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Outsourcing the collection of defaulted, unsecured, consumer debt, from lending, insurance, utilities and telecoms, is a well established industry in Europe, but the industry is on the cusp of disruption.
New tech-based collection firms have emerged in Europe, in the last few years and built increasingly attractive, viable businesses off the back of the internet based products, in digital services explosion.
In this episode, we discussed the current market and key considerations for the incumbent debt management firms and industry investors, to think about, as they appraise their strategies in response to the rise of the challenger brands. Today, we are joined by L.E.K. partners, Eilert Hinrichs and Peter Ward.
Hello, I'm Peter Ward, co-lead of L.E.K.'s global financial services practice, with 15 years experience in tech management. And today, my colleague Eilert Hinrichs, will be joining me. Thanks for joining me today, Eilert.
Thank you very much for the introduction, Peter. I'm Eilert Hinrichs. I'm a partner at L.E.K. and I'm advising, alongside with Peter, in tech management, for over 15 years, focused on the UK, as well as in Europe and occasionally also on a global basis. I'm very glad to talk to you today, Peter.
To start the conversation, how do you think these internet based companies, will impact the incumbent providers and will it take from their bottom line?
Tech-based providers, have mainly focused historically, on verticals, which were small and probably not important for the incumbent players, as they were of low value and the incumbent players have focused on the large verticals. Therefore, it's important for the incumbent providers, to monitor, very carefully, how these tech-based providers are getting on and what progress they're making.
The new companies, at least try and to upset the existing debt management industry, by deploying technology and AI, where possible.
This Executive Insights, sets out an overview of the current market and key considerations for the incumbent debt management firms and industry investors, to think about how they appraise their strategies and respond to the rise of the challenger brands.
Those are really excellent points, Eilert, and really interesting. But let me ask you this. What does the European debt landscape look at and what are the key takeaways for the industry?
A relatively small number of industry verticals, re-comprise the core market, for the leading traditional debt management providers. These include in particular banking, but also insurance, telecoms, utilities.
And they were the main focus of them because they were the largest value, but still a relatively manageable sort of volume, sort of flows, for these providers.
Incumbent providers have developed successful operating models, to collect these larger debts and very often, have less automated processes because they could often do, include some manual steps.
Therefore, the new economy is a challenge for these incumbent providers, because digital services, e-commerce, payment service providers, buy now, pay later providers or new mobility subscriptions, very often have very small fines, typically below hundred, sometimes even below 50 euros or pounds. And therefore, the existing processes of the incumbent providers, are not really very good set up, to collect this type of debts.
Understood. Quite a complex situation. But on the other hand, it looks like the industry is being shaken up, by the new leaders in technology. What can be expected, going forward?
Over the last five years, we have seen, that new capabilities and digitization, process optimization and artificial intelligence, have combined, with the growths in the new economy, enabled a new breed of debt management companies, to emerge in Europe.
These sets of tech-based providers, are really set up, their operations, to focus on these smaller, yet very high volume verticals and found thereby segments, which are rapidly growing, but also are increasingly of substantial size.
E-commerce, for example, in Europe, is creating seven to 800 billion of annual revenue. And that in itself, creates a increasingly attractive industry vertical.
That all seems very clear, but changing the subject a little for a moment, what are some of the key factors, that companies have used, to be successful?
Firstly, they are using a very high degree of process automation, including chatbots, mailbots, and really to drive down their operational costs and their cost to collect.
Secondly, the huge volume of individual files, in these new economy verticals, mean that artificial intelligence, can add considerable value to their collection strategy design.
Thirdly, they have built their businesses, around a high quality level of end customer services and experience, which is increasingly important, in any consumer centric market and can help enhance that recovery rates, compared for more traditional, non digital ways of collection.
The high level of automation, also enables them to connect with customers, which do not provide hundreds and hundreds of files every month.
Finally, a new economy company, that need their debt collected, have considerable synergies with the new tech-led collection companies, in terms of culture. And they are operationally much closer to each other and prefer to deal with these new set of companies, instead of the more traditional, sometimes stuffy, incumbent providers.
Okay. Very good point, Eilert. And looking at that one in a bit more detail, can you elaborate on some of the challenges, incumbent providers will face?
Of course, I can. The strategic challenge of the incumbent players, is really multifaceted. The first order consideration, is about the participation choice, i.e. do they really want to participate in these new emerging, new economy verticals?
The second order consideration, is about protecting their existing market positions, in the traditional verticals, as the technical based providers will knock on their doors, and with existing customer bases, try to win some of those.
Low cost customer centricity and customer satisfactions are attractive, to all customer facing businesses, not only in the new economy. Therefore, what strategies and investments are needed, to improve customer engagement, of their existing customer base?
And thirdly, a third order consideration, of much more technical [inaudible 00:07:49] level. What IT infrastructure and data analytic capabilities, are really required, to ensure cost effectiveness? What investment and transformation programs are required, to implement these and move the existing processes to a more modern world? And does that have in turn, actually enabled the incumbent players, to be more competitive in the more high volume and low value files?
Which brings us back to the first question, where do they participate? Which of the verticals should they focus on, in the future?
In summary, that management providers of all types, have their strategy work cut out for them. The incumbent providers have to make sure their businesses remain relevant and competitive, in the long term. The tech-based providers, have to protect their niches and try to eat the lunch of the incumbent providers.
That's really fascinating stuff, Eilert, I completely agree. Incumbent providers need a detailed picture of the new players, including their strengths and weaknesses and a good understanding of the rapidly developing industry dynamics, before realigning their strategy, as the market transforms, over the next few years.
Traditional debt management providers are heavily reliant on manual ways of working, making it uneconomical to collect the skyrocketing volume of smaller files. In any case, the incumbents cannot afford to stand still. The competitive threat will increase, as the broader debt management customer base, realizes the benefits to be gained, from the new breed of debt management companies.
So, are there any other closing remarks or thoughts you'd like to make, on this industry?
I've been advising in debt management, for the last 15 years. And it's been a fascinating journey, to see how the industry has evolved, for both the incumbent players, as well as the tech-based players.
We are very happy to engage in discussions, in our experience and in our perceptions, where the industry is heading, in supporting you, in defining a winning and sustainable strategy.
This is a trend, that's here to stay. And if they close their eyes, they will be surprised how quickly they are really competing with them, on a day to day basis.
Well, thank you very much indeed, Eilert, for your time and insights today. Really fascinating stuff.
You're very welcome.
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