Manual processes traditionally used for debt collection are no longer efficient nor effective. The pandemic has caused millions to lose their jobs and in many countries consumer debt is at a record high (Lazarus, 2020). The uncertainty of the global economy is also creating a new type of debtor. This debtor has temporarily fallen into debt and is likely to be highly motivated to resolve their debt to protect their credit rating (Kenneally, n.d.). Traditional practices will struggle to keep up with the amount of customers while also harming customer relationships. This is why many debt collection companies are changing.
Debt collection is changing
Debt collection is taking on a customer centric approach with a mindset shift from “I’m collecting from a debtor” to “I’m collecting from a customer” (Dennis, 2021). This mindset helps debt collectors to better assist customers to clear the debt and ensure collections for the client. This approach has shown to increase collections and be more profitable for the business (Dennis, 2017).
Artificial intelligence and machine learning are changing how the debt collection industry operates. Both technologies enable debt collection companies to customise communications through insights regarding customer needs and preferences. AI platforms gather extensive data regarding customer behaviour from sources such as social profiles, financial history and credit data and machine learning is used for analysis (Firstsource, 2020). Furthermore, machine learning can be regularly retrained in order to improve accuracy (So, 2020).
What is open banking?
Open banking is a banking practice that securely shares financial information, such as consumer banking transactions and other financial data, to third-party financial service providers (Estevez, 2020). Sharing data is done through the use of application programming interfaces (APIs) and only with the consent of customers (The Balance, 2020). Open banking is the driver behind both innovation and competition in the financial industry (Cahill, n.d.).
Why does debt collection use open banking?
Debt collectors need to understand the financial health of customers and help them settle their debts. Open banking increases the amount of data available and enables debt collection agencies to more efficiently collect and refinance debt.
Open banking enables debt collection agencies to understand income stability and active loan loan payments by providing access to the customer’s current cash flow.
Some debt collection companies you should know about
Tully is a free online service that gives users personalised financial plans and advice. For users that are in more difficult situations, Tully gives a choice of flexible debt repayment plans that adjust to the user’s situation each month (Finextra, 2019). The service uses open banking to have an accurate understanding of a user's financial health (Finextra, 2019).
Flexys provides an extensible debt management, collection and recovery solution (Flexys, n.d.). The company uses open banking to formulate a sustainable repayment plan by collecting and analysing users transactions and disposable income figures (Open Banking Use Cases, n.d.).
What’s to come?
Europe has a variety of national regulatory models regarding debt collection, which has caused discrepancies in the legal status and defence available to consumer-debtors across Europe (Stănescu, 2021). To protect debtors and prevent malpractices of debt collectors, it's important to standardise collection-specific regulation across Europe.
The debt collection industry will continue to move towards digitisation and fintech innovation. As debt rises, effective debt collection becomes increasingly important. Technology allows agencies to implement customer-centric approaches that use multi-channel communication strategies and empower customers to pay their debts, instead of alienating them (Score, 2018).
The Balance. (2020, October 11). What Open Banking Is and How It Will Affect You.
Cahill, H. (n.d.). InvoiceFair. The Evolution of Open Banking: Connectivity breeds digital competition.
Dennis, N. (2017, October). Customer Centric Collection. AICM.
Dennis, N. (2021, Febuary 19). How Customer Centric is your Debt Collection Agency? Linkedin.
Estevez, E. (2020, August 27). Open Banking. Investopedia.
Finextra. (2019, April 25). Tully taps Open Banking to help Brits tackle their debt. Finextra.
Firstsource. (2020, October 1). How digital debt collection can drive fintech success. Firstsource.
Flexys. (n.d.). A digital debt management solution for the full collections lifecycle. Flexys.
Kenneally, E. (n.d.). How cloud technology can improve collections performance. Credit Connect.
Lazarus, D. (2020, June 8). Column: Debt collectors see golden opportunity with all of us stuck at home. Los Angeles Times.
Open Banking Use Cases. (n.d.). Flexys use case. Open Banking Use Cases.
Score. (2018, July 30). The future of debt collection. Score.
So, K. (2020, January 20). How AI Is Modernizing The Collections Process. Forbes.
Stănescu, C. G. (2021, January 22). Regulation of Abusive Debt Collection Practices in the EU Member States: An Empirical Account. Journal of Consumer Policy.