What makes a good collection method? The collections game has largely stayed the same, with methods based on direct debits or some form of peer or authority pressure remaining the most popular.
Payroll lending and some digital lenders use direct debits as their main collection method. This improves repayment rates because the debit coincides with the customer’s salary or the debit is on a digital wallet the customer uses frequently. The limitation here is that it creates a psychological barrier between the company and the customer. There’s little to no communication between the two groups. So the company might resent the customer, and the customer doesn’t trust the company.
Microfinance companies and banks rely on peer or authority pressure. This improves collection rates because the customer prioritizes their repayments over other repayments they owe. When your community knows you’re refusing to repay your debt, or you receive a certified mail demanding payment, the probability of you repaying that debt goes up. The limitation here is that it’s expensive. It’s expensive to hire staff to create connections with all your customers, and it’s expensive to train and manage debt collectors.
The answer to which of these methods is better isn’t obvious. Both methods are still common in the marketplace and used by forward-thinking businesses on both sides. I think there is room for both methods, as it comes down to what the customer wants. If they want a quick and easy loan they don’t have to worry about repaying, they will select a company that has direct debits. If they want a relationship with their credit provider or information about products or someone to talk to when times are tough, they will use a company that provides peers or an authority. When companies are managing collections in a transparent and healthy way, everyone wins. When they don’t, we get a debt crisis.