Outsource or in-house: How should APAC countries handle debt recovery?

It’s difficult to talk about the APAC region as a whole - it includes industrial giants like China, global financial centres like Hong Kong, and burdened economies struggling to handle their debt-to-GDP ratio. That said: three specific factors recur as concerns for debt collectors across the region:

1. Customer financial difficulties that lead to long-term loan delinquency (with 80% of payments that stay overdue for 180 days never being paid off at all).

2. Loose credit controls: in 2016, only around 50% of creditors in the region as a whole checked and monitored buyer creditworthiness, and more and more we're offering 90 or 120-day credit terms to address customer liquidity issues. To an extent, non-performance is a problem of the lenders’ own making - and a particular problem in China, India, and Thailand, where many businesses have 2% of potential turnover tied up in non-performing loans.

3. Complex collections processes: Indonesia, China, Thailand, and especially Malaysia (with the third most complex debt collections environment in the world) are all singled out, but the region as a whole is ranked ‘high complexity’ at least - even the likes of Japan and Hong Kong. The key factor in this complexity across the region is insolvency (accountable for 24% of non-performances), closely followed by court systems (20%), and the inadequacy of payment systems (11%).

Historically, companies and financial institutions in APAC countries have preferred to outsource their debt collections. But is that the right approach?

Outsourcing debt collections

APAC countries have been keen to embrace alternative methods for handling debt. It’s why 14.4% of businesses in APAC countries have been prepared to sell their debts to firms who specialize in collecting on them, and it’s why collections have tended toward the use of collections agencies who make personal visits, avoiding the need for court proceedings and focusing on debtor relations. Customer behavior is far more straightforward than the Byzantine processes around insolvency and court hearings.

Field collections by out-of-house personnel need support from the institution itself. Banks need to prioritize collections that are likely to yield results and exclude those which have been paid on the day. Ideally, they need to provide smart routing, so collectors can make the best use of their time, and operate with cases where their approach will be most viable (whether this means working with payment behavior rather than against it.)

In-house debt collections

In the here and now, a speculative report by PwC suggests that 70% of financial business leaders in APAC countries are concerned about the speed of change in technology. Emergent technologies are being adopted more and more quickly - ten times as quickly now as in the early twentieth century.

PwC recommends involves updating IT operations, simplifying legacy systems, and building the technology capability to interact with customers in new ways, building intelligence around customer needs, and using that intelligence to redesign operations so that the customers who want to pay can do so easily.

The ideal solution is one that’s been tested in more mature markets and proven to work with the kind of situations APAC economies are now experiencing. Financial suites which modernize core Customer Relationship Management capacities and include specialist 24/7 payment processing for debt accounts can make broad improvements to the operation of the bank as a whole, including the screening of potential creditors and the ease of debt recovery through making payment easier and more agile. If the bad debt can be headed off before it emerges, banks' and collectors’ burdens will be eased.

Which is better?

There is no one-size-fits-all solution to debt collections, but prevention is always better than cure. A lot of banks outsource at the stage where a loan has defaulted for a long period of time - but as we’ve seen, a lot of banks also offer credit periods that are too long, entering the kind of 180-days-or-more territory where only 20% of debts are ever recovered. These banks need in-house reform to prevent bad debt from emerging in the first place.

It’s important to understand that these in-house solutions will not replace field agents. There will always be debts that need to be collected directly, there will always be a need to avoid court proceedings, and there will always be customers who respond better to a face-to-face encounter than they do a mobile app nudging them to pay.

The role of in-house improvements, like rolling out a new financial suite with tools that improve creditor screening, account handling, and debt repayment, is to make everyone’s job easier - ensuring that debt collectors only spend their time on the most valuable debtors who are most likely to pay.