The lending business – a geek’s playground?

Technology has transformed many traditional services in recent years, but in general, most operations are still manual. Take logistics for example, no matter how seamless the order placement process is, there will always be someone to deliver the purchased items to the customer’s doorstep. (Before drones start taking over, at least.)

Drawing from the learnings from companies such as Grab, Go-Jek, or AliPay – there are definitely still gaps in the customer journey that goes undetected if the customer chooses to bail. Such are the challenges in the O2O (online-to-offline) model.

Take one of the popular FinTech categories, for example, the online lending business – which offers loans through application online. Loan collection is known to be a very manual process. While the growth in this industry is staggering and many players are eager to enter the business, they are all fearful of losing money.

How can we improve our loan collection odds without violence?

1. Data, data, data

Similar to crime prevention, we all want to stop loan defaulting before it happens. There are plenty of hypotheses on how to determine someone’s risk based on the person’s personal information. For example, the general findings suggest that single males who are lesser educated tend to have higher default rates. Correlations like this have been easier than ever to be identified given the availability of big data solutions these days.

Information is typically gathered through KYC (Know Your Customer) processes which include background checks, and other key data points derived from public databases or third-party credit rating agencies.

There are of course no shortage in enterprises who still rely on traditional processes such as paying the applicant a visit to their home, or evaluating the applicant’s ability to pay by looking at his/her pay slip.

2. Good CRM system

One of the reasons most mentioned by borrowers who fail to repay their loans on time – they forget.

For that reason, proper Customer Relationship Management (CRM) tools should be deployed. It could start with a simple phone call, or an SMS. Since borrowers have the tendency to apply for more than one loan at a time, they may not remember all the payment due dates.

3. Carrot and stick

Incentives and punishments are both good tools to be used to encourage repayment. Many loan platforms give their borrowers more favorable interest rates when they share more information about themselves (shopping receipts, paychecks etc). Incentives for early or timely repayment, also come in form of high credit scores for the applicant, which can be used to apply for more loans down the road.

However, if the borrower defaults, the process becomes slightly manual. Besides placing a phone call to the borrower’s workplace, a common way is usually to send someone sit at the borrowers’ doorstep, “reminding” them to repay. This will also inform his/her neighbours, relatives, and friends about such behavior. This tactic while meant to coerce, is also meant to shame the defaulter. Most defaulters will choose to repay when facing social pressure of this kind, or at least try to negotiate repayment.

“What happens if the borrowers still don’t pay back?” I asked this question in front of an expert with over 20 years of experience in debt collection, hoping to hear the movie-like scenes from his mouth. “It’s none of our business,” he replied. In the end, the lenders may choose to sell the rights of the debt on discount to someone who is willing to collect. What happens next – you can probably imagine.

Conclusion

Growing up, we often hear about the splashing of red paint and brutality associated with debt collection. While it does not tell the whole story, it does happen from time to time as last resort. Whether we realise it or not, technology is changing this industry (besides stricter rules and regulation).The use of data enables lenders and debt collectors to identify risks for each applicant and to provide reference points with the sole aim of minimising risks.

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Thanks for reading The Low Down, insight and inside knowledge from the team at Momentum Works. If you’d like to get in touch with us about any issues discussed in our blog, please drop us an email at [email protected] and let us know how we can help.