From daunting to digital: How technology makes debt collections better – Academia

Rishabh Goyal

Uttar Pradesh, India ●
Friday, November 25, 2022


Loans, Collections, Digital, Technology, FinTech, Non-Performing-Loans, Artificial Intelligence, App, OJK
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Let’s face it, debt collection is challenging for everyone involved. Despite the perception that lenders and borrowers have the same interests, they both want the same thing: loan solutions that are timely and seamless.

However, today’s debt collection methods of manually contacting borrowers through repeated phone calls, letters and visits are antiquated in the modern and high-tech age, especially in the financial services industry.

According to Google, Temasek and Bain & Company, Indonesia is Southeast Asia’s largest digital economy with US$70 billion in gross merchandise value (GMV) last year. The same report also estimates that the country’s digital economy will reach $146 billion by 2025, a perfect environment for potential markets and services to grow.

Fueled by a young, rapidly digitized population with growing purchasing power, the archipelago is a breeding ground for technological advancements. Financial technology (fintech) and digital banking have grown exponentially in the past two years. Case in point, digital banking accounts reached 47 million in 2021 alone and are projected to reach 74 million in 2026 by a recent study.

However, easy and ubiquitous access to credit and buy-now-pay-later (BNPL) also led to high default rates as economic uncertainties persisted. Debt collection could become a bigger issue for Indonesia, as the Financial Services Authority (OJK) reported that banking gross non-performing loans (NPL) numbers rose to 2.9 percent in July from 2.8 percent in June this year. Recent rising gas prices will push NPL and default rate numbers higher in the future as borrowers prioritize their spending.

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Financial institutions were already facing difficulties in debt recovery. In Euler Hermes’ research titled “2018 Collection Complexity Score and Rating”, Indonesia ranks seventh among nations where it is “severely difficult” to collect unpaid debts. One reason debt repayment is difficult in Indonesia is that collection has traditionally been a manual and labor-intensive activity.

The traditional approach is often marred with hostile recovery agents and repeated calls. While there is no specific law on debt collection in Indonesia, financial service providers must follow the guidelines of Bank Indonesia, OJK, and the Criminal Code (KUHP) that prohibit the use of physical and verbal threats. Still, news of debtors facing violence, intimidation is rampant in the media. The situation creates an unpleasant experience and a negative stigma around debt collection.

The Indonesian FinTech Lenders Association (AFPI) has also encouraged firms to certify members of their debt collection teams to adhere to industry standards. While educating debt collectors is important, implementing the right technology in financial services debt collection solutions is equally important.

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Digital debt collection reduces delinquencies while improving speed and collection rates at a fraction of the cost. Lenders can leverage technology to optimize end-to-end debt recovery workflows, including communications, issues, billings, payments, and field collections.

For example, artificial intelligence (AI) driven, and omnichannel debt collection solutions will provide a more pleasant customer experience. An engagement strategy based on machine learning models can help lenders determine effective channels and resource allocation.

By segmenting customers, using a tailored communication plan for each segment, and personalizing messages for collections, lenders can not only increase recovery but also drastically cut collection costs. Instead of following a one-fits-all strategy, lenders should adopt dynamic and personalized strategies that are aligned with risk assessments, borrower behavior, communication models, and analytical insights.

For field collection, mobile-based technology solutions have enabled complete digitization of processes with innovative capabilities such as real-time field force geo-tracking, smart route planning, map-based navigation, digital receipts, in-app calling, and dashboards. The entire legal workflow including notices, legal communications, case follow-ups, and status tracking can be easily automated and digitized for greater efficiency.

According to the We Are Social report, Indonesia has 204.7 million internet users and 100 million smartphone owners, indicating that most Indonesians can use technology to their advantage. Even in small towns and villages, customers are now reachable through omnichannel outreach including SMS, WhatsApp, Interactive Voice Response (IVR), Voicebot, Chatbot, email, or voice messages.

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Borrowers prefer to engage in a channel and time that fits their schedule rather than being constantly reminded through generic communications. Defaults are also less likely if customers are reminded and supported in time about their upcoming payments.

As debt collection becomes more cost-efficient and faster, lenders with good recovery will have a greater chance of expanding their portfolio by lending to new segments in remote areas that are practically outside the credit umbrella. This is where a comprehensive technology-based approach to banking can also contribute to financial inclusion, especially given that 92 million Indonesians are unbanked and 47 million are still unserved, according to a 2019 Google report.

Providing credit to these people not only opens up financial opportunities for people who have access to banks but also reduces financial inequality in the long run.

Banks and other lending institutions should adopt a more data-driven, digitized and customer-centric collection strategy that drives superior service. Apart from boosting debt recovery for businesses, opening up new opportunities and changing the perspective of a once-challenging practice, digital-based debt collection will create stronger customer loyalty, leading to an overall better financing experience.


The author is the cofounder and CEO of Credgenics.


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