Collections: it’s time to move away from a one-size-fits-all approach

The most successful, forward-thinking lenders are revolutionizing the way they see individuals in debt. We take a look at what these changes look like.

Not all collections scenarios are alike. There’s a big difference between the forgetful customer who misses a few payments, and a seriously distressed individual entering a period of complex financial trouble.

So why have collectors generally treated debt with a one-size-fits-all approach? While no one wants to fall into debt, there are ways that lenders can make the experience less taxing for debtors. In the best cases, they can even help individuals from falling into more serious debt that is harder to climb out of.

Generally speaking, individuals in debt are looked at as pariahs — troublemakers that the lender now has to manage. The truth is more complex. An individual in debt may be someone who will quickly bounce out of debt and become a continued, valued customer.

First-party data is the key to unlocking personal insights to debt on a case-by-case basis. By using data to inform an empathetic, flexible approach, lenders can empower those in debt to take control of their finances. It requires putting certain tools and strategies to use.

The imperfect tradition of debt collection

Historically, the collections process could be summarized in one word: abrasive. Through persistent letters and phone calls, debt agencies would bombard individuals to convince them to repay what they owe. The next step would usually involve suing the consumer, placing them in a position of extreme defensiveness.

The scare tactic approach is not good for the consumer. If someone is being contacted by a collection agency, they’re understandably nervous and anxious to solve the problem. They may have questions, or simply feel stuck in a rut with no foreseeable way out. At this point, trying to pressure them into repayment could further paralyze or anger a confused debtor.

The scare tactic approach isn’t always great for the collector, either. Most individuals don’t pick up phone calls from numbers they don’t know. With the proliferation of spam and telemarketing phone calls, the chances of connecting with a debtor directly by phone are low.

Collectors also have to be careful not to fall out of compliance with a complex regulatory landscape. According to the Fair Debt Collections Practices Act, collectors can only call during certain permitted hours. They’re not allowed to threaten, and they’re not allowed to disclose to bosses, family, or friends that they’re seeking repayment on a debt. They’re not allowed to call several times a day, and if a debtor asks not to be contacted at work, it is no longer legal to do so. If a collector breaks these laws, they can risk a penalty from the Consumer Financial Protection Bureau or the Federal Trade Commission.

For all of the above, there’s reason to believe that collectors should innovate on the traditional, inflexible approach that has been the industry standard.

Considering the customer voice in collections

Today, consumers expect digital, on-demand experiences that give them flexibility. The Federal Reserve found that digital banking rose from 26% to 51% between 2012 and 2017. That means more users are interacting with financial institutions through their phone, laptop, and mobile apps.

Younger generations are more digitally-inclined, and have a strong preference for mobile over in-person interaction when it comes to financing. According to PwC, Gen Zers are more likely to choose a bank based on factors like mobile banking access and a friend’s recommendations, vs. choosing based on the proximity of a local branch and ATMs. They want personalized financial services that are convenient for them to access. They don’t want to have to bother going to a physical branch. They also don’t want to have to pick up phone calls and experience long wait times.

A digital experience is not only better for the customer — it’s better for the lender. The idea that it’s “always better to talk to a person than a machine” is an antiquated one. Especially when dealing with a sensitive subject like debt and failure to pay, individuals would rather not be confronted by a stranger who is ultimately looking to coerce a payment. Using technology not only makes a customer feel protected; it gives them clearly laid out options for debt resolution. This more compassionate path toward debt resolution can help lenders protect their brand against the fury of an alienated, poorly-treated customer.

If customers want a more empathetic and flexible approach to financing, why shouldn’t lenders and collectors reform their approach to meet those standards? Customers walking away feeling like they’ve been respected during the collections process can drive better results for the lender — they can collect more of what they are owed in a shorter time span.

The first-party data difference

This more empathetic approach is possible, thanks to the tools and information currently available to lenders. The internet age means that a more accurate program for data analysis is possible.

First-party data is now becoming the differentiator for innovative approaches to debt resolution. This type of data — which comes directly from the customer — can paint a fuller picture of why and how someone fell into debt, and how likely they are to climb out of it. First-party data is more powerful because it goes beyond a cursory credit score or repayment history, and illustrates financial capacity and financial character. Through data like rental history, utilities payments, employment and income data, and financial transaction data, a deeper story is told.

Even larger financial institutions — not typically known for agile methodologies — have started introducing digital frameworks into their day-to-day. There are entire departments devoted to using digital engagement for bringing in new customers. Institutions are waking up to the fact that digital experiences will help to onboard and engage a wider variety of customers, and make these customers happier in the process. Collections has generally been untouched by this wave of digital innovation, and that is a missed opportunity.

Data and automation can lead to quicker and more accurate issue resolution. Whether an individual has simply forgotten a payment, or has lost a job and needs to readjust their repayment terms, or has fallen into a state of financial distress — lenders using first-party data will be able to categorize them and offer more personalized, empathetic solutions.

A new transparency

When collectors can identify potential vulnerabilities early in the process, they can act before the situation reaches a crisis point. At an earlier stage, there’s no need to bombard an individual with phone calls or implement the services of debt collection agencies. In many cases, a customer is simply looking for personalized advice and access to realistic repayment options.

For example, for Toyota, improving resolution time for their Collections team was critical. Aire was able to provide unique insights to help them do this. As a result, Toyota could have better conversations with their customers through Aire’s Interactive Virtual Interview (IVI) via SMS and email.

Some lenders still believe that ten phone calls a day is still the optimal way to collect on an outstanding debt. But in today’s landscape, consumers want a variety of options at their fingertips. In any other product, the customer is always central to the way the business is run. You build products for the customer. Debt collection is similarly customer-centric. The best way to convince someone to do something is to build an interaction and experience that is customer-focused. To retain and engage customers, focus on the features they’d like to see. Facilitate a kinder, more seamless approach to repayment.

Empowered by first-party data, lenders can offer a wider range of resolutions to an in-debt consumer. This non-invasive approach has the added benefit of helping the consumer to breathe easier and not go into panic mode. There’s no need to maintain the current stigma associated with the collections process — not on behalf of the lender, and not on behalf of the person in debt. Especially not when first-party data is helping the collections landscape to evolve.

Aire is a credit assessment service that reveals the bigger picture, enabling lenders to make more informed decisions across the customer lifecycle. If you’re a lender looking to partner with Aire, get in touch with our international team:

We do hard things so people don’t have hard times. And we’re starting by fixing the income ecosystem — for everyone.