Digital collections, as the name suggests, prioritize a digitized and data-driven approach to collections (both internal and external), as opposed to basing it on manual methods supplemented by outdated software.
In addition to having a direct impact on your button line, collections is also a key customer touchpoint that can make or break your reputation in the any lending industry.
We’ve written at length about the need for digital transformation in loan management and how the Onyx IQ platform is helping lenders of all shapes and sizes leave behind legacy technology. When it comes to debt collection, we have mainly focused on internal soft collections and the ROI of intelligent workflows and personalized communications via the Onyx IQ platform.
Today, we are going to look beyond the Onyx IQ platform and focus on digital first collections and why lenders have been slow to adopt this approach. Expect to learn the three most common roadblocks lenders face when digitalizing their collections process, as well as offer helpful tips to overcome them.
First, Why “Digital-First” Debt Collections?
Traditional collections require massive operational costs and human resource investment. Lenders often spend a considerable portion of their budget on third-party agencies, call centers, and one-way, paper-based communications letters (especially for soft collections).
And regardless of how well a lender or a collector develops their collections workflow, the whole experience tends to leave a bad taste in the mouth of borrowers. In fact, debt collection complaints make up more than half of complaints in the financial services industry.
According to a study by McKinsey, digital collections can significantly reduce operational costs and increase resolution rates. By implementing a digital collections strategy, you can enjoy a few other benefits as well, including:
- Improved Efficiency: new technology can complete more tasks in less time and with fewer errors. The secret? Automation.
- More Recoverable Debt: with data-driven collections, you can segment customers based on risk profile and monitor financial health in real-time before problems arise.
- Better Customer Experience: personalization is the key to a better customer collections experience, especially in the soft collections stage. Here, meeting customer communication preferences is key.
Now that you are familiar with some of the benefits of digital collections, here are five common roadblocks holding lenders back from implementing this approach.
Roadblock #1: Integration
If you think that planning a well-structured and coherent digital collections solution is a hard task that requires forethought and planning, you’re absolutely right. But done once and done right, your collections will be immeasurably more effective.
As you transform your collections to a digital-first approach, you may not necessarily need a complete overhaul of your collections tech stack. What you do need to do, however, is to introduce software that will complement and amplify the effectiveness of the tech you currently use and works well for you.
You also need to decide how far you will take collections. Most lenders will develop delinquency “buckets” based on total days past due. The key is to determine at which point a bucket of delinquent accounts will transition from your internal staff to an outsourced third party.
Most lenders will opt for a “light-touch,” soft collections strategy before moving delinquent accounts to a third-party collections agency. This is typically done within a loan management software (and is a feature of the Onyx IQ platform).
As such, lenders will not only need to find a vendor that offers the features they are looking for (unlimited third-party communications, intelligent collections workflows, personalization, etc.), but they will need to ensure that the solution integrates seamlessly with the systems and tools that they already use.
If there is tension between your traditional and digital touch points, or gaps in how/when you are engaging with borrowers, the less likely you are to collect.
Overcome Roadblock #1
Analyze your existing collections workflow: see what works well and identify what can be improved. Which tech components are integral to the process and are holding your collections together?
Keep what works well and look for ways to improve your gaps and weaknesses. Again, a key consideration is that any new technology you implement should integrate with your existing tech and collections workflow.
Be sure to research the capabilities and features of any potential system/vendor. It’s always a good sign if the software has been designed to integrate easily with other systems.
Roadblock #2: Change Management
Any change within your alternative lending business will require a coordinated effort across your organization. Something as big as digitally transforming collections can seem a mammoth task to bring to fruition.
It’s an important change to see through, because if managed ineffectively, implementing new systems into your existing workflows won’t go according to plan, and your employees will be left confused, frustrated, and unable to accomplish their tasks.
A lot could go wrong when rolling out changes. But with prudent decision-making and transparent communication throughout your organization, effective change management is possible and will result in more upside for your lending collections.
Overcome Roadblock #2
Choosing the right vendor for your collections software is the first step to effective change management. Look for one that offers advisory support (i.e., look for vendors with lenders or collections professionals in an advisory role), troubleshooting help (i.e., a process driven approach), and quick deployment.
Inculcating a culture of acceptance to change and a willingness to try new ideas can be helpful. After all, the employees in your organization are what will bring the tech together and get the collections process underway.
Following an agile change management approach can also help you deliver early in the life cycle, and test and iterate quickly to realize a return on investment as soon as possible.
Roadblock #3: Regulatory Compliance
Navigating the regulatory landscape is as challenging as it gets in 2023.
The collections process is highly regulated by multiple government agencies, with major differences between B2B and B2C collections, as well as first and third-party collections. Depending on where your business falls in this spectrum, any number of guidelines or legal statutes may be applicable. Note that internal and commercial collections tend to have far fewer regulations.
Some agencies/guidelines your going to want to pay attention to include, but are not limited to:
- Consumer Financial Protection Bureau (CFPB)
- Federal Deposit Insurance Corporation (FDIC)
- General Data Protection Regulation (GDPR)
- Fair Credit Reporting Act (FCRA)
- Telephone Consumer Protection Act (TCPA)
- Fair Debt Collection Practices Act (FDCPA)
If you’re concerned about whether new cloud collections platforms comply with all these regulations and adapt as the laws change, it can seem tempting to stick to the old ways of legacy platforms or outsourcing your collections.
But this is less efficient than you think, especially with the rate at which the rules keep changing. If you choose a collections software vendor with a competent compliance team, then compliance is practically taken care of for you by the system.
Overcome Roadblock #3
The software vendor you choose must show that they are compliant.
If the vendor doesn’t comply with your request to observe change management procedures, chances are that they don’t comply with regulatory bodies either.
Choose one that follows a transparent and effective regulatory change management process, and provides the latest industry-standard compliance board certifications. Look out for PCI-DSS compliance and SOC2 certification. Ideally, these should be updated regularly and provided to you.
To learn more about debt collection compliance, as well as the important differences between commercial and consumer collections, check out this great resource from the National Service Bureau.
Take the First Step Towards Digital Collections With Onyx IQ
Digital transformation permeates the alternative lending industry through and through, not just in collections.
The top lenders in the industry are digitalizing the entire lending lifecycle, from underwriting to portfolio management to loan syndication and beyond.
Onyx IQ is an alternative lending software designed for forward-thinking SME lending businesses who want to take their lending business to the next level.
We will work with you to digitalize your lending operation and realize its full potential. We offer modern billings and soft collections workflows while also helping you automate underwriting, loan syndication, risk management, and portfolio monitoring—all catered specifically to your SME lending needs. If you’re looking to test the digital collections waters, soft collections with Onyx IQ is a great place to start.
Request to demo Onyx IQ today.
