Fintech Uses Machine Learning for Smarter Debt Collection

By Lydia Beyoud

A San Francisco-based startup that uses algorithmic machine learning to study consumer behavior is trying to flip a decades-old model that banks and other creditors use for collecting debts.

Machine learning can help banks and other financial services companies preserve their relationships with customers in delinquency rather than sending them to collections and saying goodbye, Ohad Samet, CEO of TrueAccord Corp., said in an interview with Bloomberg Law.

“We found that not many institutions are thinking about retaining those consumers who have become debtors,” Samet said.

The firm’s approach is driven by the use of reinforcement-based machine learning, which compares an individual’s behavior interacting with TrueAccord’s collections platform and communications to a database drawn from more than 3.2 million consumers the company has already worked with, Samet said.

The system allows customers to explain why they might be delinquent on a credit card debt or unsecured loan — a job loss or sudden medical expenses, for example — and offer customized repayment options, like allowing consumers to set up a repayment plan or resume payments at a later date.

As consumers continue to interact with the platform, TrueAccord’s communications and repayment options become more tailored to the individual over time, Samet said.

The company’s tech-based collections model has attracted investment from Capital One Growth Ventures and nearly 100 clients, including a number of top 10 U.S. banks, as well as companies such as Yelp, Inc. and fintech lender LendUp Inc.

By coupling machine learning with giving consumers a choice in how they want to be contacted — email, text message, phone call, and others — TrueAccord is able to collect debt at a rate 50 percent better than competitors using traditional call center-based methods, Samet said.

“What we think is going to happen as we start knowing these people and knowing their financial institutions, we will become a platform to allow these consumers to return back into regular financial services,” he said.

Reaching Millennials

U.S. household debt is on the rise, reaching more than $13.29 trillion in the second quarter of 2018, driven by an uptick in mortgages, credit card debt, and more than $1.3 trillion in student loan debt, according to data from the Federal Reserve Bank of New York. As of June 30, 4.5 percent of outstanding debt, or about $598 billion, was delinquent, a slight decrease from the previous quarter, according to the New York Fed’s data.

At more than $1.5 trillion, the outstanding student loan market is a new area TrueAccord’s clients are asking it to help them with, Samet said.

Student lending is distinguished by younger borrowers with higher balances. That same demographic group is also marked by preference for mobile communications, as 92 percent of U.S. adults aged 22 to 37 have smartphones, according to Pew Research. About 75 percent of millennials prefer texting over voice communications, according to research by OpenMarket, a Seattle-based mobile messaging company.

“Phone as a channel is just becoming irrelevant” as more consumers quit picking up calls or start blocking them, Samet said.

That means the future of collections may need to turn to communicating with borrowers in the way they prefer, he said.

Call Me, Maybe

Email and other digitally driven collections may also help TrueAccord’s clients avoid litigation risks under the 1991 Telephone Consumer Protection Act and the 1977 Fair Debt Collection Practices Act.

Industry groups have been clamoring for years for updates to the rules to reflect modern communications technologies and consumer habits.

The Treasury Department recently gave a nudge to federal agencies and Congress to update rules governing robocalls and other rules governing third-party debt collection practices.

“Treasury recognizes that the increasingly digitized nature of the economy and financial system requires revisiting of customer communication and disclosure rules that were designed primarily for an era of physical mail and telephone calls,” the agency said in a July 31 report.

That includes clarifying reasonable digital communications under the FDCPA to reflect consumers’ preferred methods, Treasury said. Acting CFPB Director Mick Mulvaney indicated in January that he wanted to make debt collection issues a priority, though it’s still unclear whether he will launch a new rulemaking.

Robocall rules under the TCPA are also a policy priority at the Federal Communications Commission. Debt collection calls are one of the agency’s top consumer complaints.

The TCPA governs technologies that companies can use to contact consumers, including automated calls and texts. Industry groups, from retailers to health care providers to financial institutions, said the provisions are vague and leave them open to massive class-action lawsuits seeing $500 penalties for each violation.

‘Litigation Juggernaut’

The outpacing of communications technology over the TCPA’s definitions has helped launch a “litigation juggernaut” for class-action suits, forcing companies to defend alleged violations for even legitimate calls, Michelle Cohen, a member of Ifrah Law in Washington, told Bloomberg Law.

It also means emails are generally a safer mode of communication from a litigation perspective, Cohen said.

“If you go back to the legislative history, it was never intended for class actions,” said Cohen, whose practice has included TCPA litigation defense since the law’s inception. “It was really intended for ‘Joe Q. Citizen’ who’s getting harassed at dinnertime to go to small claims court.”

A federal court in March overturned 2015 FCC rules further restricting robocalls. The decision opened up the possibility for FCC Chairman Ajit Pai to overhaul the TCPA.

“I think everyone’s aligned that technology needs to be allowed in the debt collection space,” TrueAccord’s Samet said. “I don’t think it’s a gray zone from a compliance perspective to use email and other digital communications.”

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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