From daunting to digital: How technology is making debt collection better – Academia

Richab Goel

Uttar Pradesh, India●
Friday, November 25, 2022

Debt, Collections, Digital, Technology, Fintech, Bad Loans, Artificial Intelligence, App, OJK

Let’s face it, debt collection can be a daunting task for everyone involved. Despite the assumption that lenders and borrowers have misaligned interests, they both want the same thing: timely and seamless debt resolution.

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

Indonesia is Southeast Asia’s largest digital economy, with a gross merchandise value (GMV) of $70 billion last year, according to Google, Temasek and Bain & Company. The same report also predicts that the country’s digital economy will grow to $146 billion by 2025, an environment suitable for potential market and service growth.

The archipelago is a hotbed of technological advancement, fueled by a young, rapidly digitizing population with growing purchasing power. Financial technology (fintech) and digital banking have grown exponentially over the past two years. Case in point, digital bank accounts reached 47 million in 2021 alone and are expected to reach 74 million by 2026, according to a recent study.

However, easy and ubiquitous credit and buy now pay later (BNPL) have also led to higher default rates as economic uncertainty persists. Debt collection could become a bigger problem in Indonesia, as the Financial Services Authority (OJK) reported that total non-performing loans (NPL) in the banking sector rose to 2.9% in July from 2.8% in June this year. The recent rise in natural gas prices could drive higher nonperforming loan and default figures in the future as debtors prioritize spending.

Financial institutions are already facing difficulties in debt collection. In Euler Hermes’ study titled “Collection Complexity Score and Rating 2018,” Indonesia ranked seventh among countries with “very difficult” collection outstanding debt. One of the reasons it is difficult to obtain debt repayments in Indonesia is that collection has traditionally been a manually labor-intensive activity.

Traditional approaches often suffer from malicious recovery agents and repeated invocations. While Indonesia has no specific laws on debt collection, financial service providers must follow Bank Indonesia, OJK and Penal Code (KUHP) guidelines prohibiting the use of physical and verbal intimidation. Still, stories of debtors facing violence and intimidation are rampant in the media. This situation creates an unpleasant experience and a negative stigma around debt collection.

The Indonesian Fintech Lenders Association (AFPI) also encourages companies to certify that their debt collection team members meet industry standards. While educating debt collectors is important, it’s equally important to implement the right technology in financial services’ debt collection solutions.

Digital debt collection increases speed and debt collection at a fraction of the price and minimizes delinquency rates. Lenders can leverage technology to optimize the end-to-end loan recovery workflow, including communications, litigation, billing, payments and on-site collections.

For example, an omni-channel debt collection solution driven by artificial intelligence (AI) will lead to a more pleasant customer experience. Engagement strategies based on machine learning models can help lenders determine effective channel and resource allocation.

By segmenting customers, using a tailored communications plan for each segment, and personalizing collection messages, lenders can not only improve collection rates, but also significantly reduce collection costs. Rather than following a one-size-fits-all strategy, lenders need to adopt dynamic and personalized strategies aligned with risk assessments, borrower behaviors, communication models and analytical insights.

For field collection, mobile-based technology solutions fully digitize the process through innovative features such as real-time field crew geo-tracking, smart route planning, map-based navigation, digital receipts, in-app calling and dashboards. The entire legal workflow including notifications, legal communication, case follow-up 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 users, showing that most Indonesians can use technology to their advantage. Even in small cities and villages, it is now possible to reach customers through omnichannel outreach, including SMS, WhatsApp, Interactive Voice Response (IVR), voicebots, chatbots, email or voice messages.

Borrowers prefer to engage at channels and times that fit their schedules rather than constant reminders through generic communications. If customers are reminded and assisted in a timely manner regarding upcoming payments, the likelihood of default is also reduced.

If debt collection becomes more cost-effective and faster, lenders with higher recovery rates will have a greater opportunity to expand their portfolios by lending to new segments in more remote areas that are not effectively covered by credit protection within. Here, too, technology-based integrated payment collection methods can contribute to financial inclusion, noting that 92 million Indonesians are unbanked and 47 million remain underbanked, as stated in a 2019 Google report. Serve.

Extending credit to these people will not only provide economic opportunity to the underbanked, but will also close financial disparities in the long run.

Banks and other lenders need to adopt a more data-driven, digital and customer-oriented collections strategy to provide superior service. In addition to facilitating debt collection for businesses, opening up new opportunities and changing the perspective of what was once a daunting practice, digitally-based debt collection will create stronger customer loyalty, resulting in a better overall financing experience.


The writer is the co-founder and CEO of Credgenics.

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