When the downturn arrives, lenders must be willing to change their approach dramatically.
It is a familiar shift for more established financial institutions, but for fintechs, it's all new. Instead of focusing primarily on growth and acquisitions, fintechs will - maybe for the first time - have to turn their attention to the less glamorous, historically neglected aspects of lending: credit governance, customer experience, charge-offs, and delinquencies. In short, collections.
“When the economy is good and growth is good, [fintechs] can focus on lending, and everything is rosy,” says Justin Metacarpa, Senior Operations Leader at 2nd Order Solutions. But the economy won’t be good forever, and as the Federal Reserve continues to raise interest rates, the risk of a recession becomes very real.
As fintechs turn their focus to recoveries, leaders have to ask themselves: can we mitigate losses and retain customer loyalty? Yes, says Metacarpa. Here are three good strategies fintechs can use to do it.
1. Should We Outsource or Not? The Answer Is Yes.
It starts with some decisions, like whether to outsource or build a department focused on collections.
It can be a challenge to find a third-party agency that is sophisticated enough to handle fintech charge-offs and delinquencies. Partnering with the right agencies can mean less resource-intensive investment from your company, if the agency is able to offer your customer a similar experience to what you provided earlier in the account lifecycle, which includes advanced self-service options, text messaging, and inbound options for consumers who want it. Fintechs also need the ability to really control their customers’ experience, and according to Metacarpa, “no one [in the third party collections space] really has it all today.”
To learn how to see past a vendor’s pitch, check out our Collections & Recovery Webinar Series: The Vendor Management Masterclass
Building an internal collections solution has its own set of challenges. While 2nd Order Solutions recommends handling some collections in-house for benchmarking purposes, an internal call center should not be on your list of initial investments.
“The volatility in call volumes, management headaches, and compliance concerns” make an internal call center a long-term priority, but not an immediate one, according to 2nd Order Solutions’ most recent whitepaper, Collections Best Practices for Fintech Lenders.
Instead, fintech lenders should focus on segmentation, digital collections, risk management, and outsourcing phone-related services. The right mix of internal and outsourced collections will be critical to finding success, even when growth is minimal.
2. Update That Org Chart
Fintechs tend to be flat organizations, but getting involved in collections means “creating roles and responsibilities focused on ensuring adherence to credit risk management and complying with relevant laws and regulations,” according to 2nd Order Solutions.
It’s important to define strategy-facing roles and credit governance roles separately. “The person who is making decisions about issuing more credit should not be the same person who is outlining the risks,” Metacarpa adds.
You might think this means hiring a ton of new people in a difficult job market, but it’s just a matter of splitting up functions efficiently. Focus on execution matching intent, and creating a strong partnership between your credit and analytics team and your operations team (which should absolutely be separated).
3. Get Flexible
The CFPB, unsurprisingly, has announced its intentions to focus on fintechs. Plus, there are ever changing state regulations that complicate reaching out to consumers who owe a debt.
Fintechs can’t afford to get caught in a situation where the only option is to stop contacting entire portions of their portfolio because of a state regulation. While it might seem like the less-risky approach, “regulations are only going to get stricter,” Metacarpa says, “and fintechs need to understand state by state laws [in order to collect] without violating the law.” Deciding to stop collecting in a single state because “it’s too complicated” is not a tenable solution to a problem that is only going to mutate in the future.
Instead, focus on flexibility whether your organization is collecting internally or outsourcing. And if you’re outsourcing, it’s vital to understand if your agency partner can keep up with the regulations. For example, can your agency partner handle customer preference, or are they planning to place a cease & desist or do-not-call flag on every account where a customer expresses preference? Applying broad strokes due to regulations like this can result in excluding up to 30% of your inventory.
By focusing on these three areas, fintechs can get prepared to combat the lack of originations during the next economic downturn.
Recommended reading: "Collections Best Practices for Fintech Leaders," a new, comprehensive whitepaper and blueprint for fintechs looking to improve their collections - from 2nd Order Solutions.
Recommended reading: For more on the CFPB's recent turn to fintech / nonbank enforcement, see "The CFPB Is Coming for Fintechs, BNPLs, Telcoms, and More."
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