With increasing consumer debt, the debt collection industry is growing but the traditional methods of debt collection such as robocalls are no longer viable with new laws in practice and modern customer expectations. The collection teams must understand the new trends which are influencing their collection practices directly or consequently.
As we move into the new year, let us take a look at these industry trends, what these mean for creditors and collectors, and how they can keep pace with these trends.
1. Increasing consumer debt
Levels of consumer debt in the United States will continue to rise with credit card debt, auto loans, and student loans being at the lead. As of Nov 2018, the Federal Reserve reports that US consumer debt rose 6.7 percent to $3.979 trillion, surpassing the previous month’s record of $3.957 trillion. Here is a chart on how the consumer debt has been rising over the last 20 years. You can also view historical statistics by month since 1943.
total consumer credit owned and secularized, seasonally adjusted level over the last 20 years
Of this debt, $2.937 trillion was non-revolving debt which has risen by more than seven percent. This non-revolving debt is mostly auto and student loans. In September 2018, school debt totaled $1.564 trillion and auto loans were $1.141 trillion. Americans are in more debt but the composition of that debt has changed over the last 10 years. This chart created by American Banker based on the data by New York Fed Consumer Credit Panel summarizes how the consumer debt has evolved.
While credit card debt exceeds the record set in 2008 with a figure totalling to $1.042 trillion, its share in the total consumer debt has actually decreased from 38 percent in 2008 to 26.2 percent in 2018.
Understanding the evolution of consumer debt
Credit card debt is on the rise due to the Bankruptcy Protection Act of 2005 which led to the 2008 recession. Statistics show that healthcare is the highest cause for bankruptcy as people turn to credit cards to pay their medical bills. Low interest rates due to the Federal Reserve’s expansive monetary policy have resulted in a surge in auto loans, with repayments in 3-5 years.
Student loans are usually for 10 years, but some are as long as 25 years. With no assets for collateral, the Federal government offers these loans at low interest rates to encourage higher education. This boosted the non-revolving debt to over 30% in the last 5 years.
With increasing debt, more consumers are defaulting. According to the Consumer Financial Protection Board (CFPB), one in three people with a credit record have been contacted by a creditor or collector. However, these calls are often random and ineffective. Reducing NPL (non-performing loans), understanding the portfolio impact of NPEs (non-performing exposures), reporting on the UTPs (unlikely to pay) will drive a reshaping of the debt purchase and servicing infrastructures.
The flood of new debt should be supporting collection industry growth but yet the amount of collections seems to be declining as traditional methods are dated and manual, and hence, continue to fail. Further, collectors and creditors can no longer exercise aggressive calling with new consumer protection and data privacy laws.
2. Legislation impacts use of personal data
The federal version of CCPA, which will go into effect in 2020, is beginning to have a nationwide impact. Though a new law might be unlikely this year; federal agencies will shape CCPA clarifications and enhancements through the course of the year.
This means the sharing of data among and between accounts and creditors will have to change ways. The collectors must be able to demonstrate compliance with the data protection principles. The implications of not doing so are nearly $12 million or your growth plans quite firmly quashed.
Just as HIPAA turned agencies and healthcare providers inside out over privacy and security responsibilities in 2003, state and federal laws will now impact what customer personal data is being used where and for what purposes in collection methods.
The Consumer Financial Protection Bureau (CFPB) will publish the new proposed rules for debt collection. Changes due to new interpretations of laws or regulations will be particularly hard to adapt among all the modifications in the existing laws or regulations. When the NPR comes out, the focus will be on disclosures, limitations on contact frequency, and some support for new communication channels that will fall short of a litigation-proof formula.
With these regulations, traditional collection practices will have to change with new, digital methods which are non-intrusive, and compliant with the data privacy laws. Digitization of collection methods is indispensable for both managing compliance and improving collections.
3. Collection methods change with digitization
With increasing number of defaulters, creditors are likely to turn to aggressive calling but robocalling is already an overexploited method — especially without much context. According to an Arkansas-based firm, incoming spam calls will increase exponentially to 45 percent by early 2019. Contacting customers is only effective if you have an effective collection script to follow during the contact which can only happen when you have optimized who to contact, when to contact, and what to say. Robocalling, for lack of better word, is spam. And with multiple calls a day, it can amount to harassment and eventually getting blocked.
Traditional methods of debt collection such as aggressive calling, making collections in-house, sending additional invoices are proving to be ineffective and time consuming. With digitization, debt collection can surmount organizational silos to enable improved customer experience, leveraging unified data and an omnichannel experience.
Omnichannel Virtual Agents will allow better engagement and conduct conversations with delinquent customers while following compliance laws. Early adopters of highly sophisticated omnichannel systems will gain an advantage from their ability to serve pre-delinquent and disorganized payers at an extremely low cost, whilst achieving a better customer experience.
Platforms that provide the biggest change in customer treatment and performance only start to truly make a difference when deployed on a foundation of analytic optimization. For example, the introduction of accounting systems that include an Account Receivables module has removed the need for a manual debtor ledger to be maintained. Small, but valuable additions like this will see a rise as companies start investing in technology and creating customer-centric experiences. Finance, at large, is seeing adoption of some of the latest technologies.
4. FinTech continues to see more innovation
- Mobile Technology
By 2022, people physically going to the bank is expected to drop by 36%. In the same amount of time, mobile transactions are projected to grow by 121%, eventually composing 88% of all banking transactions. Moreover, enterprise mobility will also influence debt collection industry with apps that allow employees to work anywhere and anytime as collection related information can be exposed to mobile phones and tablets. This allows collectors to be more productive if they are out of the office for onsite account visits or have flexible working arrangements. Further, payments can be actioned quickly which increases the likelihood of successful collection.
Blockchain will change how an organization works. $1.7 billion is being spent annually on blockchain by the financial industry to give customers the power of choice. Its aim is to establish a peer to peer, digitalised community that has more on-time payments and fewer loss factors. As this becomes more mainstream, it will have a positive impact on how organisations credit score their customers and reduce the level of bad debt.
- Artificial Intelligence
20% of financial organizations are already utilizing AI in their operations, with 41% planning to implement it in some way within the next year. AI is the biggest commercial opportunity available and will grow to be 14% GDP by 2030. AI can boost efficiency and improve customer experience for debt collection as well with its personalized predictions on how to reach customers.
Devising strategies with new technologies
Today, a lot of manual preparation is required if collectors wish to perform onsite account reviews with their customers, viz., debtor reports need to be run and exported, invoices printed and compiled, and account notes saved prior to a visit. However, single customer view with instant access to information using any device can boost efficiency.
Creditors must look at how they can automate the manual process involved such as those in managing compliance, to further improve team efficiency. To boost collections, creditors need to meaningfully invest in a system that helps them improve contact, payment, and treatment strategy leveraging the collections data with technologies such as AI/ML and Big Data.
At Dasceq, we help collection teams identify deep consumer patterns, understand client persona, and maximize influence across channels using our 2iTM recommendation engine. Simplifying debt collection management, we empower creditors to drive improved collections while also personalizing customer experience. Our platform ensures continual improvement as it goes on to learn to optimize profits with more data.
Through a phased implementation of Dasceq’s 2iTM cloud platform, we have provided quick returns leveraging the collection data with AI/ML. Dasceq is also enabling lenders manage compliance, mitigating the risk of failure much more effectively.
Please feel free to get in touch with one of our experts if you have questions or if you would like to know more.