When the right tools are used, and the right approaches are followed, debt collection can be a simple process. Unfortunately, this isn’t always the case. Some past-due customers continue to not repay what they owe—so financial institutions often decide to cut their losses. They either assign the debt to a debt collection agency (DCA) or they might sell it outright.
Debt assignment and debt sales are common strategies that even the largest of institutions practice:
- The European Central Bank (ECB) is actively considering setting up an Amazon-style marketplace where it can sell off billions of euros of bad debt
- According to the EU, there are four different examples of debt assignment: Outright transfer of a single claim, Assignment as security, Factoring, and Assignment as security
- With the European non-performing loan (NPL) market soon set to be worth roughly €1.4 trillion, it’s likely that debt sales and debt assignment will only increase in the near future
This blog seeks to examine debt assignment and debt sale, diving into the pros, cons, and differences between each process. We then outline how financial institutions can minimise debt assignment/sales as much as possible by leveraging cloud-native collections software.
What is debt assignment?
No matter how hard financial institutions try, some past-due customers simply don’t pay up. Perhaps they’re unwilling to do so—or maybe they’re simply unable. Whatever the reason, this is an issue. Debts become less valuable the longer they’re left unpaid as financial institutions have to spend more time, energy, and resources trying to collect them. At some stage, they might decide this debt is no longer worth pursuing.
This is where debt assignment comes in. Financial institutions assign the debt to another party (usually a DCA) and inform customers that they have to deal with—and pay—the DCA, instead of their institution. Then, companies have to transfer all necessary personal data over to the DCA and avoid running into any compliance issues or risks related to the General Data Privacy Regulation (GDPR).
If the DCA is successful, they will receive a portion of the debt, while the original financial institution will also still receive a portion.
What are debt sales?
Alternatively, a financial institution might just decide to sell the debt outright. This is a good option if they do not consider those debts to be collectable. They can wash their hands of the debt while still receiving something for it, though the amount they receive is a fraction of the original debt.
The DCA is then entirely responsible for collecting the debt. If they’re successful, they will also receive 100% of the proceeds.
What are the pros and cons of debt assignment/debt sales?
There are 4 main benefits of assigning/selling debts:
- Financial institutions can improve their liquidity
- They can increase their cash flow
- They will spend fewer resources trying to collect this “uncollectible” debt
- As a result, they will be able to focus more on other important accounts and projects
However, there are also some drawbacks that are worth considering:
- Third parties can sometimes use unethical practices when seeking repayment
- They generally charge past-due customers a large interest or fine
- There are occasions when they may pursue debts that have already been settled
- Assigning/selling debts carries a large security risk (due to transferring large quantities of personal data)
- In the case of debt sales, financial institutions will lose a large portion of money which they might be able to collect when leveraging a smart collections software
5 ways a cloud-native collections software can optimise your in-house collections
Assigning and selling debts aren’t the only options when dealing with past-due customers. The secret of effective debt collection is to remove as much friction as possible. So how can you do this?
By implementing a cloud-native collections software. A smart collections software possesses 5 main benefits, each of which will optimise your in-house collections, increase your recovery rates, and boost your overall ROI. As a result, you can minimise debt assignments and debt sales.
1. AI optimisation
You want to send outreach messages and payment reminders at the best possible time. For example, if you send busy professionals reminders at 11 am on a weekday, they’ll be at work. By the time they do get back from work and check their personal emails, your email might’ve already slipped down their inbox—meaning they might not even notice (or open) it.
But if they do open your messages, you need to ensure the tone is just right. Some customers will prefer short messaging that gets to the point. Others might prefer a bit more hand-holding and will respond better to kind words of encouragement.
By using collections management software that has a multi-armed bandit algorithm embedded, you can automatically send out the right messages at the right times. This will maximise the likelihood that your dunning approach has the desired impact—and will transform your ROI.
2. Strategy builder
Cloud-native collections software contains in-built strategy building capabilities to help you create the perfect outreach approach. Use “if” conditions to create targeted, automated strategies that are tailored according to each individual’s behaviour or preferences.
For example, if a recipient doesn’t open your messages, you can choose to automatically send out a reminder 2 days later. If they open the message, click on the landing page, but don’t proceed with their payment, you can get in touch to ask if they’ve had any issues with submitting payment. Or, you can see if they would like to speak to an agent who can guide them through the process.
3. Landing page builder and email builder
Design a range of landing pages, emails, and payment options using simple drag-and-drop tools. Avoid having to consult with IT—and having to wait until they can get around to the task.
Not only will this speed up your operations, but it’ll also make the entire dunning process more cost-efficient. Your valuable IT staff won’t need to put other projects on pause while they build your landing pages and emails. Instead, every single agent can do this themselves in a matter of minutes.
4. Data-driven insights
Dig into how effective each of your strategies has been and identify areas for improvement. Pinpoint precisely which tactics, messaging strategies, channels, and delivery times work best for each customer. Segment past-due customers that behave in a similar manner and make sure you’re always using the most effective strategy for each segment.
5. Self-service functionality
Let your customers handle their repayments themselves. This will give them more control and make them feel empowered. Moreover, it will also reduce the amount of time your agents need to spend on each individual case. They can therefore focus their time and energy on accounts that need the most attention.
With cloud-native collections software, you collect more before the debt assignment/sales process
Bad debts are a reality for financial institutions of all sizes. When a debt becomes too difficult to recover, assigning it (or selling it) to a third-party agency can be the only option. But while these strategies have their benefits, it would be even better to recover the debt in-house.
By implementing cloud-native collections software, you can drastically improve your recovery rate, and lower the number of accounts that you assign or sell. Your strategies will be more effective, your agents more productive, and your results more impressive.
What are you waiting for? To get started today, simply book a demo with receeve.