German Inkassorechtsreform is an opportunity

There is a new draft law in Germany that aims to lower collection costs and increase transparency for consumers regarding the consequences of late payments. Important consumer-relevant parts of the law will come into force on October 1, 2021.

What you need to know about the German collections law

In Germany, collection costs have for a long time been deemed too high in relation to the underlying claims. The Inkassorechtsreform eliminates this problem. This is very important, especially because of the current corona pandemic, as many consumers could get into payment difficulties through no fault of their own.

The new “Inkassorechtsreform” law provides for a comprehensive package of measures in order to establish more effective and fairer debt collection practices. The primary purpose of the law is to reduce the current collection costs, in particular for smaller claims and for uncontested claims which are settled by the debtors at their first request. Moreover, in future, it will no longer make any difference whether the collection is carried out by a lawyer or a collection agency.

The law provides a lot of clarity regarding fees, which greatly benefits the consumers. For claims up to €500, this implies a reduction in collection costs from the current €50 to €22.50. For claims up to €1,000, the new collection costs are only €40. The collection costs for disputed claims remain the same. After all, these result in more work.

In addition, the summons needs to contain several promises: for example, what possibilities there are in case of identity fraud. Furthermore, the debtor must be expressly informed that a payment arrangement will result in higher costs.

While this is a good thing for the consumer, the slashing of fees that debt collection agencies have generally relied upon to run their business is a challenging development, to say the least.

Daniela Straube, Managing Director at debt collection agency Troy stresses this point. “The new fee structure poses an existential threat for large parts of the traditional debt collection industry. In recent years, almost every other industry has had to cope with constant price competition whereas debt collection has enjoyed stable and more than adequate fees for a very long time.”

“The new fee structure poses an existential threat for large parts of the traditional debt collection industry” – Daniela Straube, Managing Director at Troy

Stability, however, leads to complacency. As a result, the perceived need to exploit the full potential of digitization and automation was rather limited. “To make up for this within a few months is hardly possible, which is why the collection agencies are increasingly hinting at obliging their clients to compensate for the lost fees.” The solution? According to Straube, an improved customer experience in debt collection is the key to success.

Lessons learned from the Netherlands

The proposed changes are not unique to Germany. For example, in the Netherlands, similar regulations were adopted in 2012. Among other things, the Dutch Wet Incasso Kosten (WIK) established fixed fees for debt collection and set new standards regarding payment terms.

So, how did creditors and debt collection agencies in the Netherlands respond to these changes in regulation?

In the Netherlands, creditors now send out payment reminders themselves, either via e-mail or paper and provide the debtor with the option to pay the open amount without adding any costs. Moreover, to prevent customers from being terminated, creditors increased their efforts in their internal debt collection process (dunning).

Initially, this resulted in lower churn numbers as a consequence of late and non-payments. However, the costs for traditional reminders such as letters and manual calls (by employees of the creditor) were still too high. It was, therefore, that creditors increasingly turned to digital communication channels such as e-mail, SMS, and voice and later on also started offering a wider range of online payment options.

The result of this transition to digital tools was twofold. Firstly, reducing overhead meant that the costs for the collection process were covered by the efficiencies gained. Moreover, creditors also saw improved customer retention and an increase in customer lifetime value.

For Dutch debt collection agencies, the situation was quite challenging as well. Collectors were confronted with a lower number of dossiers that were handed over to them by creditors. To make matters worse, the agencies had to work with lower conversion rates due to the fact that the creditors, in a lot of cases, had already harvested the low-hanging fruit. As the remaining dossiers were harder to collect, the earnings dropped.

As was the case with creditors, the collection agencies also turned to innovation as a means to become more efficient. In practice, this meant digitally transforming their dunning processes as well as their communication with debtors. Digital channels like E-mail, SMS and voice were rapidly adopted by the sector.

Both responses, by creditors and debt collection agencies, fuelled innovation in the Dutch market. At this point, there are multiple very well-regarded services available on the market that are super effective in terms of the KPI’s most-valued by creditors and debt collection agencies. The added benefit is that the improvements also worked out very positively for the debtors as well

 Why Inkassorechtsreform is an opportunity?

In the Netherlands, creditors and collection agencies learned that teaming up with a fintech to provide digital means of communication made a lot of business sense.

Collaboration with a fintech provides them with access to state of the art (segmented) workflows, a wide range of digital communication tools, various online payment options, the ability to handle payment arrangements and also highly skilled and flexible staff to handle incoming calls or other forms of communication.

It quickly became apparent that digitalization was a big step toward turning credit management into a positive part of the customer journey, without increased costs. When modern debt collection agencies adopted new technologies, the results for the creditors were always maximized. Without fail, creditors always lowered churn by at least 50% and reduced dunning costs by an average of 70%, while at the same time increasing customer value and improving NPS.

In the Netherlands, complying with the new rules was not easy at first, but for creditors and collectors who joined forces with fintech firms, the collection process has now become a lucrative part of the customer journey, instead of a negative and costly process.

If you’re doing business in Germany, do not be discouraged. Consumer protections are a good thing. The more you meet your customers halfway, the more loyalty you earn and the more profitable the relationship becomes.