California Tech Taking on Debt Collection Industry
Inside Subprime: Sept 4, 2018
By Lindsay Frankel
Debt in America has reached an all-time high of $13.1 trillion, and the problem is impacting just over 80 percent of Americans. Of the 32 percent of consumers who were contacted by a creditor or collector, more than half reported the debt was not theirs or the amount was incorrect. At the same time, debt collection practices have become increasingly aggressive, leaving 27 percent those contacted to feel threatened, according to a 2017 study by the Consumer Financial Protection Bureau.
In contrast, new tech startups in Silicon Valley aim to change the way consumers experience debt collection by using technology to personalize the process.
But as these innovative debt collection startups draw interest from investors, they are met with criticism from consumer advocates. Ira Rheingold, executive director of the National Association of Consumer Advocates, noted that while these companies may have unique business models, “they’re simply competing against other creditors to get your money quicker and faster.” Efficiency and convenience may improve, but that doesn’t change the fact that many borrowers don’t have the funds to cover their debts. Rheingold added that these debt collection startups collect information about borrowers to become better salespeople. While collection attempts may seem more friendly, the goal remains the same: Collect the highest amount possible from the borrower.
A growing number of tech startups have used algorithms for financial products such as student loans, payday loans, credit scoring, and now debt collection. Critics say the data collection process leads to digital redlining, where promotions change based on a consumer’s individual data. And despite employing a more borrower-friendly approach, debt collection startups aren’t free from customer complaints. 28 Lawsuits have been filed against one debt collection startup since 2015, though Sabet pointed out that problems are rare, considering the company has worked with nearly 4 million customers. His company has seen a mere fraction of the complaints that traditional debt collectors face.
While the software used by new debt collection startups may alleviate some of the burden on consumers, the technology fails to address underlying issues that cause people to default on payments. Rheingold notes that increasing access to income and employment opportunities for low-income individuals is the best way to evolve the process of getting out of debt.
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