Debt collection at a crossroads: AI and the race for efficiency

The debt collection sector is undergoing a period of transition. Macro-economic conditions are weakening, and although higher consumer default rates and business insolvencies drives the flow of unpaid debts being passed to agencies, recovery rates have slowed due to mounting regulatory pressures and concerns about the quality of arrears portfolios. At the same time, significant investment in digital transformation and AI has become a prerequisite for attracting capital, particularly as the sector approaches a material refinancing wall 2027-28.

Over the past 18 months, several major market participants — including Intrum, Lowell and iQera — have undertaken restructuring processes, reflecting a combination of elevated leverage, higher funding costs and ongoing operational pressures.

Reduced supply of NPLs pushes up pricing

Despite increased demand for debt collection services, agencies are facing the impact of a longer-term structural reduction in the supply of non-performing loans (NPLs). According to Octus analysis, annual European NPL transaction volumes declined to €18 billion in 2025, down from €72 billion in 2017. NPL ratios also remain close to historic lows, falling in the UK from approximately 4% in 2011 to around 1% in 2024–25.

This trend reflects the legacy of sustained bank deleveraging following the global financial crisis, rather than a meaningful improvement in underlying borrower quality.

The result is intensified competition for a smaller pool of assets, driving up portfolio pricing and compressing returns. Octus research shows that historically, in stronger market conditions, Intrum achieved returns of around 4.0x its cost of funding. This declined to approximately 2.5x in the period leading up to its restructuring. More recently, market participants - including, for example, Arrow Global - are operating at closer to 2.0–2.2x, highlighting a marked tightening in portfolio economics relative to historical norms.

Regulatory requirements increase cost of doing business 

Alongside these financial pressures, regulatory expectations have increased significantly. Since the introduction of the Consumer Duty in July 2023, and its extension to closed products in July 2024, firms have faced heightened obligations to demonstrate fair customer outcomes.

A growing proportion of customers are financially vulnerable, requiring more detailed affordability assessments and tailored repayment plans. Firms must also evidence fair treatment through comprehensive documentation of customer interactions in line with FCA requirements.

While the volume of overdue accounts has increased, the time required to collect has lengthened, leaving recovery rates broadly flat or declining. These factors are increasing administrative costs, extending collection periods and placing additional strain on cash flow.

AI and tech is emerging as a critical differentiator, as refinancing wall beckons

In this environment, operational efficiency is key, and technology – particularly AI – is emerging as a critical differentiator.

AI-enabled platforms can materially reduce cost-to-collect through automation, while improving customer engagement through more personalised interactions. This combination supports higher conversion rates and allows firms to bid more competitively for portfolios while protecting margins.

However, the ability to invest in these capabilities is uneven. Smaller firms may lack the resources required to embed AI effectively, but businesses that remain reliant on labour-intensive call centre models will continue to face structurally higher unit costs.

AI capability is therefore likely to become a key point of differentiation across the market, with this divide expected to widen as companies approach refinancing. The years 2028 and 2029 will be critical for the sector - while EUR 1.3 billion of debt matures in 2027, this increases to EUR 2.4 billion in 2028 and EUR 5.1 billion in 2029.

Firms with limited digital capability and higher cost bases are likely to encounter weaker lender appetite, higher funding costs and more restrictive covenant structures. In contrast, those able to demonstrate embedded AI-driven strategies, robust regulatory compliance and scalable operations should benefit from stronger access to capital and greater refinancing flexibility.

The window to implement these technological improvements is relatively narrow. Firms that delay risk approaching future refinancing events from a position of weakness.

Diversifying revenue streams

In a low-margin environment, a balance of revenue streams is increasingly important. Several large operators have adopted multi-line business models combining servicing, investment and fund management. Partnerships with third-party capital providers allow participation in portfolio growth without increasing leverage.

Intrum’s partnership model with Cerberus Capital Management is one example, while Arrow Global positions itself as an integrated asset manager, combining debt purchasing, servicing and fund management. These approaches can provide more stable and predictable cash flows and enhance resilience in fluctuating market conditions.

Reliance on servicers

While the sector continues to rely heavily on corporate servicing operators, there is growing uncertainty over how many assets remain with servicers delivering minimal returns. These portfolios are often managed on a high-volume, whole-portfolio basis, which may be limiting performance.

A more effective approach could involve separating underperforming assets for faster resolution and increasing the supply of volumes available for sale in the NPL market. This could help replenish the market, improve pricing, and drive revenue, particularly when supported by technology-driven measures that accelerate performance.

What should firms be doing?

At a time when significant investment in digital transformation is required and market conditions are tightening, the importance of regular, granular cash flow forecasting cannot be over-emphasised.

Management need to ensure that the flow of information from their primary servicers in all the jurisdictions they operate is reliable, timely and efficient. Managers at all levels need to be empowered to raise concerns if they foresee problems. We know from our recent experience in the sector that internal teams are often resource constrained, information flow is not always timely, and this impacts the ability of central teams to accurately assess liquidity and take prompt action when needed.

As always, preparation for refinancing should begin well in advance. Firms need to assess their full range of options, particularly in scenarios where new debt may come with more onerous pricing or covenant requirements.

The debt collection sector remains resilient and strategically important, but the industry is clearly evolving. Businesses that can successfully invest early in digital transformation, diversify earnings streams and strengthen liquidity management should remain well positioned to access capital and deliver sustainable long-term performance. Those that fail to adapt may find the combination of lower portfolio returns, regulatory scrutiny and more selective credit markets increasingly difficult to navigate.