The ultimate guide on debt collection software

This guide provides information on what to look for in debt collection software as well as the key trends in the industry. With this knowledge, you can make an informed decision on which software is best for your business needs.

Are you a business owner looking to increase efficiency and reduce costs? If so, then debt collection software may be exactly what your business needs. This comprehensive guide will provide an overview of the various types of debt collection software available on the market, explain how they can assist with boosting cash flow and cutting losses, show you how different solutions compare against each other, and give helpful tips for finding the right one for your company’s situation. So if you want to stay ahead of overdue payments and remain competitive in today’s rapidly changing markets, keep reading!

Late payment is a growing problem for businesses all over the world.

The average payment terms have increased from 33 days in 2019 to 37 days in 2022. Simultaneously the average invoice payment delay has increased from 21 days to 23 days, and globally more than 3% of revenue is written off as bad debt!

The consequences of late payments are far-reaching and significantly impact businesses, both large and small. Late payments can cause financial strain, create legal risk, and damage customer relationships.

On a financial level, late payments can impede business growth. When working capital is locked up due to delinquent accounts receivable (AR) it becomes difficult to pay suppliers and invest in growing the business.

Therefore it is very important to have a good accounts receivables and debt collection process to improve liquidity and avoid losses.

You can manage much by having good policies in place, but the real magic comes with automation. In this post, we will look closely at the debt recovery software market.

We’ll explain what a debt collection system does, why it matters and how businesses can benefit from using such software.

First of all, what is debt recovery or debt collection software? In short, it’s a tool that helps businesses collect unpaid invoices and manage accounts receivables efficiently.

It automates the process, enabling businesses to send payment reminders, schedule follow-ups, monitor customer accounts and track payments. This gives a business better control over their debt collection, allowing them to act swiftly and efficiently when it comes to recovering outstanding amounts.

How is the debt collection process managed today?

Only 9% of European businesses outsource the entire receivables process.

The most common way of managing AR is to combine internal and external ressources. 4 out of 10 companies rely on external service providers to process receivables.

In Europe, 13% of businesses have sold debt within the last 12 months, 34% have used a law office/attorney, 26% have used external debt collection agencies, and 55% have used internal resources.

In the US, 16% have sold debts, 32,7% have used a law office/attorney, 43,6% have used an external debt collection agency, and 59,4% have used internal resources.

We can therefore conclude that there are 3 typical ways to manage debt collection, and most businesses combine them:

  1. Debt collection with internal resources
  2. Debt collection with external resources (debt collection agency or attorney)
  3. Sell the debt

The market for debt collection services is estimated to be €30 billion per year, with an 8-12% gross profit margin and a 2.7% YoY growth rate.

Debt collection software is a fast-growing segment of this market, and businesses are increasingly turning to automation for accounts receivable management.

Debt recovery software is becoming increasingly popular among businesses and is an essential tool for managing accounts receivables and debt collection efficiently. By automating manual processes, debt recovery software allows businesses to save time and resources while also improving customer communication and visibility over their AR process.

The main benefits of debt recovery software include:

  • Automated payment reminders - Automated payment reminders save time and money by removing manual processes from the equation. By automating the process, businesses can send out payment reminders at the optimal time and frequency, thus increasing the chances of collecting outstanding amounts.
  • Better customer communication - Debt collection software helps to keep customers informed about their payments. This improves customer relationships and prevents them from unknowingly falling behind on their payments.
  • Improved visibility - Automated debt recovery software provides businesses with better visibility over their AR process. This gives them a better understanding of who owes what, when payments are due and when follow-up actions need to be taken.
  • Increased efficiency - Automated debt collection software helps businesses save time and resources by automating manual tasks such as sending payment reminders, scheduling follow-ups and tracking payments. This allows them to focus on other tasks, such as growing the business.

Market size and growth of the debt collection software industry

Most businesses today agree that no matter the strategy, they need a good and digital software solution to streamline their recovery process. This has led to the 10.2% YoY growth rate for the debt collection software market. The debt collection software market has an estimated market size of €3 billion, with an 80% gross profit margin. With the current CARG of 10.2%, the market will garner 6.7 billion by 2027!

As we can see, the service market is much larger, but the debt collection software market is leading in terms of growth and especially in terms of profit margins. Thus, debt collection software is an ever-growing market with a high demand for automated solutions to streamline the recovery process. With its increasing acceptance among businesses and its lucrative market size, it is no wonder that entrepreneurs are eager to enter the market!

North America dominates the global debt collection software market and will likely remain at the top during upcoming years, as it has a strong infrastructure that allows easy integration of such software into various BFSI systems. On the other hand, Asia-Pacific is expected to display remarkable growth in this industry due to digital transformation and consumers' growing willingness to embrace new technologies.

The on-premise segment currently dominates the debt collection software market, and is projected to persistently lead in this area for the near future. The continual demand for protecting confidential data from cyber threats as well as monitoring internal information access are some of the main reasons why organizations opt for on-premises based debt collection solutions. What's more, these establishments have full control over expensive software updates which also serves as a benefit. The cloud-based deployment mode is anticipated to witness the greatest growth rate due to a booming adoption of cloud-debt collection software among both large enterprises and SMEs. Enterprises are looking for ways to reduce their infrastructure investment, and with the help of debt collection software they can gain access to real-time operational data as well as financial information. Therefore, this segment's impressive growth will undoubtedly drive up the global demand for debt recovery solutions throughout its forecast period.

The financial industry holds the biggest portion of the market share for debt collection software, and this is expected to stay as more banking institutions turn to digitalization. Meanwhile, healthcare providers are predicted to experience a tremendous surge in growth due their increasing patient costs and unpaid debts.

Types of debt collection software

There are many different types of debt collection software available, and it can be quite difficult to get an overview of the industry.

Below we tried to group the market into 6 sub-categories:

Types of debt collection software

The debt collection software market is highly competitive with many players competing for a share of the lucrative industry. The debt collection software market seems to be highly fragmented. I have found more than 60 companies on Google that rank on the first pages with English websites. A Google search in german “Inkasso system” shows that there are plenty of local systems in Germany. In Denmark with 5 mio people, we also know about booth EG Inkasso, e-inkasso, and Debbie. Based on this I would estimate that there globally exist more than 500 different collection systems.

The systems are either developed by very small providers with 1-10 employees selling very old school systems, OR large companies selling complex enterprise systems.

An example of a very large but modern enterprise system is Qualco

An example of an SME system is Simplicity.

There are very few startups building debt collection systems.

There are quite a few like Billendo, YayPay, Upflow, and Kelleno building AR platforms. There are also a good number of digital / consumer-friendly debt collection service businesses like TrueAccord, InDebted, and PairFinance. Most funding has been going to consumer-facing lending platforms and securitization.

Therefore, the debt collection software market is highly fragmented with a few large companies dominating the industry and many small providers competing for market share. Additionally, there are a few startups that are building innovative solutions in this space, but they face stiff competition from incumbent players. Going forward, companies will focus on developing more user-friendly debt collection software solutions as well as leveraging machine learning and AI technologies for better results.

Across many of these systems, the common value propositions include the following:

  • Compliance: Avoid litigation and consumer complaints by staying compliant
  • Recovery rates: Recover more revenue
  • Automation: Labor cost is the largest cost category in debt collection. If automation can reduce labor costs this increases profitability.
  • Integrations: Can the system integrate with my other systems and local partners like court systems, data providers, and more?
  • Ease of use: How easy is it to get started?
  • Flexibility: How much can the solution be adjusted to specific business needs?
  • End customer satisfaction: What is the effect on the end customers? Do they complain or stay happy?
  • Easy and fast implementation: What does it require to get started?

Another way to categorize the market is by looking at the customers going from SME to enterprise, and the stage of collection (invoice and AR management and late-stage collections on the other hand.

It is most common that businesses to manage the early stage of the collection process internally, and then outsource the later stages to their debt collection agencies or attorneys. This means that invoicing and AR tools are most often bought directly by the business and user for first-party collection, while the later-stage collection software is often bought by external parties working with third-party collections.

Based on this two-by-two matrices we can segment the market in the following way:

Debt collection market segmentation

The key difference between the “early-stage” vs. “later-stage” collection software in terms of features is that in the early-stages the frequency is very high, and therefore the entire process should be automated and 100% integrated (two-way sync) with the ERP / accounting software the businesses used. Features that automate the payment reconciliation process, forecast cash flow, and decrease DSO are among the most important features in a system for early-stage collections.

For later-stage collection systems, the following features are critical:

  • Calculate interest rates
  • Calculate and add fees
  • Manage payment plans
  • Create legal documents
  • Integrations to data providers such as Experian, Equifax, and TransUnion
  • Advanced analytics to optimize collections strategies.

At the enterprise level, the main difference is that they require larger customer bases and a more comprehensive solution which includes self-service portals, automation of customer outreach, and robust customer segmentation and analytics.

Overall, the debt collection software market is becoming increasingly competitive as more companies enter the space, while incumbent players focus on innovating in order to stay ahead of the competition. Companies that are able to combine cutting-edge technology with user-friendly features and comprehensive integrations are likely to be the most successful in this space.

As the market continues to evolve, debt-collection software companies will need to focus on delivering comprehensive solutions that enable businesses and agencies to collect debt in the most efficient way possible, while also ensuring a satisfactory customer experience.

In the embedded table below, you find a more detailed list of debt collection software solutions: 

What are the key trends in the debt collection industry in 2023?

2. The right channel at the right time to the right customer (intelligent omnichannel)

In the year 2022, people were talking about how debt collection agencies needed to be present on multiple channels. Now there are rules that say how often an agency can contact a borrower, and the agency has to communicate with the borrower on the channel that the borrower chose. This makes it even more important for debt collection agencies to be present on multiple channels.

Every time a collector tries to contact the borrower, it becomes more valuable. This means that they should try to get accurate information. That way, there will be more high-quality interactions and more data to analyze.

Omnichannel intelligence means that communication with customers happens across multiple channels that are integrated with each other. This way, the different channels can share accurate information with each other.

For example, if the borrower tells us something important in an earlier email, we should know about it when we talk to them on the phone. If the borrower tells the chatbot that he is unemployed or having trouble making payments, that information should be shared with us so we can help them.

Making sure that we have accurate and up-to-date information helps us communicate better and makes it less likely that people will have problems down the road.

2. Greater Transparency

More and more people are worrying about their money. They are start to pay attention to small details that they never noticed before.

Even when something small happens, like a charge on their bank account, consumers want to know why it happened. They would ask questions about it. Or if they are filling out a form to apply for a loan, they want to understand what the different form fields mean. Or if they get a bill from their healthcare provider, they want to see what is covered and how much it costs.

People will expect companies to be more honest with them. Debt collection agencies should show people their policies and explain them so that people know what to expect. Agencies can become more transparent by thinking about how agents get information during calls. They can do this by making sure all call notes are the same and happen at the same time. This way, the agent will have more information and will be able to understand the conversation better.

3  Artificial intelligence has to be human (and collaborate with case workers)

Collaborative Intelligence is when humans and machines help each other to solve a problem. Sometimes machines need help from humans, especially when the problem is something difficult or sensitive, like debt collection. In these cases, it is important for a human to be there to help because the machine might not be able to understand everything that is happening.

An example of how AI is used to help collect debts is with note automation tools. These use AI to listen to the conversation between the agent and borrower. The AI then writes a summary of the important points from the conversation. However, the agent can make changes to the notes generated by the AI. The AI model learns from the feedback it gets from humans. It uses this information to improve itself. When humans and machines work together, they can both be more effective.

4. Debt Forgiveness is on the rise

Recently, the US government has forgiven a small number of student loans instead of sending those to debt collectors. Although it may sound surprising, there are ways to have student loans forgiven: by doing public service work, by making use of income-based schemes, etc. And later, they are forgotten in their credit bureau scores.

Other types of debt can also happen, but it is very rare. This is a big topic for the year and you need to pay attention to it. It might also happen again in the future, so you need to be careful and watch out for how it could affect your business.

In order to manage your business debt, you need the right software. This guide provides information on what to look for in debt collection software as well as the key trends in the industry. With this knowledge, you can make an informed decision on which software is best for your business needs. If you're still not sure where to start, we can help. Contact us and get 3 free quotes from local debt collection experts.