6 Reasons Why Traditional Debt Collection Is a Dead End
Digitalisation and globalisation of markets and services are constantly creating new consumption and payment habits. This leads to complex transaction chains that cannot function without the utilisation of advanced technologies. The transaction volume, and therefore the number of outstanding claims, is continuously growing, especially in the areas of eCommerce, online and subscription-based services. Providers of goods and services often need to operate cross-border with flexible payment options and contract terms in order to stay competitive. In this environment, adequate receivables management becomes an integral part of the business process and can have a critical impact on the liquidity of companies.
Studies on the common payment practices in Europe showed a worrying tendency:
- On average, 42% of the total value of B2B receivables in Switzerland hadn’t been paid by the due date.
- According to an EU-wide survey issued by the EOS Group, 19% of all invoices (B2B + B2C) in 2017 were paid too late or not paid at all.
- 42% of 3,200 interviewed companies in 16 European countries do not use receivables management techniques to settle outstanding invoices.
- 77% of the companies do not expect any further upswing, which means payment practices will remain the same or get worse.
- Only 18% of European companies have already completely digitalised their dunning processes.
These studies indicate 6 main problems of traditional debt collection practices:
1. Analog communication
The communication with debtors as well as with creditors takes place via outdated channels (mainly by post) and often uses an incomprehensible jargon, which highly extends the processing time.
2. Location-based business processes
Traditional collection practices can barely keep pace with the boom of the transnational eCommerce and the digitalisation and globalisation of services. Most of the collection service providers are still highly dependent on their location and offer consultancy on-site at limited office hours.
3. Manual processing
Manual data processing often leads to errors that are difficult to control and fix. The responsible debt collection clerks are overwhelmed with the increasing amount of the receivables and can hardly offer individual support to the debtors. The case processing can even come to a standstill once the debtor is abroad and the information and processes need to be adjusted to the local requirements.
4. Outdated software and complicated data exchange
More than 80% of all debt collection companies still use software tools that were developed in the 90s and can hardly be integrated into complex technical infrastructures and multichannel processes of modern business models. The result is performance issues and lack of integration, especially for business with international sales markets.
5. Unprofessional business practices
Legally incorrect practices are widely used, like disregard for the amount of collection fees set by law or non-compliance with consumer rights such as notice periods, cancellation and revocation rights, etc. Furthermore, morally questionable practices are sometimes used in the operation process itself, such as threatening phone calls, constant harassment or regular violations of data protection regulations. Under these circumstances, debtors feel intimidated and even “cheated” by debt collection actions, which on the other hand diminish the success of customer recovery efforts of the creditor.
6. Inefficient legal options
High attorney and court fees, insufficient information on the debtors and the increasing number of personal bankruptcy make legal collection uneconomical and lead to a drastic reduction of the success rates when issuing legal proceedings.
The way out: Smart collection online
A successful receivables management strategy should consider the specifics of the underlying business and the users’ ordering and payment habits. It should additionally provide opportunities for rapid and easy communication through digital channels.
The way of doing collections in the digital world builds on the classical virtues…
- Professional expertise and legal know-how
- Compliance with governance and regulatory requirements
- Cross-border coverage
… and enhances them through technology:
- Consistent data on claim progress
- Implementation of web-based or mobile software solutions
- Digital customer-oriented multi-channel communication
- Optimisation of processing steps through Artificial Intelligence and Machine Learning
Despite the obvious advantages, many conventional collection agencies still struggle with the adoption of the newly available technological advances.
Switching from analogue and manual processing to digital infrastructures, automation and digital communication has proven to be a slow, tedious, and expensive process for many companies.
Quite different, on the other hand, are the flexible, cloud-based SaaS and PaaS solutions of the FinTech sector, which are increasingly gaining popularity among customers thanks to their fast and cost-effective implementation and quality of services.
So, say goodbye to traditional debt collectors — receivables management is starting to go digital.
Atradius (2017): “Atradius Zahlungsmoralbarometer. Internationale Studie zum B2B-Zahlungsverhalten Schweiz — die wichtigsten Studienergebnisse”
EOS (2017):“EOS Survey ‘European Payment Practices’ 2016”
Author: Yuliana Lefedjieva, Corporate Communications Manager