Rethinking the unrepayable: The business impacts of eliminating delinquency and bad debt
Delinquency and bad debt are often considered the price of doing business – but many telecoms organisations can do more to eliminate supposedly unpayable debt and discover a wealth of opportunities for growth.
Through our automated messaging and device locking technology, telecoms carriers are recovering substantial volumes of debt that would otherwise be written off. In an industry known for its tight margins, unlocking these additional repayments can have a considerable impact on working capital.
Credit where credit’s due?
Whatever form your business takes, bad debt is never good news.
For companies built on extending credit or financing to their customers, any delayed repayments will limit cashflow – and, given the tight margins that telecommunications firms operate on, cashflow control is vital. Failing to reduce bad debt can impact the bottom lines of mobile operators, inhibiting potential opportunities for growth.
Before we explore some of the implications of bad debt, it’s worth taking a moment to define our terms.
‘Bad debt’ simply refers to the financial loss faced by businesses who deem a customer’s outstanding credit unrecoverable.
A related but separate term is ‘delinquency’, which refers to slow and late repayments that don’t follow the agreed-upon timelines.
Of course, none of this is new information. Businesses are already dealing with bad debt. But this isn’t about re-treading old ground.
Instead, revisiting the subject of bad debt is an opportunity to take a fresh look at bad debt in the telecoms industry. Is it as unrecoverable as some organisations might assume? And what are the consequences of giving up on ‘bad’ debt?
Bad debt is bad for business
The business impacts of bad debt are largely monetary. Recent research does, however, illustrate just how extensive the problem can be – not to mention the inefficiency of current solutions.
According to credit insurance firm Atradius, UK-based businesses alone wrote off £8 in every £100 in 2021 – while 44 per cent of UK B2B sales were overdue in the last year. A Gartner study drew similar conclusions for the US, which reportedly suffered a 26 per cent increase in bad debts across 2020.
These percentages represent an enormous amount of financial loss – especially in the context of financing or subsidising smartphones, where repayments are necessary to recoup the initial losses incurred by selling handsets at a heavy discount.
The spiralling cost of delinquency
While these figures are concerning, bad debt’s business impacts don’t end with uncollectable debt alone.
Delinquency might seem like a lesser issue. Many delinquent customers do eventually make their payments. In order to prevent delinquency from turning into outright bad debt, however, firms are forced to spend money hiring call centre staff to chase late payments.
In fact, the Atradius study found that around 50 per cent of businesses have escalated the cost and resources that they commit to recovering late payments.
In other words: not only are businesses losing valuable revenue due to bad debt, but they’re also incurring further expense by attempting to chase down late payments.
For businesses that suffer an unexpectedly high volume of bad debt, the first and most immediate issue is cashflow. Some businesses might even be forced to delay payments on their own debts, contributing to a vicious cycle of late payments while damaging their company’s credit score in the process.
Alternatively, but no less concerningly, other businesses might be able to cover such expenses only to find that there’s no money left for growth, forcing them to step away from opportunities for increasing market share or entering new business sectors.
Many organisations stop thinking about the cash flow issues that bad debt can create – because they’ve already accounted for it.
According to standard accounting practices, credit-based organisations need to make a provision or allowance for bad debt, estimating how much debt will be unrecoverable and accepting that loss ahead of time. But are these estimates accurate?
In our experience, such provisions can vastly overestimate how much debt should actually be classified as uncollectible – perhaps “the price of doing business” doesn’t need to be as high as some organisations believe.
Different countries, comparable problems
That doesn’t mean many firms, especially in emerging markets, aren’t currently facing high levels of bad debt.
In our work with telecom carriers across the globe, we’ve encountered the same story of bad debt in a huge variety of countries. Whether the degree of bad debt is closer to 8 per cent or 30, there’s no question that reducing this figure represents millions of dollars of unrealised working capital and liquidity.
Any improvements to bad debt reduce the need for financial headroom, impact borrowing levels, and – ultimately – increase profitability.
That’s why it’s so important for all mobile operators and smartphone sellers to reassess their bad debt provisioning by seeking out solutions that can quickly and conveniently reduce their levels of bad debt.
How Trustonic can help
Our Telecom Platform represents a unique opportunity to redefine the parameters of ‘unrecoverable’ debt by allowing smartphone sellers to message consumers to promote prompt payment, and remotely lock any Android device in the event of late payment.
We’ve found that this incentive to pay has had a galvanising effect on customer behaviour, with 62 per cent of customers paying within 0-5 days of device locking and 83 per cent of customers resuming their payment scheme within 15 days.
In practical terms, this reduces delinquency and bad debt from [in the case of one customer] 35 per cent to 11 per cent – a significant realisation of cashflow. While 35 per cent may be a high example for some customers, the success of our solution demonstrates that even lower bad debt provisions can be easily and automatically halved through automated messaging and device locking.
In addition, the automated nature of the platform has led to a substantial drop in the cost of chasing delinquent customers. One client reported a 50 per cent reduction in call centre costs – an unsurprising statistic, given that our platform results in a successful ‘collection rate’ of 85 per cent when compared with call centre outreach.
The result, for our clients, has been the realisation of millions in what was previously considered lost revenue. In turn, our telecoms industry customers have discovered a a wealth of possibilities in terms of growth, liquidity, and profitability.
Just as importantly, our solution allows carriers to continue offering subsidised smartphones at affordable prices, helping consumers around the globe access digital services that would otherwise remain beyond their reach.
At the same time, our mobile device financing solution ensures our client organisations remain comfortable in the knowledge that – even among demographics with poor credit or un-checkable credit histories – the device financing they provide is more secure than ever.