To understand the state of debt collection industry in Vietnam, think back to the last ten friends and relatives you lent money to, even if it was as small as 200,000 Vietnamese dong. Now imagine if you had applied this approach to all of them: You demand that they pay you back immediately, or else they will face serious consequences, you tell them.
As ineffective as this collection strategy sounds, it’s currently the status quo for debt collection in Vietnam and even in many parts of Southeast Asia. Banks outsource debt collection to third-party agencies, whose tactics have two major problems: One, they rely on a one-size-fits-all approach to consumers. Two, their main tactic is intimidation, leveraged through constant calls and hostile, field-based collection. Both sides of the marketplace lose out in this equation. Banks boast of poor recovery rates for their non-performing loans and negatively impact their reputation, while consumers remain in debt, as they would prefer to ignore or avoid these kinds of debt collectors rather than engage with them. Banks in Vietnam, in short, are still firmly in the first generation of debt collection, where efficiency is low and risk is high.
To return to our opening analogy, now imagine if you take a customized approach to each of the friends and family that owe you money, each based on who they are. Nguyen admits he is forgetful, so he is happy to receive regular, friendly reminders for repayment.
Dao’s biggest motivation is to be debt-free, so she likes being told how close she is to fulfilling her balance, as a means of motivation. Tran prefers a firm deadline, so you offer him one by which the full debt should be paid. In much the same way that you are more likely to successfully collect from friends when you take a personalized and friendly approach to each one, banks in Vietnam can boast of a higher collection rate when they think of consumers as individuals and treat them accordingly.
Unlike asking friends and family for repayment, the personal approach in the case of banks is tech-enabled. The second generation of debt collection is sophisticated and tech-driven, and it becomes even more complex in the third, which leverages artificial intelligence and even psychometric analysis – the communications to consumers effectively become as unique as a fingerprint, tailored to what each person will be most responsive to. Banks with the foresight to move toward the second and third generation of debt collection experience an inverse correlation in their favor: As efficiency increases, the risk decreases. By the third generation, risk is low, while efficiency is high.
Of course, many banks in Vietnam may not even be aware of second and third generation debt collection, so a large part of my role is market education. We explain to banks how tech-enabled debt collection will enable them to more efficiently communicate with consumers, do so in a way that is personalized to each one, and ultimately recover more debt. The revenue generated from repayment on non-performing loans will be substantially higher than what they typically get from third-party agencies.
As profit-oriented as banks may be, they still care about their end users. We thus are also careful to explain that other side of the equation: Tech-enabled debt collection will enable more consumers to dutifully make repayments, and ultimately become debt-free.
In a healthier financial state, many of these consumers will return to the same banks as users of their higher value products, such as home loans.
Helping banks accelerate from first generation to third generation debt collection will require more than the deployment of the latest technology. Like the relationship between banks and their consumers, it must begin and be forged with a value that for even a financial institution is priceless: trust.