With a potential recession on the way, creditors need to retool their recovery and debt collection strategy now, says Jake Cahan, CEO of January. In this Q&A with Collection & Recovery's Erin Kerr, Cahan argues that creditors have to make a philosophical shift - away from incremental dollars and towards compassionate customer care and strong compliance - if they want their brand and business to get through an impending recession successfully.
"The philosophy of collections must shift from a short-term focus on incremental additional dollars collected to sustained relationships," Cahan says. "Compassion at scale is missing and needs to be added to the collections equation."
You’ll find out:
- Why creditors need to plan for scenarios where delinquencies and charge-offs are higher than modeled
- Why creditors who care about their brand must focus on sustained relationships
- Why additional CFPB oversight is good for the consumer and the collections industry
- Key questions to ask within your organization about collections and recoveries in order to prepare for the downturn
Q: How would you describe the current economic climate?
A: Unfortunately, we expect to see a rise in consumer debt due to macroeconomic changes.
Anecdotal data from our large creditor clients suggests this is already underway. Our original creditor and debt buyer clients are seeing delinquencies and charge-offs pick up and are analyzing their collections and recoveries strategy to ensure their current partners can handle an increase in volume.
Consumer delinquency rates are rising as per Fed data, up 9.5% over the last two quarters of 2021. We expect this trend to continue into 2023 due to soaring inflation, rising interest rates, and the end of pandemic forbearance programs.
Q: In a recent Collections & Recovery interview, Dave Hanrahan, CEO of Kredit, said fintechs will need to get more sophisticated when it comes to their customer service processes, especially collections. Do you agree?
A: Yes. Customer service suffers from quality and risk control challenges due to the multitude of human touch points. As regulators like the CFPB increase their oversight, implement more consumer-friendly requirements such as Reg F, and volume increases, those human touch points become higher risk and more costly.
Meanwhile, creditors are interested in protecting their brands and increasing their margin as the public markets prioritize cash flow in a world no longer buoyed by zero interest rates. To mitigate these risks, we’ve seen that fintech lenders have prioritized solutions that increase the quality of the customer experience while decreasing the human touch points required. In particular, they’re assessing solutions that prioritize consumer engagement, compliance, and automation to minimize the historical risk associated with those touch points.
A philosophical change is needed as it comes to collections. Countless creditors have told us how the practices of collections departments have long been overlooked. As creditors care more about protecting their brand and rehabilitating relationships with their borrowers, a compassionate collections program is critical.
The philosophy of collections must shift from a short-term focus on incremental additional dollars collected to sustained relationships. Compassion at scale is missing and needs to be added to the collections equation.
Q: How would you advise fintechs to approach a potential economic downturn?
A: We’re biased, of course, but we would focus on what happens when payments are behind. We encourage fintech companies to consider what happens if delinquencies and charge-offs are higher than modeled. Strengthen your analysis of key challenges leading to the uptick. Ask your teams:
- How will you engage – at scale – with borrowers suffering from increased financial distress? How will you maintain collections effectiveness?
- Do you have confidence in your agencies’ compliance and oversight?
- Can you quickly adapt to changing regulations at the municipal, state, and federal levels?
Depending on the magnitude of these challenges, lenders might want to evaluate new solutions to ultimately help them improve their profitability and reduce their operational, compliance, and reputation risks. Solutions range here from better telephony systems, more reliable and dynamic systems of record, superior agency partners.
Q: What was your reaction to the recent CFPB announcement that they intend to use their oversight authority to supervise nonbank entities which pose a risk to consumers?
A: We weren’t surprised. After all, the CFPB’s mission statement makes clear their focus on doing well by consumers. Compliance, effectiveness, and empathy don’t need to be mutually exclusive.
More generally, we view additional oversight as a good thing for consumers and the credit ecosystem. With the rapid increase in new financial products and tools, we appreciate the need for renewed focus on how consumers are impacted.
That said, we echo industry feedback that additional guidance and clarity on the operationalization of the announcement would improve compliance of companies in our industry.
Q: Did that announcement come as a surprise to your clients? What advice have you given to them regarding the CFPB?
Most of the discussions we’ve had related to answering what the announcement actually means. Our advice is to continue prioritizing compliance and the consumer experience. While the CFPB appears to be casting a wide net in who they can target here, those with sub par compliance and customer service will quickly rise to the top of the CFPB’s list.
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