AI-Based Debt Collection May Help Avoid Another P2P Lending Crisis

Peer-to-peer lending, or P2P, should have been the long-awaited answer to a complex problem of financial inclusion: how to help the poor break out of the cycle of poverty?

Finally, there is a commercially viable way to lend money to the “riskier” segments of the market through high mobile internet penetration and the elimination of costly middlemen.

Sixty-six percent of Indonesia’s population was unbanked in 2018 and cash was king. P2P lending platforms, which typically pair promising borrowers with private lenders, offered the perfect solution to the problem. Ordinary Indonesians gained much needed access to credit, while lenders were able to earn higher returns than many other investment opportunities at the time.

Then everything went wrong.

Lenders hide behind the P2P loan mask

In January, P2P lending was the third most criticized sector in Indonesia. Stories of stalking can still be found on social media, grouped together under the hashtags #korbanpinjol or #korbanfintech (“victims of online borrowing” and “victims of fintech” respectively) with story after tale from victims warning against online borrowing.

Borrowers are crushed by impossible interest rates (up to 2% per day) and administration fees which lead to inflated debts by unscrupulous lenders no matter how low their initial borrowed amounts were. Desperate borrowers then refinance their loans with other P2P lending companies over and over again. They are now trapped in a vicious circle.

Then comes the time of collection. Bullying, sexual harassment, data privacy breaches, blackmail, and harassment from friends and family are all part of the horrific norm. One of the patented debt collection tactics is to create WhatsApp groups and add the borrower’s friends, family and coworkers to shame delinquent borrowers. In these groups, borrowers are described as “fugitives” to be hunted down. Debt collectors will often ask members of these groups to reveal where borrowers are “hiding”.

Unfortunately, even legitimate businesses can go through dire times due to high default rates and, without a viable collection strategy planned, can unwittingly employ third-party debt collection agencies who use these barbaric tactics to drive out their debt.

One of the victims of this harassment was a Jakarta taxi driver who committed suicide last February after failing to repay outstanding loans from 20 different lenders.

His suicide note contained a call to the Financial Services Authority (OJK) to eliminate online lending, which he called a “devil’s trap.”

The taxi driver case presents two of the biggest problems with P2P loans: the harassment of borrowers and borrowers who inevitably default on their loans if they borrow from too many lenders. The OJK found at least one instance of a single borrower borrowing up to 40 platforms.

The OJK attempted to regulate the market, but found itself faced with an uncomfortable truth: the Internet is impossible to regulate. I can talk about these issues in Indonesia with some first hand knowledge, but we are not unique.

Lessons we haven’t learned

China’s problems with P2P loans more often stemmed from defaults that forced even higher interest rates and the closure of P2P lending platforms, and taking with it investors’ savings of a lifetime. .

The Philippines, another infamous recipient of P2P loans, faced problems more akin to those of Indonesia. Vietnam too.

The trajectory, however, is still the same.

P2P loans are gaining considerable attention for providing “a real solution”, and investors are starting to pump funds into these platforms. The industry is becoming marred by ridiculous fees from bad players. A combination of this and the lack of a real debt collection strategy leads to increasingly desperate lenders. Borrowers are starting to report harassment from lending platforms. Lives are lost.

Regulators have worked to prevent the situation from worsening. Now we come to an important question: Could we have prevented all of this?

Borrowers Should Learn Financial Basics

Low-income people often can’t quite grasp the idea of ​​interest rates, making them easy to choose when sold on weekly payment schedules. If lenders take advantage of it, they cannot identify the harm that has been done to them, or what they can do about it.

In fact, those who earn lower incomes may not even be equipped with the money management skills necessary to manage debt, which can contribute to higher default rates, and an inability to find real solutions to debt. problems caused by their debts other than refinancing from reputable lenders.

Any social good that might have been felt by increasing access to financial products is compromised by the lack of knowledge on how to truly maximize these offers.

KPMG noticed the problem as early as 2017, and today it rings truer than ever. Educated borrowers are better equipped to protect themselves against bad lenders and, more importantly, can make decisions that will actually benefit their financial situation in the long run.

Credit Checks: A Necessary Evil?

Credit checks were the very reason for the need for P2P loans, but failures in the industry can sometimes remind us: there was a reason they were needed in the first place.

The P2P lending industry needs to do rigorous credit checks, and it needs to do so without preventing previously underserved segments from entering the market.

Fortunately, third-party alternative credit scoring solutions have been launched to fill this important gap. Solutions such as smartphone credit scoring solutions use robust artificial intelligence to obtain information about an applicant’s creditworthiness simply through their smartphone and could help P2P lenders provide financing on fair terms to borrowers whose traditional systems have failed.

There are also solutions based on artificial intelligence to collect debts.

Ethical and personalized collection

Companies like AsiaCollect strive to help businesses maximize their non-performing loans, from offering credit management counseling and software-as-a-service (SaaS) solutions, to purchasing portfolios. of debts.

AI and machine learning can be used to analyze the behavioral and emotional psychology of borrowers, enabling call center operators to communicate more effectively with different personality types. Our platforms are also able to identify the best times and channels (SMS, emails, social media) to reach customers, resulting in higher engagement and refund rates.

This level of smarter profiling and targeting of borrowers not only increases the likelihood of reaching the borrower, but also the collection rates for each individual targeted.

P2P lending platforms can benefit from technology-driven debt collection, but the platform can also find its place within various organizations, from collection agencies and digital lenders to banks and non-institutions. banking. A more people-centered and focused approach to how we collect debts also reduces a company’s exposure to any form of reputational risk.

Maybe as an industry we had to go through these terrible growing pains to really understand the double-edged sword that we allowed in the market. To answer the question posed above, yes, I think these tragedies could have been avoided.

Industry players should consider a holistic application of P2P lending in new markets, taking into account all stages of a borrower’s life cycle.

At the heart of these efforts is a critical question: do we really understand the underserved markets that require P2P lending?

I think once we do, the rest will follow naturally.

Guillermo Martin is the Head of Global Sales and Country Director of Indonesia at Asia Collecting, a Singapore-based financial technology company that aims to reform the collections industry using AI and machine learning.

Janet E. Fishburn