#Digital transformation

Digitizing the collection process

Oct 01, 2021 - 7 min read
Also Available in : Français
Sopra Banking Software

Debt collection has always been a tricky business. Preserving customer relationships while maximizing revenue and avoiding defaulted payments is a delicate balancing act. And with the advent of Covid-19, things have only gotten more challenging.

Post-Covid economic conditions

The pandemic increased borrowing rates as people responded to crisis-related income shocks. While banks braced for a sharp increase in delinquent loans, borrowers have performed better than expected so far.

Temporary aid programs took some of the pressure off, but as these measures expire, there is still a chance that banks may experience a surge in non-performing loans. 

In the UK, a recent report stated that one in sixteen companies are at risk of closure in the next quarter. Furlough schemes are also ending, which may cause further redundancies. Similar shaky conditions can be seen in many other countries as state-backed relief initiatives wane.

While some of these measures may be continued, they won’t be at their current scale. And this means that the runway for borrowers and lenders is running out. In response, the largest US and European banks have set aside a combined $139 billion in loan-loss provisions. But stockpiling cash likely won’t be enough. Banks must also embrace digital collections to improve repayment rates, drive down costs and supplement their capital resources. 

Benefits of going digital

Pre-pandemic, digital debt collections were a differentiator, but they’ve quickly become a must-have. Indeed, it’s predicted that the debt collection software market will grow to $6.77 billion by 2027, and it’s easy to understand why. Implementing digital solutions enables better customer engagement, automation-driven efficiency and more personalized customer journeys. 

By digitizing the collections process, lenders are saving borrowers’ time and giving them what they want. Research into the customer experience of credit delinquency has shown that most customers prefer a digital approach to repayment processes. Having more digital channels makes communication easier, which has the knock-on effect of improved customer retention, higher acquisition rates and more regular, on-time payments. 

Harnessing the powers of artificial intelligence (AI) is another significant part of the digital collections equation. Traditional debt collection approaches are based on the whims of human collection agents rather than an analysis of sequential datasets and the insight they can unlock. By employing AI, lenders can use predictive analytics to identify potential defaults early, allowing lenders to intervene and help at-risk customers via credit counseling, restructuring plans, etc.

Digital solutions also allow customers who prefer self-service to deal with debt quickly without talking to a collections agent. Aligning with customer preferences in this way has the twin benefits of improved customer satisfaction scores and a boost in operational efficiency, i.e., the same number of agents can now handle more accounts.

Challenges in digital transformation 

Digital transformation is often a struggle for traditional lenders. This is because efforts to transform are impeded by legacy technology that makes it hard to edit workflows, use more types of data to inform decisions or otherwise realize efficiency gains.

Although many banks ramped up digital capabilities and shifted to remote work, if the expected spike in defaults materializes, it will be a true test of any manual processes that remain. And the truth is many remain because going digital is not typically a smooth linear process but rather one with many hurdles.

Banks have to effectively integrate software with their existing systems. They must retrain staff on how to use the new tools, all while maintaining security and compliance. Those last two issues are a particular challenge when it comes to updating the stack. Collections processes regularly deal with consumers’ data, and it requires considerable planning with respect to compliance, privacy, and security. 

While these issues can seem small, they are of utmost importance and have already created quite a few headaches. For instance, related GDPR fines are on the rise, and in the last year alone, the total penalties have surged by around 113.5 percent.

Shifting to digital can also be a cultural shock for some lenders, requiring strong top-down management and the reorganization of disparate silos. While digital can be a great asset for collection management processes, there’s a balance to strike, and it’s essential for leaders not to eliminate the human touch.

Become digital-ready

Buoyed by a flow of rescue packages and unemployment benefits, the surge in struggling borrowers has yet to arrive. And in the interim, banks have the opportunity to bulk up their digital capabilities should a spike come. 

With so much economic uncertainty in the air, institutions need to be prepared with updated tools to ensure they can effectively engage with customers. Banks can mitigate the incoming collections surge by going digital—proactively engaging, identifying the most vulnerable customers and employing empathetic messaging informed by data-driven customer engagement. 

While the goal of recouping debt as efficiently as possible hasn’t changed, it’s the lenders that embrace digital without losing their human side that will be the leaders of tomorrow. 

Navigating the digitization of the lending process is often best approached with an experienced partner. To learn more about Sopra Banking’s Collection Management solution, click here.