lending space to focus on practices ensuring sustainable and responsible recovery of funds.

While consumer debt continues to mount, recovery rates remain dismal. The estimated success rate of collections between 01/2014 and 12/2016 in the United States was just at 36.7% (with the same metric for Canada estimated to be at 17.7%, the UK at 65.8%, Mexico at 38.7%, China at 23.9%, India at 17.3%, Germany at 63.9%, and France at 67.8%).

The years ahead will signify a perfect storm to launch the renaissance of debt collection. In a study, two researchers from the Georgia Institute of Technology found that marketplace borrowers are more financially constrained relative to the average adult in the US. These borrowers have 2X as many credit cards and 2X+ the average credit card debt relative to the national average.

Most tellingly, their credit utilization ratio is 69%, which is over twice the national average of 30%. Additionally, marketplace borrowers have average credit scores that are more than 20 points below the national average and a striking 80 points below the US homeowners’ average.

As 1,500+ startups globally enable frictionless access to credit – through marketplace lending, in particular – deepening indebtedness will inevitably lead to the necessity to develop appropriate practices to recover defaults.

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Source: Counting the cost of debt recovery 2018 (UK)

The lack of transformative work in recovering debt from borrowers with limited experience sustainably managing financial products and credit is a ground for debt collection to become one of the sexiest segments in FinTech in the years ahead. Without significant investments in business models and technological transformations, traditional collection agencies are unlikely to adequately address the rising problem. Professionals suggest that the trouble of partnering with a traditional collection agency is twofold: they typically only accept debts over $1,500 and on average and only recover 1–1.5% of outstanding debts. Moreover, the fees are rather hefty: most collection agencies now use a contingency payment model with the average fee ranging from 25–50% of the total amount of debt collected per account.

Data science and advanced technology will take FinTech startups much further – from sustainable debt recovery to client retention. Upwork, for example, saw more than $2 of additional, post-recovery payments from recovering customers for every $1 of debt recovered with an ML-powered debt collection platform by TrueAccord. TrueAccord’s decision engine uses ML to create personalized, digital-first, consumer experiences that are tailored to each consumer. The platform creates a complex interaction model with a consumer and a clustering engine to compare the consumer to more than 1.5 million consumers who passed through the platform. Based on these hundreds of millions of data points, it predicts the consumer’s reaction to communication frequency, timing, channel, and content.

TrueAccord’s decision engine then selects from hundreds of internally generated and legally pre-approved messages that drive consumer engagement via omnichannel delivery. Once delivered, it tracks real-time events from the consumer – the number of emails opened, link clicks, browsing patterns on TrueAccord assets, and interaction with the company’s call center – to decide what its next step should be. LendUp, Yelp, and the earlier-mentioned earlier UpWork are among the company’s clients.

Collectly is another interesting case. The company focuses on streamlining and making medical bills collections easier for all parties involved. The integration allows companies to send a digital statement to patients via text and email with an easy-to-pay button. Once the patients click it, they can view their detailed bill and can make an instant payment. Clients include GE Healthcare, Greenway Health, Athena Health, McKesson, Epic, eClinicalWorks, Allscripts, Allmeds, Cerner, AdvancedMD, and others.

There are certainly more examples – like Symend, InDebted, collectAI, Debtor Daddy, InterProse, Simplicity Collection Software, CollBox, Debito – which vary in the ways they leverage technology, in offered functionality, and business models.

But most importantly, they vary in the approach and a particular focus on one side or another. There is a class of players that offer a sophisticated ‘communication scheduling’ software to reduce the collection time, but do not particularly emphasize a change in approach from the debtor’s perspective.

Others are more advanced in the application of advanced technologies (cloud, ML, AI, behavioral analytics) to not only improve the recovery but take the debtor’s experience from the Stone Age to 2019.

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Source: Counting the cost of debt recovery 2018 (UK)

The future of debt collection is not as much in aggressive recovery, as it is in long-term customer retention and increased LTV. A study in the UK found that poor practices of debt collection lead more than half (51%) of a company’s customers to switch their provider.

Meanwhile, the good practices keep 53% loyal to the provider, prompt 32% to pay faster, and 30% to recommend the provider versus only 5% remaining loyal when encountering bad collection practices, only 7% paying faster, and only 8% recommending the provider as a result of the impact of poor practices.

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Source: Counting the cost of debt recovery 2018 (UK)

Debt collection in 2019 and beyond will put an emphasis on non-damaging consequences for the customer, allowing debtors to recover and continue mutually beneficial relationships with their providers. Given that a 90-day late account may swipe 50 points from someone with excellent credit and 10 points from someone who was already in the lowest tier, it’s critically important to develop and adopt practices that enable debt collection that not only does not damage the relationships between customers and companies, but strengthens long-term commitment to one another and advocacy.

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