Will Open Banking Make Debt Collection Agencies Go Extinct?
If your local supermarket increased prices by 300%, how would you feel? I’m guessing you would not be pleased. I’m also guessing you’d choose to do your shopping elsewhere. But what if the law left it up to your local supermarket to decide if you could switch? Sounds crazy, right? Well, that’s exactly how debt collection agency rules are set up. If you owe money to one agency, you cannot switch to another. But there’s good news: a revolution is underway.
The basic principle behind debt collection is the same around the world: if your bills become overdue, an agency will step in to force you to pay. It starts with letters, phone calls, texts and emails. Fees are added. Eventually, a bailiff, sheriff or someone of equal standing pays you a visit. But there’s one critical problem with this outdated system: debt collectors have no clue how much you have in terms of financial assets. Trying to collect debt without this critical information is like fishing in the ocean without a clue where the fish are. If you’re an expert at baiting, you may catch a fish now and then, but you will never get too many. In the fishing industry, the creation of the fish finder changed the game. Its use of underwater sound energy to locate fish allowed for more strategic, and efficient, fishing.
Open Banking can be the fish finder for the debt collection industry.
How will Open Banking change the debt collection game?
Open Banking allows third parties to securely access data, such as historical transactions and balance, from bank accounts. A repayment platform will allow creditors to predict how much debt a debtor can repay using artificial intelligence (AI). This repayment platform will simply release payments to creditors each month based on what is feasible, and they will do so until the total debt is paid off. Those who would like to pay but find themselves unable to do so will not be endlessly hounded. Their financial details will not be shared with creditors.
Creditors benefit, too. When they sign up, they simply accept the amount the AI predicts the debtor can pay. There is no downside, as the debtor would not be able to repay more than the predicted amount anyway.
How will the repayment platform work?
Open Banking’s platform will connect businesses (creditors) with customers (debtors). When an invoice or bill becomes overdue, the platform will send a message to the debtor inviting them to sign up for the platform. With one click, the platform get access to the debtor’s historical data and balance. The data is not shared with the creditor or debtor; it is only used to predict the amount that can be paid. In a few seconds, the platform predicts the feasible payment amount. The debtor accepts the amount. Payments are withdrawn automatically each month. The creditor instantly receives the amount.
Who benefits from using the platform?
For a creditor, the advantages of using Open Banking are faster repayment and larger payment amounts. The amount repaid is always the maximum that the debtor can afford. Creditors only pay a minor fee for using the repayment platform, which is deducted from the payment amount. This is the same model used by Uber and Airbnb; they take a small commission fee out of the total transaction.
Debtors benefit by way of improved cash flow, as their repayments are never larger than what they can afford. The total owed amount reduces every month. And because repayments are classified as instalments rather than overdue debt, there is no negative impact on the debtor’s credit score. No debt collection process is initiated, and no embarrassment ensues.
When an enormous asteroid disrupted the Earth, all dinosaurs went extinct. Open Banking is coming to do the same to debt collection agencies. And honestly, it’s about time.
