Future trends in debt collections

Since the COVID-19 pandemic began, lending has massively increased among cash-strapped Americans. According to data from credit reporting agency Experian, U.S. consumer debt rose by more than one trillion dollars — to $15.3 trillion — in the two short years between 2019 and 2021.

As such, the debt collection market is only expected to grow. Marketdata estimates that between 2022 and 2025, the market will increase 2.8% annually, reaching $16.7 billion by 2025. This presents an extraordinary challenge — and opportunity — in the fiercely competitive arena of debt collection. To compete, companies are turning to digitization and other key trends to collect debt.

What kinds of debt do consumers have?

According to the Urban Institute, more than a quarter (28%) of Americans had at least one debt in collections in 2022. The following are some of the biggest sources of debt:

• Mortgages: American homeowners currently owe $11.2 trillion.
• Auto loans: Americans owe $1.4 trillion in auto loans, according to Consumer Finance.
• Medical debt: Stanford University reports that Americans carry $140 billion in outstanding medical debt.
• Student loans: Americans hold $1.6 trillion in outstanding student debt.
• Credit cards: Americans’ collective credit card balances currently total $890 billion.

The source variation, as well as the overall increase in consumer debt over the years, has caused collections organizations to look into more efficient and innovative ways to collect on overdue payments.

The case for digital debt recovery

In 2019, prior to the COVID-19 pandemic, the average collection rate was below 20% — the lowest it had been in 25 years, according to Ernst and Young.

Traditional phone calls and letters, while still relevant, are being supercharged by digital debt collection strategies. Consumer credit reporting company Experian estimates that 52% of consumers who visit a digital site when prompted by a collection agency agree to pay what they owe.

The following tools and strategies show great promise by adding a digital touch to collections.

Automation

Calling debtors is still useful in debt collection, but automating processes can reduce effort and improve accuracy. Companies leveraging virtual assistants can respond to customers’ queries twenty-four hours a day, seven days a week, and automating processes has been known to improve compliance. A Forbes article notes that the use of automatic procedures can “…potentially reduce different legal complexities from arising and limit liabilities. Collector procedures can be programmed in a way that limits liability under the Fair Debt Collection Practices Act and Telephone Consumer Protection Act. This can involve automating specific procedures the individual collector cannot bypass, therefore preventing legal mistakes.”

Increased reliance on digital channels

A 2021 U.S. Retail Banking Satisfaction Study by J.D. Power found that 41% of U.S. retail bank customers are now digital-only. The study also revealed that customer satisfaction improves when there are high levels of digital engagement. Digital channels will continue to grow in importance as an avenue for debt collectors amid regulations that prohibit excessive phone calls. One regulation outlines in the Telephone Consumer Protection Act (TCPA), for example, states that if a collection agency speaks to a borrower, they cannot call again for another week. Digital technology opens the door for debt collectors to reach people in other ways.

Increased use of self-service options to boost efficiency

The use of self-service digital channels in banking increased by 20% in the first few months of the pandemic and is being adopted at “unprecedented” rates, according to a report called Redefining Customer Service for the Future by Boston Consulting Group (BCG). Self-service channels are available to customers and agents around the clock, and can reduce the need for time-consuming conversations. In fact, early adopters of a self-service collections portal during the pandemic were incredibly successful, BCG found, namely because people liked paying in their own time with a single click.

Collectors should think about how to provide self-pay options across multiple channels. For example, a text or email could include a link or a QR code that sends a customer to a payment platform or help page. Companies could also offer customers the option to schedule autopay through an online self-service channel.

AI, machine learning and analytics in predictions

The ability of artificial intelligence (AI) and machine learning to provide predictions has been a game-changer in debt collection. For example, AI can recognize patterns and isolate potential defaulters by identifying those who take a long time to respond. Using predictive modeling allows debt collection agencies to take the right action for risky accounts.

AI can aggregate data and inform debt collectors of the best time to contact customers, and how, based on their behaviors. It can also be used to analyze the effectiveness of a text, email or payment landing page. Did they open an email? Did they respond to a nudge? AI has the answer.

The value of working with a knowledgeable outsourced collections partner

When planning your collections strategy, you should consider working with a partner who is experienced in payment recovery solutions. Doing so will free up time so that you can focus on other aspects of your business. Be sure to choose an experienced provider with a proven track record delivering tailored, outsourced collections via a specialized team.

As a trusted partner, TELUS International works with global brands to develop strategies that deliver payment success along with customer satisfaction. Our experts can help develop the right approach for your business. Contact our team of professionals today.