Debt collection requires a lot of technical support. Given that a typical debt collection case load comprises 100 accounts per person per day, staffing debt collectors for a million accounts requires a small army. As a result, triaging the accounts and assigning them to staff who are best equipped to address them is crucial.
To meet this challenge, companies such as Zoot have developed account management and debt recovery systems that analyze customer behavior to rank delinquent payers by risk level, and assign them to the staff best equipped to manage them. Optimized debt-recovery systems will be crucial for financial institutions as the pandemic glut of savings diminishes and consumers take on more debt.
Changes in Credit Card Trends Since the Pandemic
At the beginning of the pandemic when unemployment spiked, consumer debt declined paradoxically. This was due to government financial support as well as changes in consumer behavior. Consumers benefited from increased unemployment aid, antieviction policies, stimulus checks, and loan forbearance programs. In addition, because of COVID-19, consumers decreased their spending on shopping, fuel, dining, entertainment, and travel.
As a result, consumers were in a better place financially, on average, after the pandemic. With extra funds and reduced costs, many consumers paid off debt and accumulated savings. This led to a decline in credit card balances and loan delinquencies.
In 2022 this trend has reversed, with inflation cutting into consumers’ budgets. From December 2021 to May 2022, total household debt increased from $14 trillion to $16 trillion. In Q2 of 2022, the number of credit cards Americans hold increased to a record 500 million. All of this reflects the reality of the American economy: people are struggling to keep up with inflation. Credit card delinquency rates have increased since their lows during the pandemic, as have foreclosure rates.
For financial institutions, this means the financial situation of their customers has changed. As a recent True Acord article explained, “Consumer ability to acquire, and feasibility of keeping up with payments for most types of loans is very different today than it was a year ago. And that customer’s profile changes again when they start missing payments due to financial stressors.”
Financial institutions should anticipate that consumer debt will continue to rise, especially if a recession does come. They need to focus on optimizing their debt collection systems so they can be ready for the storm.
What Is a Debt Collection System?
A debt collection system leverages the customer data it has and allows banks to assess the likelihood an individual customer will repay their debt, as well as helps banks devote debt collection resources accordingly.
Zoot’s system uses cash flows, collections history, collateral, account balances, customer demographics, bankruptcy filings, and account activity to help determine risk ratings for customers.
As an example of how this works, Zoot looks at a customer’s credit line and evaluates how much credit they’ve used so far and how much is available. “Does the customer only use $100 of it or are they running up to $5,000 every month? That data says a lot about how the customer manages a budget,” said Brian Riley, Co-Head of Payments Research at Mercator Advisory Group.
One red flag is the use of cash advances. “[Cash advances] have a much higher interest rate. To get $20 out of an ATM on your credit cards could cost you $8 in interest fees,” he said. “A person who does that repeatedly is a high-risk customer.”
People who bounce checks are inherently riskier as well, as are those who consistently don’t make payments until the end of the month.
Using the Risk Model Effectively
When it comes to customers who aren’t paying off their debts, banks tend to hand over that information to collection agencies to recoup that money. “For those who don’t have the money, banks work out arrangements,” said Riley. “There are certain consumers who can’t pay due to temporary situations—they’re in the hospital, there’s a natural disaster, or they’re dealing with a family emergency.”
If customers have a reliable track record, it doesn’t make sense to waste internal resources collecting from them. Moving collections staff toward the riskiest customers lets banks manage their collections with fewer staff.
The more interactions with customers, the more likely those customers are to pay back debt. According to Zoot, “Consistent interaction with delinquent account owners can reduce charge-offs, strengthen customer retention, further trust and goodwill, and reinforce the institution’s reputation.” A debt recovery model goes through those millions of accounts and sorts them into groups. “Typically, there’s three groups of accounts,” said Riley. “There’s ones where no matter what, they’re not going to pay; there’s another that, with a little effort, will pay; and finally, there’s one that just doesn’t have the resources to pay.”
The debt-recovery system sorts these customers into account queues in a case management platform. A collection manager assigns staff to these work queues and can sequence the queues in order of urgency.
Riskier clients require more aggressive efforts to collect, while dependable clients may require less aggressive efforts. “A bank customer with a mortgage that’s paid off who has been working for 40 years is less risky than a young guy right out of college,” said Riley.
Using Collections Staff Wisely
According to Riley, the turnover rate in the collections department is very high, typically around 25% to 30% a year. As a result, highly trained debt collectors are scarce.
“If there are 500 debt collectors at a bank, 100 of them will be relatively new, 100 of them will be well trained, and 300 will have medium-level training,” said Riley.
A debt recovery system can classify accounts into different buckets based on the likelihood of client repayment. Those categories can be deployed to employees with the right level of skills.
Collecting from delinquent customers is “more brain than brawn,” Riley said, leaning on his experience running a debt collection unit at Chase. “If somebody is 30 days delinquent, I don’t want to kill their account and alienate them as a customer. As time goes on, I slowly increase pressure. If a customer hasn’t called me in four months, or had no contact, I’m not going to be that forgiving when he wants to make an arrangement. But at the end, you can’t get blood from a stone.”
With Zoot’s debt collection software, it’s possible to give certain segments of the population a pass on debt collections based on extenuating circumstances. “With the Fort Myers hurricane, do you really want collection calls when people’s windows are blowing off?” Riley asked. A sophisticated collections system like Zoot’s can block all accounts in an affected zip code. “This happens every year in New Orleans,” he added.
Preparing for the Future
According to Zoot and The Washington Post, “the modest delinquency rates of the recent past appear to be coming to an end. Charge-off rates remain at historical lows, but falling since 2010, they recently plateaued and in mid-2022 showed a hint of an increase.”
This implies that customers will be more likely to be delinquent on paying debt in the coming year. As bank profits are hit by inflation, banks need to focus on making their businesses as efficient as possible. Focusing on optimizing debt collections is a good step toward that effort.