How to Reduce Your Collection Cost and Boost Your Cash Flow
- Mashum Mollah, at Blogmanagement.io
- 12.03.2023 02:30 pm undisclosed
Did you know that collection costs can eat up to 20% of your revenue as a fintech business? That’s right, every time you have to chase a customer for payment, you are wasting valuable time, money, and resources that could be used for growing your business.
Collection cost is the total amount of expenses incurred in collecting payments from customers. It includes staff salaries, technology fees, communication costs, legal fees, etc. Optimizing your collection cost can help you improve your cash flow and profitability.
In this article, we will show you how to reduce your collection cost and boost your cash flow by following four simple steps. By following these steps, you will be able to save money, increase efficiency, and enhance customer satisfaction.
Let’s get started!
How to measure your collection cost and identify areas for improvement
The first step to reducing your collection cost is to measure it accurately. You can do this using a simple formula or a tool that calculates your collection cost ratio (CCR). CCR is the percentage of revenue spent on collecting payments from customers. For example, CCR = (Total Collection Cost / Total Revenue) x 100.
A lower CCR means a more efficient collection process. A higher CCR means a more costly collection process.
The average CCR for fintech businesses varies depending on the type of service they provide.
● Payment processing: 0.5% - 1%
● Lending: 2% - 5%
● Insurance: 5% - 10%
You can compare your CCR with these benchmarks or with other similar businesses in your industry to see how well you are performing.
Once you have measured your CCR, you can identify the key factors that influence it, such as staff, technology, processes, etc. You can analyze how much each factor contributes to your total collection cost and where you can make improvements.
● Staff: How many people are involved in your collection process? What are their roles and responsibilities? How much do they get paid? Are they trained and motivated? Can you reduce or outsource some of their tasks?
● Technology: What tools do you use for your collection process? How effective and reliable are they? How much do they cost? Are they integrated with other systems? Can you upgrade or replace some of them?
● Processes: What steps do you follow for your collection process? How efficient and consistent are they? How long do they take? Are they documented and standardized? Can you simplify or automate some of them?
By measuring your collection cost and identifying areas for improvement, you can set realistic goals and action plans for optimizing your collection process.
Section 2: How to automate and streamline your collection process using technology
The second step to reducing your collection cost is to automate and streamline your collection process using technology. Technology can help you save time, money, and resources while improving your collection efficiency and accuracy.
There are many tools available for automating and streamlining your collection process, such as invoicing software, payment gateways, reminders, etc.
These tools can help you with:
● Invoicing software: Generate invoices automatically based on predefined rules or triggers; send invoices electronically via email or SMS; track invoice status and history, integrate invoices with accounting software or CRM systems, etc.
● Payment gateways: Accept payments online via credit cards, debit cards, e-wallets, bank transfers, etc.; provide multiple payment options for customers; secure payment transactions with encryption and fraud prevention, etc.
● Reminders: Send automated reminders via email or SMS before or after due dates; customize reminder messages and frequency; escalate reminders based on payment behavior or risk profile, etc.
By using these tools, you can reduce manual errors, delays, and disputes, increase payment convenience, and speed up payment cycles.
Many fintech businesses have implemented these tools and achieved positive results. The most notable ones are:
● Stripe: A leading online payment platform that enables fintech businesses to accept payments from customers in over 135 currencies across different channels and devices. Stripe claims to reduce collection costs by up to 50% compared to traditional payment methods.
● LendingClub: A leading online lending marketplace that connects borrowers and investors. LendingClub uses automated reminders and notifications to communicate with borrowers and encourage them to pay on time. LendingClub reports a collection cost ratio of 2.5%, which is lower than the industry average of 5%.
● Lemonade: A leading online insurance company that offers renters and homeowners insurance. Lemonade uses artificial intelligence and chatbots to handle claims and payments. Lemonade says it can process claims in seconds and pay customers instantly.
By automating and streamlining your collection process using technology, you can reduce your collection cost and boost your cash flow.
How to communicate effectively with your customers and improve their payment behavior
The third step to reducing your collection cost is to communicate effectively with your customers and improve their payment behavior. Communication is key to reducing collection costs and boosting cash flow because it can help you build trust, loyalty, and satisfaction with your customers while reducing disputes and delinquencies.
There are some tips and strategies for communicating effectively with your customers before, during, and after the payment cycle, such as:
● Setting clear expectations: Inform your customers about your payment terms, policies, and procedures upfront; provide them with clear invoices that show the amount due, due date, late fees, etc.; remind them of their payment obligations regularly; etc.
● Offering incentives or discounts: Motivate your customers to pay on time or in advance by offering them incentives or discounts; for example, you can offer a discount for early payment, a reward for referrals, a loyalty program for repeat customers, etc.
● Providing multiple payment options: Make it easy for your customers to pay you by providing them with multiple payment options; for example, you can accept online payments via different methods, allow partial or installment payments, offer flexible payment plans, etc.
By communicating effectively with your customers and improving their payment behavior, you can reduce your collection cost and boost your cash flow.
How to negotiate with delinquent customers and recover your debts
The fourth step to reducing your collection cost is to negotiate with delinquent customers and recover your debts. Despite your best efforts, some customers may still fail to pay on time or at all. In these cases, you must negotiate with them and recover your debts without damaging your relationship or reputation.
There are some best practices and tools for negotiating with delinquent customers and recovering your debts, such as:
● Debt collection agencies: Hire a professional debt collection agency that can handle the communication and negotiation process on your behalf; choose an agency that has experience in the fintech industry; check their credentials and reputation; agree on a fee structure and a contingency plan;
● Arbitration services: Use an arbitration service that can help you resolve disputes with delinquent customers amicably; choose a service that has expertise in the fintech industry; check their qualifications and ratings; agree on a procedure and a timeline;
● Legal action: Take legal action against delinquent customers who refuse to pay or cooperate; choose a lawyer who knows the fintech industry; check their credentials and reviews; agree on a strategy and a budget.
These options can help you minimize your losses, maximize your recovery rate, and protect your rights. However, you should use them wisely depending on the situation, severity, and feasibility.
● Debt collection agencies: Use them when the debt amount is large enough to justify the fee; when the customer is unresponsive or hostile; when you have exhausted other options;
● Arbitration services: Use them when the debt amount is moderate enough to afford the fee when the customer is willing or cooperative when you want to preserve the relationship;
● Legal action: Use it when the debt amount is significant enough to cover the cost when the customer is fraudulent or malicious when you have strong evidence.
By negotiating with delinquent customers and recovering your debts, you can reduce your collection cost and boost your cash flow.
Ultimately, reducing the cost of collecting payments is vital to improving your cash flow and maximizing profitability as a fintech business.
Accurately assessing your collection costs, pinpointing growth areas, automating and streamlining the process with technology, and connecting effectively with customers while negotiating payment solutions and debt recovery are keys to optimizing your collections. Doing so will not only save you time, money, and resources but also strengthen customer satisfaction and loyalty.
Don't forget each dollar saved on collection expenditure is a gain of the same amount! Take immediate action to minimize your collection costs and allow your business to thrive in today's competitive fintech environment.
