Improve Collections: Top Debt Collections and Debt Recovery Strategies in Banks, Credit Unions and Equipment Finance in 2023

According to the International Association of Credit Portfolio Managers (IACPM), over 30% of outstanding debts in banks, credit unions, and equipment finance remain unresolved. If you're seeking effective debt collections and recovery techniques to minimize losses and boost your institution's bottom line, you're in the right place. In this blog, we'll delve into the top strategies that can empower your organization to navigate the intricate landscape of debt management in financial institutions, ensuring a more prosperous future for both your institution and your clients. Let's dive into the problems, and strategies in debt collections and recovery, exploring proven methods that can make a significant difference to your collections rate and delinquency management.

Table of Contents

• What was the Traditional Debt Collection Process?
• Problems in the Traditional Debt Collection
• How Debt Collection Practices are Changing?
• Top 12 Debt Collections and Debt Recovery Strategies for Financial Services to Improve Collections in 2023
• Conclusion

What was the Traditional Debt Collection Process?

• Credit Assessment: In this initial phase, a thorough evaluation of each applicant's credit behavior is conducted. This involves manually reviewing their credit history using an in-house credit risk scoring system or by consulting external credit bureaus. The goal is to assess the level of risk associated with each applicant. Applicants with low risk are approved for credit, while those with high risk may be declined. Medium-risk applicants require further scrutiny during the credit assessment process.
•  
• Customer Approval and Payment Start: Once an applicant's creditworthiness is determined and approved, they are granted the credit or loan they applied for. This marks the beginning of their payment journey as a customer of the organization.
•  
• Payment Collection: The organization then initiates the process of collecting payments from the customers. Regular payment schedules are set up, and customers are expected to make timely payments according to the agreed terms.
•  
• Late Payment Detection and Database: If a customer fails to make timely payments, their account is flagged for late payment. This information is recorded and stored in a collection database maintained by the organization. This database helps track and manage delinquent accounts.
•  
• Follow-Up with Default Customers: Customers who consistently default on their payments are identified as defaulters. Their information is then passed on to desk collectors, who specialize in follow-up procedures. In certain cases, particularly within the banking sector, field collectors may also be hired to engage with a larger number of defaulters in person.
•  
• Debt Recovery: If the efforts of desk and field collectors do not yield results and the debt remains unpaid, the lender may decide to enlist the services of a third-party collection agency. This agency, also known as a collection service, focuses exclusively on recovering the unpaid debt. They may employ various tactics and strategies to collect the outstanding amount from the debtor. Additionally, the agency may report the delinquency to credit bureaus, which can negatively impact the debtor's credit score and financial reputation.

Problems in the Traditional Debt Collection

SOURCE

• Time-Consuming and Insufficient Workforce: The manual nature of credit assessment and debt collection processes can be time-consuming. Human errors during credit approval may lead to inaccurate decisions. Additionally, relying solely on human resources for tracking and following up with debtors may result in inefficiencies, especially when faced with a sudden surge in defaulters. The limited workforce may struggle to manage the increased workload effectively.

• One-Size-Fits-All Communication Methods: Employing a standardized approach to communicate with defaulters overlooks the fact that each individual debtor has a unique financial profile, background, and behavior. Using a generic communication strategy may fail to resonate with debtors, as it doesn't address their specific circumstances. This can lead to a lack of engagement and cooperation from debtors.
•  
• Inappropriate Tones and Actions: Some debt collection practices, particularly by desk collectors and field collectors, can involve aggressive or threatening communication methods. Harassing calls and messages delivered at inconvenient times can make debtors feel harassed and pressured. This approach is not only counterproductive but can also create a negative image for the creditor and the collection process.
•  
• Customer's Inability to Pay: Persistently bombarding debtors with mass calls and messages without considering their financial difficulties can exacerbate the situation. Instead of offering guidance or tailored solutions to debtors facing financial challenges, the relentless pursuit for payment can lead to frustration and resentment. This approach may not encourage debtors to prioritize payment; rather, it can push them further away from cooperation.

How Debt Collection Practices are Changing?

Debt collection practices are undergoing significant changes in response to the evolving economic landscape and the need for improved accuracy, efficiency, and compliance. In today's competitive environment, staying at the forefront requires banking professionals to adopt advanced tools that can swiftly adapt to shifting legal and regulatory demands, monitor consumer credit behavior, and effectively enforce new policies and procedures.

The conventional approach to debt collection, reliant on outdated manual account-monitoring systems in banks and credit unions, is proving insufficient. These systems lack the modern, dynamic, and real-time efficiency required to meet the challenges of today's debt collection landscape. As financial institutions grapple with larger volumes of debt and increased risk, there is a growing imperative to harness technology that can address these issues while also enhancing the productivity of their collections staff.

Key changes in debt collection practices include:

1. Technology Integration: Financial institutions are increasingly integrating advanced technology solutions to streamline and automate various aspects of the debt collection process. This includes adopting specialized software that enables real-time tracking of debtor accounts, predictive analytics to assess credit behavior, and compliance management tools to ensure adherence to evolving regulations.

2. Data-Driven Insights: With the availability of big data and analytics, debt collection practices are becoming more data-driven. Institutions are leveraging data analysis to gain insights into debtor behavior, payment patterns, and risk profiles. This information enables more informed decision-making, personalized communication, and targeted collection strategies.

3. Digital Communication Channels: Debt collection is shifting toward more diversified and consumer-friendly communication channels. Email, text messages, and interactive web portals are being utilized alongside traditional phone calls to engage debtors. This multi-channel approach accommodates debtor preferences and improves the chances of successful communication.

4. Compliance and Regulation: Rapid changes in legal and regulatory requirements necessitate agile debt collection practices. Financial institutions are adopting technology that can quickly adapt to new compliance standards, ensuring that their collection efforts remain within the boundaries of the law and maintain ethical practices.

5. Risk Management: Advanced risk assessment tools help financial institutions identify and prioritize high-risk accounts, enabling them to allocate resources more effectively. Predictive modeling assists in foreseeing potential defaults and tailoring collection strategies accordingly.

6. Customer-Centric Approach: Debt collection practices are becoming more customer-centric, focusing on understanding debtors' financial circumstances and providing viable repayment solutions. Empathy and flexibility are being emphasized to build positive relationships and improve collection outcomes.

Top 12 Debt Collections and Debt Recovery Strategies for Financial Services to Improve Collections in 2023

1. Comprehensive Record-Keeping: The Foundation of Successful Collections and Recovery

Incorporating an advanced record-keeping framework that captures detailed borrower and lessee information lays the groundwork for efficient decision-making throughout the loan lifecycle and recovery phases. Ensuring records are consistently updated ensures accuracy and completeness, enhancing the ability to navigate recovery processes effectively.

2. Strengthening Collection and Asset Recovery Provisions: Ensuring Payment and Collateral Security

Financial institutions are enhancing their collection and asset recovery provisions within loan and lease agreements to fortify their position in cases of default. These updates often involve passing on collection costs and maintaining transparent communication channels with borrowers and lessees about asset recovery procedures. Collaborations with legal experts aid in drafting enforceable asset recovery clauses that adhere to local regulations.

3. Vigilant UCC Activities Monitoring: Safeguarding Interests

Dedicated teams overseeing Uniform Commercial Code (UCC) filings and automated monitoring systems assure prompt and accurate submissions. Real-time alerts signal any changes or gaps in UCC filings. Regular UCC searches help evaluate lien priority, safeguarding financial interests in situations of default or insolvency.

4. Optimal Lien Perfection: Ensuring Secure Collateral Recovery

Internal reviews or professional lien service engagement allows lenders to identify and rectify gaps or errors in lien perfection. By adhering to best practices and regulatory requirements, lenders educate staff engaged in the lien perfection process, averting potential legal conflicts that could hinder collateral recovery.

5. Navigating Complexity of Merger and Acquisition Considerations

Increased M&A activity in the asset-based lending and lease finance sector necessitates meticulous due diligence during acquisitions. Evaluating portfolio quality and collaborating with legal and financial advisors to assess risks and liabilities associated with acquired portfolios ensures favorable deal economics. Streamlined integration of acquired portfolios into existing recovery processes maintains compliance and efficiency.

6. Partnering with an Experienced Debt Collection System Vendor

Gain a comprehensive understanding of the institution's recovery strategies by conducting insightful inquiries. Tailor a customized debt collection system to align seamlessly with the institution's unique identity. Facilitate the smooth adaptation of technology by providing collections staff with thorough training. Ensure optimal support, service, and training by offering U.S.-based assistance, enhancing the institution's capabilities. Use text messaging automation to automate the loan collection payment process and collect payments via simple messaging. To know more about the use cases of automation in the financial services industry, read our blog on loan origination automation and commercial lending automation.

7. Developing Customer-Focused Communications

To elevate customer loyalty and value, it is imperative to ensure unwavering communication. This involves effectively conveying transparent expectations while streamlining the payment procedure. To facilitate improved engagement, it is advisable to adopt preferred communication avenues. These encompass a variety of options, including electronic mail, text messaging, United States Postal Service (USPS) correspondence, voicemail, and conventional voice calls.

8. Simplifying Payment Process for Past-due Debtors

Enhance the payment process by ensuring up-to-date contact information is included on invoices, coupled with a range of standard payment options to cater to diverse preferences. Simplify debtor payments by providing accessibility around the clock, allowing them to settle dues conveniently. Accommodate both on-us and non on-us payments, granting debtors the flexibility to utilize accounts within or outside the institution. Implementing a dependable payment processing engine guarantees the execution of transactions with precision and punctuality.

9. Clear Expectations Throughout the Collections Lifecycle

During the loan lifecycle, it is essential to establish and communicate clear expectations to borrowers. Additionally, implementing initiatives that focus on restoring negative accounts can contribute significantly to customer retention. These efforts, coupled with a commitment to transparent and open communication, serve to enhance overall customer satisfaction and foster greater loyalty to the financial institution.

10. Intelligent Collection Decisions Using Contact Data

To optimize collection efforts, it is crucial to prioritize activities based on insights derived from contact data. This involves a comprehensive analysis of various factors, such as collateral property details, risk scores associated with the borrowers, and the overall relationship context. By utilizing this information, collectors can engage in proactive and data-driven strategies, enabling them to swiftly address delinquencies and achieve timely resolution.

11. Documenting Every Debt Collection Action

Maintaining comprehensive records that encompass invoices, payments, and all collection-related actions is of utmost importance. It is crucial to ensure the accuracy and continuous upkeep of identity data associated with loan repayments. This meticulous record-keeping serves as a cornerstone for effective debt collection and recovery processes, enabling financial institutions to make well-informed decisions and engage in timely actions to manage delinquencies and defaults.

12. Dynamic Decision Strategies for Debt Collection

In determining the most efficient approach to debt collection, it is essential to evaluate the balance between the expenses incurred during the collection process and the potential income that can be recovered. This assessment enables financial institutions to prioritize their focus on outstanding loans that offer the highest likelihood of successful recovery. By analyzing not only debtor credit scores but also their financial behavior, institutions can develop targeted and customized collection strategies. Incorporating collection-specific risk scores further enhances the decision-making process, enabling a more sophisticated and refined approach to debt recovery efforts.

Conclusion

Incorporating these invaluable strategies into your debt collections and recovery practices is essential for banks, credit unions, and equipment finance institutions aiming to enhance their financial health. By adopting a customer-centric approach, optimizing communication channels, leveraging advanced data analytics, and fostering collaboration among your teams, you are poised to achieve remarkable results in streamlining your collections processes and reclaiming outstanding debts. Further, as a loan lender you can avail Loan Servicing Softwares to make your work easier.

Commercial lending industries face a lot of issues when collecting payments, especially during early-stage delinquency.

• One of the critical problems in collections is getting the customers to set up auto-pay
• Another significant issue is poor collection rate when automated reminders and notifications for collections are sent through less preferred, outdated channels like calls, emails, etc.
• The third issue would be the lack of insights from AI-driven conversational analytics to find out the best-performing messages to boost collections.

Now, imagine converting every text notification into 2-way conversations using App0 to confirm payments over SMS with encrypted payment links or a simple “Y” response from your customer.

App0 is a text messaging AI solution that is making collection communication 50x more effective for top equipment finance companies and other FIs in the US.

Request for Demo

FAQ