By: Daniela Gaub, Senior Legal Counsel, PAIR Finance
Good news: From October 1, 2021, collection costs for consumers in Germany will fall. The reason for this is a change in the law. In this article, we explain the new rules, their benefits for default payers and what they mean for our business customers and the debt collection market.
What is it about?
There are many reasons why people persistently fail to pay bills. Almost half of those who are contacted by a debt collection agency have simply forgotten to pay their online order or insurance. Collection costs are then doubly annoying. Until now, the smaller the claim amount, the higher the costs in relation to it. Claims up to 500 euros were on a common value level and usually triggered costs in the amount of the so-called business fee of 1.0 or even 1.3. This resulted in collection costs of 49 – 63.70 euros (plus expenses). In drastic cases, the collection costs were thus higher than the original invoice amount to be paid. This will change as of October 1, 2021.
At PAIR Finance, we have always opposed high collection costs and, since the beginning, have aimed to ensure a reasonable relationship between the debt to be collected and the collection costs. An advantage for consumers*: They paid lower collection costs with PAIR Finance than with other companies in the industry. The new law has also incorporated this idea and is therefore a step in the right direction when looking at the industry as a whole. PAIR Finance’s technological approach continues to allow it to maintain the same high quality and customer-focused approach, even with lower costs.
What will change for consumers?
Specifically, the law provides for a cap on costs for uncontested claims, i.e. claims for which consumers agree to the reason and amount. As of October 1, collection costs will be capped at 0.9. They will be reduced to 0.5 if defaulters make payment on first demand within two weeks or reach a payment agreement. From now on, collection costs of up to 27 euros may be charged for receivables of up to 50 euros. The reform will therefore ease the burden on consumers in particular who have not paid small amounts. On average in the industry, collection costs will be reduced by around 30 percent.
Another innovation is that, in future, debt collection companies will have to provide more detailed information on whose behalf they are acting and why they are contacting consumers (the address of the client, for example, will also have to be provided). The information requirements will make it even easier for consumers to see whether they are dealing with a reputable debt collection agency, whether the claim is justified and what the consequences of their actions will be. PAIR Finance does this right from the start to make it easier for consumers to identify the debt and to ensure the greatest possible transparency.
What consequences does the law have for collection service providers?
The reform of the law brings another change: debt collectors will be put on an equal footing with lawyers. Many debt collection service providers had long demanded this, as there is no difference between the collection activities of the two professions. Now the cost cap for debt collectors who represent their clients in judicial dunning procedure will be lifted (previously: 25 euros). With the new law, the costs of the collection agency for the judicial dunning procedure may now be charged in the same amount as lawyers are allowed to do.
This will open up new revenue potential for collection agencies in the future in judicial dunning proceedings. Consumer advocates will therefore be watching closely to see whether the reform means that debt collectors will be able to take their claims to court more quickly than before. PAIR Finance takes a very clear position against this practice and sets new standards: Since its launch in 2016, the focus of PAIR Finance has been on the individual needs of consumers* and finding a solution before court. This is exactly our strength and this is exactly what we will continue to do even after the law comes into force. PAIR Finance’s technological approach allows us to continue to provide the same high-quality, customer-centric approach, even with lower costs.
As a pioneer in consumer-focused debt collection, we work with the help of intelligent algorithms, psychological knowledge and mobile-first payment options personalized to each individual. With PAIR Finance, each person receives a customized offer and finds the right solution faster. However, 45 percent of defaulting consumers* cannot pay directly, because of short- or long-term payment difficulties. Here, too, we make individual payment offers and give defaulting payers enough time to find the right solution in the future.
What does the law mean for the industry?
According to estimates by industry experts, fee income for collection service providers in the pre-litigation area will decline by a double-digit percentage across the industry. This applies equally to collection service providers and lawyers. Whether all market participants in the collection industry will survive the change is indeed doubted by quite a few.
AI-based debt collection will continue to gain in importance in the future, because technology-driven receivables management is hardly affected by the revenue declines described above. Large call centers and paper letters are a thing of the past in debt collection. People also expect a mobile-first approach to debt collection and want the option of dealing with their outstanding receivables in a confident manner – without any surprise calls or annoying letters.
What’s changing for business customers and why is AI-based collections becoming more important?
For finance teams with the goals of rapid recovery and long-term customer value (CLV), the new AI-based collection technologies are also becoming more important. Only a technological approach will enable a consumer-centric collection process in the future: Delinquent payers* would like to settle their debt effortlessly via self-service on mobile devices, wearables and the web with the least amount of time. Payment should also be possible in debt collection – without media disruption – via individual message, airtime and personal payment link at any time.
Nearly 66 percent of people who owe a payment already find a solution via smartphone with PAIR Finance. At the same time, the desire to receive personal support remains. This requires customer service by telephone. Consumers should have the opportunity to experience the best of “both worlds” – digital and consumer-oriented processing combined with individual support.
Do you have questions about the new collection law? This way.
About the author: As Senior Legal Counsel, Daniela Gaub (37) is responsible for the areas of debt collection and data protection law at PAIR Finance. The fully qualified lawyer was previously head of the legal department at Bundesverband Deutscher Inkasso-Unternehmen e.V. (BDIU). Since 2013, she has also been a lecturer at the Deutsche Inkasso Akademie (DIA), leading training courses, primarily with a focus on civil, professional and data protection law.
