Bank Lenders Brace for an Ugly Wave of Consumer Credit Defaults

After a period of suspended animation, consumer credit performance will revert to more typical patterns and financial institutions will have no choice but to shift to intensive collections activity. Mishandling this will cause banks and credit unions to lose troubled consumers that they might have held onto for better times. Fresh approaches to collections, including artificial intelligence and cloud computing, will help.

Major credit consumer credit problems will be surfacing in the months ahead, after having been substantially masked and muted in 2020 by government programs, legislative controls, lender forbearance and debtors dipping into dwindling savings.

When the pandemic first hit and began to affect the national economy, we advised in an earlier article on The Financial Brand that banks and credit unions needed to focus their collections organizations on three key areas to survive the crisis and emerge stronger on the other side of it.

Specifically, we called for a more customer-centric approach to collections, better blending of advanced digital technologies with expert human judgment, and revamped operational models for lenders’ collections organizations.

So, what’s happened since? How have lenders fared in these areas? And what can they expect in 2021?

Today’s Clogged Collection Channels May Drive Tomorrow’s Customer Departures

During the pandemic, based on our observations, there have been fewer customer service representatives answering phones. The reasons include agent absenteeism, cutbacks and a lack of resources for agents to work from home. Meanwhile, more customers are calling their lenders hoping to defer mortgage or credit-card payments, for example. The result? Record phone wait times.

In parallel, more people have become comfortable with digital options for banking. And an ultra-low interest rate environment has heated up competition among lenders.

These factors, combined, mean lenders’ customer churn will increase, especially once consumers can start going into branches again to move major accounts.

As a result, the actions that collections organizations take today will play a vital role in determining whether banks can retain their customers in the near-to-mid term.

Preparing for the Tidal Wave of Defaults

For the time being, though, most lenders’ collections organizations appear to have survived the initial influx of calls from the many customers who are dealing with financial hardship as a result of the pandemic.

“Deferral and forbearance programs — and government assistance — have delayed the inevitable tidal wave of delinquencies and defaults.”

But now is not the time for banks to rest on their laurels. Their deferral and forbearance programs — and governments’ assistance programs — have delayed the inevitable tidal wave of delinquencies and defaults.

Most of these programs are expected to end soon, even though a second wave of the pandemic has already hit many geographies.

As a result, unless new relief programs become available to stem the tide, lenders should anticipate a surge in collections in the first quarter of 2021.

Three Essential Steps Your Collection Function Must Take

Increased switching risks and an impending uptick in delinquencies mean our earlier advice takes on renewed urgency and importance.

So, if your institution hasn’t already begun to do so, now is the time to take these three key steps:

1. Deliver a better collections experience for customers.

Nobody enjoys getting a call from a debt collector, but collections in a pandemic — when debtors are more likely to be bereaved, ill, unemployed or low on income — call for consideration and cooperation.

“Lenders that deliver an exceptional customer experience are more likely to be paid first — and emerge stronger when this crisis is over.”

In our report, “Banking in the Age of Instinct,” we predicted that, to survive and thrive, lenders would need to shift from being authoritative and functional to being more supportive and emotional. At the pandemic’s onset, we advised banks and credit unions to make that shift quickly.

From what we’ve seen since the pandemic began, many institutions in Australia, Europe and Canada have taken up the customer experience charge in collections. On the other hand, U.S. banks appear to have continued to focus more on recoveries.

For example, a U.K. bank is now using real-time sentiment analysis, powered by natural language understanding and machine learning, to interpret and classify debtors’ emotions during phone conversations. On their call-center computer monitors, collections agents see a smiling, neutral, or frowning face emoji that dynamically changes based on a customer’s emotions. These are determined by the rate and tone of speech, among other factors. Agents then receive system-generated recommendations to help them improve collections conversations on the fly.

This bank is not alone. The global market for emotion recognition and sentiment analysis is projected to reach $3.8 billion by 2025, according to research firm Tractica.

Meanwhile, a bank in Australia recently partnered with InDebted — a fintech that uses cloud-based, machine-learning software to understand consumer preferences for servicing overdue accounts. The fintech’s promise to the lender and its customers: “Debt collection that doesn’t suck.”

Here’s a strong reason to try new methods like these: When it comes to customer experience and collections, those lenders that deliver an exceptional customer experience are more likely to be paid first — and emerge stronger when this crisis is over, with more consumer relationships intact.

2. Make more informed business decisions about collections.

Augmented intelligence helps banks make more informed business decisions about collections. Built on a robust data foundation, advanced analytics generate intelligent recommendations, which collections agents and leaders determine when and how to act on. This results in smart collection processes that drive better outcomes for the lender and its customers.

In this area, collection organizations can take a few tips from their institutions’ marketing playbooks. Marketing mix modeling has long guided marketer’s investments by providing insights into the channels and strategies that deliver the best and most efficient results. The technique uses statistical analyses to quantify the sales impact of various marketing activities and forecast the impact of future tactics.

Likewise, collections organizations use several channels to contact their customers, including letters, phone calls, text, email, chat, mobile apps and the web. And analytics can help lenders’ collections organizations identify the most appropriate channels to use.

Analytics can inform lender decisions in other areas as well. At a segment level, they can use analytics to dynamically reset collections strategies. For example, a lender may need to focus on high-risk customers for a time and then pivot to develop specific treatment strategies for customers in the hardest-hit areas. At an individual customer level, lenders can use analytics to re-evaluate risk profiles and hyper-personalize treatment strategies.

3. Incorporate cloud-enabled digital facilities into the collections operating model.

In our report, we predicted that lenders would need to expand their ecosystems to counter shocks and de-risk the balance sheet.

At the start of the pandemic, we suggested that this meant blending onshore, offshore and digital collections facilities to create an operating model that enhances customer experience, diversifies risk and delivers the returns the bank requires.

Digital collections facilities have proven to be especially critical to lenders’ operating models this year. In fact, one of the most powerful trends shaping financial institutions is the accelerated shift from offline to online. Online has become a primary component of every institution’s business and also part of its collections model.

Lenders’ collections organizations must make use of secure cloud-based customer support solutions — including conversational artificial intelligence, skills-based routing, workforce management, and more — and deploy them intelligently across their collections operations. In addition to diversifying risk and improving the customer experience, these cloud-based solutions also prove more cost effective when managed properly.

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