Debt purchasing in e-commerce: How online retailers optimize their receivables management and the customer experience

Arne Harff
04.07.2020 | 4 minutes
Communication with defaulting customers should always be appreciative

Assessing risks and minimizing payment defaults

E-commerce is booming. Despite double-digit growth rates, online retailers face strong competitive pressure. Those who wish to set themselves apart from the competition, not only need clever ideas but also ongoing investments in optimizing the customer experience. In the digital service example, this includes new technologies like chat bots or voice assistants that support the shopping process. To implement these innovations, it takes capital. But this is often tied up in outstanding receivables. If you make some important adjustments, you can minimize bad debt losses with targeted risk and receivables management, financially protecting your growth strategy.

Intelligent combination

In my experience, a key element of a good e-commerce growth strategy is intelligently combining risk management, accounting services and the sale of receivables. After all, customers occasionally enter payment default with outstanding claims. The goal must be to minimize bad debt losses.

Based on conversations with our customers, I understand just how important good risk management is in e-commerce. Here, online merchants naturally check their customers’ creditworthiness before a purchase is made. In this way, they can take various measures depending on the risk, such as identity checks. This makes the payment behavior of customers more predictable and minimizes both the number of fraud cases and payment defaults.

Moreover, valuable data can be obtained from each step in the process, in order to calculate a fair purchase price for receivables. This guarantees transparent and attractive pricing when selling receivables. And, on the basis of your risk decision during the ordering process it is even possible to jointly determine the purchase price of open receivables for different credit rating classes in advance.

Outsource financial processes – maintain customer control

Financial processes are complex – also in e-commerce. It takes qualified personnel and standardized procedures for preparing various payment methods, debtor management, dunning and collection activities as well as ex gratia credit and chargebacks. This is all a major challenge for many online merchants. An external service provider can take on these complex processes and simplify work for customers.

I have also noticed with our customers that each e-commerce company has its own processes and requirements, which can typically only be covered by individual offerings. And it should also be possible to adjust the customer-specific solutions to new conditions over the course of the business relationship and gradually expand them, including internationally. Solutions like these require some careful thought and coordination in advance, but they are more successful in the long term in my experience.

In terms of your customer relations there is no need to worry: Outsourcing your processes in risk management and accounting to an experienced financial service provider does not mean giving up customer control. The authority and decision making on how to handle certain cases, or which deviations from the standard processes are permitted, remains with you.

In other words: 

You keep hold of the reins, the professional service provider handles the rest.

Control is only transferred to the financial service provider once a receivable is sold.

Even when control is transferred to the financial service provider with the sale of receivables, this does not mean a complete loss of control! In the ideal case, the ideas for downstream collection are jointly agreed in advance. This ensures that the customer journey, which is so important in online business, is continued in line with expectations – with respect and attention paid to customer retention and recovery.

Better to sell sooner than later?

Once you have decided on debt purchasing through a financial service provider, there are two ways to increase liquidity. A popular solution is factoring. Here, you sell receivables as soon as they arise. Many merchants shy away from this step, as they do not want to hand over customer control prematurely. The alternative is to sell receivables at a later time during the commercial dunning or debt collection process. This allows for longer control and for customers to be treated individually. But tied-up capital is only released at a later time.

My recommendation:

Consider the entire time frame, directly before a claim arises until the sale of the receivable later on.

This enables a suitable packages of measures to be created in order to minimize bad debt losses from the beginning and easily free up capital from outstanding receivables at a suitable time. Get in touch with us and find individual solutions for your e-commerce business model.

We are here to answer them.
Arne Harff
Vice President Debt Purchase Central Europe

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