Credit Management needs fintech's help to change its industry

Credit Management needs fintech's help to change its industry

Lennard Sigling from Lindorff, the world’s biggest credit management organization, shares his thoughts on the ever-changing business environment of debt collection.

From debt collection to churn reduction

The financial industry has witnessed automation across a wide spectrum of activities.   The impact on debt collection has been marginal so far, but a major shift is expected in the coming years. At Lindorff, we see different initiatives within and outside our company. Some initiatives are promising, in the sense that these can significantly improve the experience for clients and consumers. Some are even crucial, since they can determine whether an enterprise or the sector will succeed or fail.

The sector as we know it now may well see major changes in the short term. These changes are driven by a number of trends that we see across many sectors.

Tighter regulations on consumer protection

In its supervisory role, the government has sharpened regulations regarding the ​​protection of consumers. Some examples of such regulations that both corporates and consumers are faced with include:

  • The introduction of more extensive acceptance criteria for loan applications
  • The right for consumers to reverse purchases and mandatory registration of small financial obligations at BKR
  • The broader European legislation on privacy, which requires organizations to document and show proof that they are complying with those regulations

These and other regulations will make it more difficult for organizations to sell their services and products to less creditworthy consumers. As a result, the number of ‘bad loans’ and non-paying customers is expected to steeply decrease.

Big shift in IT

Most executives today are using terms such as big data, blockchain and artificial intelligence. Even though some of them only have a limited understanding of these terms, they do realize that their world, as well as their customers’ worlds, is changing as a result of technological developments. These technologies are used for a variety of purposes, such as the improvement of customer service, reducing the number of fraud cases or reducing costs. Marketers also use the power of new technology to improve their customer portfolio by finding out, among other things, what type of customers should be approached and in which specific way. Technology will also help with locking customers from product or services when they don’t pay. We already see pay-as-you-go as the dominant way SaaS services and on-demand companies like Netflix charge their customers. And in the future you will see the car you are leasing drive itself back to the garage if you don’t pay.

Social responsibility affecting businesses

Until recently – and still in some cases – not paying an invoice was considered solely as a customer problem. Fortunately, this perception has fundamentally changed and the customer’s problem is now also considered to be the problem of the corporate that sold and delivered to that customer. Debt collectors today are factoring in the individual customer situation to offer tailor-made solutions for each individual in debt. We also see a shift in the attitude of corporates towards non-paying customers resulting from the fear of damaging corporates’ reputation. More and more collection strategies and means are regarded as inappropriate or too aggressive by the general public. The power and impact of social media, as well as different consumers programs on television, further increase the risk of such negative publicity and ultimately damage the brand name or image of the corporate.

Smaller total market size and new opportunities

These developments, combined with the ‘bull state’ of the economy, cause the demand for traditional debt collection work and its associated costs to further decrease. There will always be demand for debt collection services, especially to service disputed claims and for those customers simply not willing to pay. There is no doubt, though, that the total market size will further decrease. Nevertheless, credit management organizations still have a bright future, providing that they step up their own game and increase investment in innovative services and technologies. One of the key value drivers presented by credit management organizations is the projected reduced churn rates (the outflow of customers) for their partners.

Increased focus on customer retention leads to significant financial returns

The cost of acquiring a new customer is estimated to be up to 5 times higher than retaining an existing one. Investments in customer acquisition are lost when customer relations are cancelled or are somehow lost to competitors. Replacing the lost customer (and of course the associated revenue) with a new customer comes at a very high cost and has no effect on overall revenues for the corporate. As a result, corporates may well have their longer-term revenue and profitability slowed down.

The effect of a 5% churn reduction can – in some cases – lead to an improvement of 50% higher profits [1]. A key factor in preventing churn is initial customer selection ‘at the gate.’ If corporates are better equipped to select and commit in the long term with the right customers, they will already see a reduction in their churn rates. However, for some industries and sectors, restrictions apply to selection criteria. For example, health insurance companies (in the Netherlands) are not permitted to refuse any customer or even to discriminate on insurance premiums.

More advanced companies will focus their marketing strategies and communication channels as accurately as possible on the target audience as well as on the individual customer. The experience and knowledge gained from ‘unsatisfied’ customers who are unable or unwilling to pay provides input for improved services, as well as input for characteristics and selection criteria for the desired target audience.

Organizations like Lindorff are increasingly focusing on broadening the use of all available data to improve the processes that define when and how identified target groups should be approached. Insights and predictability related to the life cycle of debt collection towards individuals are a crucial development. This also includes elements like using the right communication channels and applying the correct tone of voice. Small changes on all aspects can lead to major improvements.

Developments in big data, robotics and artificial intelligence will continue to move fast and we will continue to invest heavily. However our biggest drive as a company will not change, as we want our customers to enjoy the benefits of our investments to support their own business objectives.

[1] Studies by Bain & Company, along with Earl Sasser of the Harvard Business School, have shown that even a 5 percent increase in customer retention can lead to an increase in profits of between 25 and 95 percent, http://hbswk.hbs.edu/archive/1590.html

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