Last month we blogged about debt collection opportunities in the Cannabis industry. The e-commerce industry is also offering expansion opportunities for collection and customer care companies with a long runway that are seeking untapped markets for expansion. Venmo, the digital money transfer service, was first brought to my attention by my sons, ages 21 and 20, when they used it in College Park to pay back friends who lent them money. The same company was featured in a recent Wall Street Journal article titled, “Venmo to Users: If You Owe Us Money, We’re Coming for It.”
Attempting to offset financial losses created by this business, PayPal, who purchased the company that started Venmo in December 2013, is outsourcing to collection agencies customers who carry negative balances in their accounts. According to the Wall Street Journal article, Venmo notified its users that “it could refer them to a collection agency over amounts as high as $3,000 and as low as $7.” This is truly a volume play for bill collectors. Consumers can connect their Venmo accounts to their credit cards or bank accounts without needing to have funds already loaded into their accounts to make a transfer.
This underscores a larger trend among old-line banks and newly established fintech companies that are having a tough time generating profits while making finance faster and more convenient for their customers. Over the past decade, buying online has become the norm for many consumers, but the e-commerce and retailers providing these conveniences have been operating with razor thin margins and significant startup costs as they attempt to roll out and scale their services. To notify their customers about their obligations, they may use in-house efforts initially before turning over past due accounts to third-party debt collection agencies.
Fintech lenders are generally responsible for servicing the loans that originate through their platforms. This includes recovery efforts on past due accounts receivable. Many fintech lenders rely at least in part on third-party debt collection agencies to recover delinquent debt. For example, LendingClub, the industry leader, according to IBISWorld, “typically [outsources] subsequent servicing efforts to third-party collection agencies” once a loan becomes more than 30 days delinquent (source: LendingClub). Prosper, which specializes in personal loans, may refer debts to collection agencies if they are even one day past due (source: Prosper).
Fintech lenders’ organizational structures resemble Silicon Valley tech start-ups more than those of traditional financial institutions. For instance, LendingClub employed only 1,768 full time workers in 2018, as opposed to Citigroup which employed around 204,000 full time workers over that same time span. Indeed, fintech lenders have historically considered themselves more as “technology companies” than “lenders” (source: S&P Global Market Intelligence). As such, fintech lenders’ in-house collection teams are not nearly as robust and experienced as those of traditional financial institutions. It stands to reason, then, that fintech lenders would be more reliant on third-party collectors to handle recoveries. Moving forward, fintech lenders will have to decide whether to invest in their own in-house collection departments like traditional lenders or ramp-up their engagements with collection agencies.