A number of concerning macroeconomic indicators are signaling increased potential for a coming downturn: An inverted yield curve, sustained low unemployment, a record period of economic expansion and geopolitical uncertainty. Not every recession will impact lenders as much as the Great Recession, but increased delinquencies – and ultimately losses – should be expected. To minimize their credit losses, lenders must prepare for a downturn before it starts.
Lenders should evaluate their overall collections strategy. In this series, we will provide recommendations for a robust and comprehensive collection strategy, helping lenders protect their organization and mitigate losses by preparing for a downturn in advance. To start, let’s align on the five common definitions of the collections process.
Account management is the first stage, which begins prior to any delinquency and may extend into the first few days of delinquency. Proactive efforts in this stage significantly impact the success and speed of curing a future delinquency.
Early delinquency (1 to 29 days past due) comes next and for many lenders may include residual account management or customer service efforts, as well as collections efforts. Lenders must identify which customers to monitor, and which customers to apply intensive efforts to increase the probability of repayment.
Serious delinquency (30 to 59 days past due) is the third stage. Historically, many lenders considered 90 days past due as serious delinquency, but they recognized the low probability of curing an account beyond 60 days past due and have advanced treatment strategies. This stage represents the most intensive efforts to bring the customer current and prevent the account from rolling into the next delinquency bucket.
Loss mitigation (60+ days past due) is the last stage prior to the account being charged off and is characterized by a shift in objective from intensive efforts to contact and help the customer to minimizing losses. The ultimate goal is still to cure the delinquency, but the expectation is the majority of customers aren’t willing or able to fulfill their obligations.
Recovery starts when the account is charged off. Here, lenders are primarily concerned with maximizing recoveries to offset charge-off losses. There are a variety of options within this stage and we’ll evaluate the risk and rewards of each.
Account Management: Pre-delinquency
Regardless of when collection efforts begin (some start a day past due while others start at 10 or 20 days past due), an effective strategy requires robust account management. While a thorough account management strategy addresses a number of goals such as revenue generation, credit loss mitigation and customer retention, our discussion will focus on efforts to mitigate credit losses.
Lenders need account management strategies that are both proactive and precautionary. The best account management strategies create a surplus of data for use if the customer goes delinquent. In fact, many online lenders have augmented the origination process, requiring additional customer data upfront to ensure success if the account goes delinquent later.
Your account management strategy should yield early insights on the financial health of a customer. This can help determine the appropriate prioritization and treatment strategies if they go delinquent. During this stage, you should also validate customer contact information to ensure it is comprehensive and up to date if you need to contact the customer or locate assets.
Next, we’ll address the critical elements required to mitigate credit losses within the account management strategy.
Validate and monitor customer contact data
Data quality is important. Lenders should frequently validate the customer information file, and add more or new contact data (phone ownership, line type, email, best phone, best address, etc.) to easily reach the customer or locate the asset if necessary. The cost to validate contact data and monitor for changes is small in comparison to labor costs, materials, postage, etc. and offers a much greater return. Because customers who start missing payments typically go delinquent on other tradelines as well, other lenders will be attempting to contact them to be first in line for repayment. If lenders have up-to-date and comprehensive contact data in advance, they can be first to reach a delinquent consumer to cure the account. In the event of a recession, there will be an increase in the number of customers who miss their payments, which will strain resources. Effectively and efficiently reaching a customer quickly is a benefit of high quality data.
Leverage external credit data to capture greater insights
When lenders evaluate and monitor consumers’ credit data, it provides valuable insights into the trajectory of the consumers’ financial health. Credit data can predict performance in the near term and enable lenders to take proactive steps if needed. It can also help lenders identify the appropriate assistance to offer a consumer if they go delinquent. This helps lenders more accurately target efforts to effectively and efficiently control delinquency before it results in a loss. Additionally, with insights from trended credit data, financial institutions can improve the accuracy of their delinquency and loss forecasting by identifying correlations between changes in credit health and actual delinquencies. Crafting more tailored, proactive customer engagements improves the customer experience, increases the probability of repayments and helps lenders to prevent losses during a recession.
Identifying at-risk customers prior to a delinquency and establishing a process to update the customer information file with accurate, fresh information helps you successfully engage customers if they become delinquent. In a recession, resources are strained responding to the large volume of customers who miss their payments. Having an efficient and effective account management strategy will diminish the increase in delinquency, which reduces losses and lowers the impact of a recession on an organization’s profitability.