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Several industries worldwide have been forced to shift their business activities online due to the Covid-19 pandemic. However, lending has been stagnant during the pandemic, making digital adoption mandatory for lenders. Due to its speed and simplicity, digital lending has become a reality and a preferred way for most Indians. It has a market potential of $820 billion, with 50 percent of all lending transactions expected to be digital by 2023. However, all lending, whether digital or traditional, is a two-way traffic that involves extending a loan and then repaying that loan. At the same time, the reality is anything but simple with two processes.
Banks are encouraged to outsource collections to debt management and non-performing assets (NPAs) settlement platforms. The goal is to convince banks to hand over their defaulting buckets to these companies, which aim to mitigate NPAs through technology, reduce the likelihood of NPAs using predictive models, and streamline the collections and collections process. Historically, the use of technology in banks and NBFCs (non-bank financial companies) has been minimal. Additionally, they have historically relied on collection agencies (telemarketers and field workers) to collect debt, resulting in poor customer experience and harassment.
Even though debt collection methods have improved over time, many companies still avoid investing in lending technology due to the unpredictability of lender-borrower relationships. However, today’s technological improvements and adoption can generate vast amounts of data that can be used to better understand borrower behavior, thereby improving borrower perceptions of collection agencies.
What can lenders do?
The first step is to ensure that lenders follow ethical standards in the truest sense of the word. This means collectors must have moral principles that agents can use to create an ethical framework. Many fintech organizations have benefited from the technology to drive innovation and increase efficiency. Their main goal is to improve consumer financial services by implementing customer experience management and reducing human dependency. It also supports operators in today’s world in their successful operation.
The global debt collections software industry is forecast to grow from US$2.9 billion in 2019 to US$4.6 billion in 2024 at a compound annual growth rate (CAGR) of 9.6 percent. Consumer desire for self-service models in the collections process has increased and the expansion of specialist collections companies will be the primary growth driver. The opportunity is particularly great in India, where the BFSI sector spends over $3 billion on collections alone.
Understand the borrower’s emotions
The pandemic has caused severe financial hardship and loss of livelihoods for the vast majority of people, particularly in the informal sector, and has had a devastating emotional impact on many. Therefore, it is important to understand the emotional toll that loan repayments and constant calls can take on debtors. Lenders should be aware of their customers’ current situation and therefore empathize with them by offering restructured repayment options.
Covid has emphasized the urgency of digitization
Digitization has been a pressing issue for believers since the outbreak of the pandemic. Although debt collection procedures have improved over time, many people are still reluctant to invest in lending technology due to the unpredictability of the connection between lenders and borrowers. Today’s technological developments and widespread usage can provide enormous amounts of data to understand borrower behavior and improve borrower perceptions of collectors.
Using AI to collect better, faster and more humanely
Technology has helped several fintech companies boost innovation and increase efficiency. Their main goal is to reduce human dependency while improving the financial services offered to consumers through customer experience management. Likewise, it supports the success of operators in the modern world. Here, the combination of AI and machine learning brings efficiency and personalization by enabling improved targeting and customized messaging for borrowers. AI is currently used to predict the probability of repaying a past due loan based on various data variables such as location, EMI payment history, borrower profile, etc. The technology also helps lenders become more understanding when it comes to collecting overdue debt. By using AI-based bots to guide customers through the payment process and provide one-click payment options, fintechs, NBFCs and banks have expanded the use of digital payments for credit cards and personal loans. AI-powered models help maximize collections by selecting accounts that are most likely to pay. This helps with faster liquidation, more thorough net collection for each agent, and more account closures each month.
The way forward
Borrowers and lenders benefit from modern debt collection solutions supported by AI and ML technology. The ability to use big data and behavioral science to understand customers is very valuable. AI eliminates human bias and every process is automated using algorithms to establish a customer-centric strategy.
To thrive ethically in the marketplace today, the loan collection process must be leveraged through agility, intelligent and personalized communications, and innovation. With the alternatives listed above, lenders can be more flexible with their borrowers while improving their overall lending and collections experience.