The European debt collection market is experiencing a profound shift, reshaping how businesses recover unpaid debts. Moving away from traditional, labour-intensive approaches, the industry is embracing technology to address a new wave of challenges and opportunities.
A changing industry
For years, debt collection revolved around high-value claims exceeding €500 from sectors like lending, insurance, telecoms and utilities. This model relied heavily on legal action and manual processes. However, the rise of e-commerce and ‘buy now, pay later’ (BNPL) services has introduced a flood of smaller claims, often under €150, tied to online transactions and digital subscriptions.
This shift has opened the door for tech-driven debt collection firms to thrive. Using advanced tools like AI, as well as automation, they’re turning these smaller claims into a viable market segment and reshaping the industry’s focus.
What sets tech-driven players apart?
Tech-savvy debt collection firms are succeeding by focusing on four key areas:
- Automation at scale: Process automation is key for these companies, allowing chatbots and mailbots to handle high volumes of small debt files cost-effectively. This efficiency contrasts sharply with the labour-intensive approaches deployed by traditional agencies.
- AI-powered strategies: AI is used to analyse large data sets to optimise collection strategies, personalising communication and predicting debtor behaviour. These insights drive higher collection rates and outperform conventional methods.
- Customer-centric approach: Emphasising a positive debtor experience enhances recovery rates and preserves creditor-debtor relationships, vital for digital services and subscriptions.
- Alignment with digital businesses: Their processes align well with the fast-paced, tech-first environments of e-commerce and BNPL providers.
Small debts, big growth
The digital economy has seen a dramatic rise in small-value debt cases. For example, in Germany, BNPL services have grown with a compound annual growth rate (CAGR) of 12-16% since 2016, while e-commerce debts have increased by 8-10% annually. In the meantime, traditional segments like unsecured consumer lending lag behind at 2-3% CAGR.
This shift underscores why tech-led firms are attracting investor interest. Their scalable, efficient models are well-suited to meet the demands of a rapidly evolving market – and private equity investors have noticed.
Expanding horizons
The influence of tech-led debt collectors isn’t limited to digital debt. They’re moving into traditional industry verticals such as telecoms and insurance, where smaller debt amounts are common and less reliant on litigation. It’s also worth noting that these verticals value personalised and efficient approaches, which makes tech-enabled strategies particularly appealing.
This trend has created a favourable environment for tech-based collectors to gain ground, posing a growing threat to incumbent players.
What traditional firms must do
Adapting to this new reality is critical. To stay competitive, incumbents must:
- Focus on strengths: Continue specialising in high-value claims while cutting costs through automation.
- Modernise systems: Invest in technology to compete in smaller debt segments. This transition will be challenging, as it requires running dual systems and fostering a cultural shift towards innovation.
- Consider acquisitions: Acquiring tech-driven competitors can provide a shortcut to innovation, though integration challenges remain.
Investment opportunities
For investors, understanding the strengths and limitations of both traditional and tech-driven debt management models is essential. The rapid growth of sectors such as e-commerce and BNPL presents lucrative opportunities. However, assessing the scalability and integration potential of tech-based firms is crucial.
Investors focused on traditional companies should support those committed to digital transformation and operational efficiency. Alternatively, backing tech-led disruptors could yield higher returns, given their growth potential and scalable models.
Moving forward
The shift towards tech-driven solutions is irreversible. Traditional agencies must recognise the efficiencies and consumer focus offered by new competitors to remain relevant.
Inaction is not an option. Failure to adapt will lead to loss of market share to agile, tech-savvy rivals. Conversely, those who act decisively and strategically could secure their place in the evolving market.
If you want to find out more, reach out to the L.E.K. team.
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