Cracking the Code of Smarter Debt Collection
Surging household debt and delinquency rates are exposing inefficiencies in the debt collection industry. First-party creditors and third-party agencies are grappling with rising costs driven by manual processes, tighter regulations and outdated data and strategies. These challenges demand that the industry adopt sophisticated data-driven methods to enhance efficiency and maintain competitiveness in an ever-changing financial environment.
Three key factors drive rising costs: employee expenses, regulatory compliance and reliance on manual processes. Regulatory scrutiny intensifies these pressures, especially for third-party collectors facing stricter disclosure and contact rules. Outdated communication strategies and operational inefficiencies further increase collection costs.
The collections industry is adopting smarter, data-driven strategies and changing consumer engagement approaches to remain competitive and compliant, according to the LexisNexis Risk Solutions State of Collections Study.
Both groups aim to invest more in data, though their priorities differ. First-party collectors focus on using non-traditional credit data to enhance scoring, segmentation and account prioritization. Third-party agencies prioritize analyzing this data to improve litigation strategies and recovery outcomes.
Despite differences in priorities, original creditors and third-party agencies face the same market trends and serve the same consumer base. Both groups see the value in expanding data capabilities, incorporating alternative data and strengthening analytics.
Alternative data, such as liens and judgments, asset information and professional licenses, combined with advanced analytics like machine learning and predictive modeling, provide organizations with unique insights. By analyzing these non-traditional data sources, businesses can better understand consumer behavior, enabling improved account segmentation, prioritization and targeted outreach to drive more effective collections.
Many organizations now integrate non-traditional data with standard credit scoring, while others plan to follow. This shift reflects the industry’s broader move toward data-driven collections. The use of data analytics for litigation strategies is rising, from 30% currently to 45% planned. This trend highlights the shift toward strategic, evidence-based decision-making.
Clean, actionable data is essential for optimizing digital and personal communication. It provides a clearer understanding of consumer behavior and enables tailored collections experiences. This data-driven approach improves recovery outcomes and consumer engagement.
Collectors will rely on data-driven solutions to maximize return on investment and profitability. Alternative data will play a key role in enabling more personalized and effective collections communications.
The shift towards digital communication
Communication strategies now adapt to changing consumer preferences and new regulations. Consumers prefer mobile apps, email and SMS for outreach. Outbound calling proves less effective, as many consumers ignore unknown numbers. The collection industry has embraced texting and email as key digital communication channels. Meanwhile, mailing is gaining renewed traction among younger individuals who may feel overwhelmed by digital channels.
These changes reflect evolving consumer preferences and guidance from the Consumer Financial Protection Bureau, including Regulation F and the ‘7-in-7 rule’, which limits calls to seven within seven days. Regulation F, effective since November 2021, has given the industry time to adapt. Organizations have embraced texting and email, integrating them into omnichannel communication strategies. Digital channels are becoming both more effective and more compliant as regulations and consumer expectations align.
Customer experience plays a pivotal role in collections success. Treating consumers with respect and offering tailored communication strategies can preserve relationships and improve recovery rates. Digital self-service tools like payment portals and automated reminders allows consumers to manage their accounts conveniently, reducing friction in the repayment process.
Additionally, aligning communication methods with consumer preferences, such as SMS for younger demographics or email for broader reach, enhances engagement and builds trust. This approach not only supports compliance but also strengthens brand loyalty, even during challenging financial interactions.
The cost per dollar collected rises over time, especially for first-party collectors. Delinquent accounts become more expensive to recover, making speed and accurate contact information critical. Outreach strategies should prioritize fast, direct digital channels for early-stage delinquencies while later stage defaults are leaning into litigation strategies more.
Over the past 18 months, collectors have reported rising costs in data (49%) and employees (47%), while regulatory reporting costs have decreased the most (28%). Looking ahead, collectors expect the next 18 months to bring the highest cost increases in employees (51%) and regulatory reporting (57%).
Collectors will prioritize digital communications, driven by ease of use and consumer preferences. Online payment portals, SMS notifications, contact centers and mobile channels are expected to see the most growth.
To reduce costs and accelerate workflows, collections teams will rely more on alternative data and advanced analytics. However, technology alone is not enough. Digital tools and chatbots work for routine tasks, but complex cases will still need human intervention.
The most successful strategies will balance digital efficiency with human empathy.
About Author:
Carrie Coker-Aivaliotis is a senior director at LexisNexis® Risk Solutions. She is responsible for the strategic and tactical direction for the servicing and recovery markets.
Coker-Aivaliotis is an experienced, multi-functional leader with a 25-year track record in consumer data services, developing and expanding industry access, partnerships and strategies.
Previously, she held leadership positions at Midland Credit Management, CoreLogic and First American Credco, where she managed contractual and consumer data collaborations spanning collections, mortgage, automotive and direct to consumer markets.