We may be headed for an economic downturn and it may not look anything like the recession of 2008. What's more, consumers may be relatively healthy financially right now and employment is low, but high interest rates and high inflation will likely erode consumers' ability to repay.
Adjustments to your collections and recovery strategy now could pay dividends now and in six months when ability to repay may look very different, argues Experian Senior Dir. of Product Management Matt Baltzer.
In this Collections & Recovery Executive Q&A, Experian's Baltzer explains:
- Which macroeconomic trends executives in collections need to watch closely;
- How high inflation will affect different types of debt in different ways;
- How a healthy consumer and low unemployment might still be a challenge in a recession;
- Why collections might be a lot more difficult in 6 months and how to adjust your strategy now.
Watch the video or read the full interview transcript (below).
Erin Kerr: Hi everyone, and thank you for joining me on this episode of Executive Q&A. I am here today with Matt Baltzer, the Senior Director of Product Management at Experian. Hi Matt. How are you doing today?
Matt Baltzer: Hey Erin. It’s good to be with you today.
[EK]: I'm happy to have you. Really quick before we get started in our conversation, why don't you tell everyone who you are and what you do and then we'll jump into our conversation?
[MB]: Sounds great. Well, as you mentioned, I'm the Senior Director of Product Management at Experian and my responsibility is for the collections products that leverage consumer information to give greater insights to help debt collectors manage their workflow.
My first question for you is which two or three macroeconomic trends should collection companies and executives be the most aware of right now, and why?
I do not expect that the consumer's ability to pay has yet degraded to any significant degree. ...[C]ollectors should have just as much success as ever in getting to payment. But a consideration is that now may be a better time for these consumers than six months from now, as the impact of inflation and interest rates starts to take a toll.
[MB]: That’s a good question. We, as many are in the news, are still seeing a reasonably healthy consumer, which is great, but our team did highlight several trends to watch.
The first would be employment, which actually continues to be really strong. Those that are laid off are generally able to move quickly back into the labor force, so at least the employment situation right now looks nothing like the early days of the last two larger recessions.
Second, we're seeing consumers spend at rates higher than the past three years. Some of that's due to inflation, but we're still seeing a lot of origination activity. Consumer spending is strong.
A third in a red flag that Josie highlighted in the presentation is a declining savings rate. During the pandemic, consumers were able to sock away extra cash at an almost unprecedented level and that's no longer the case. Part of that is inflation, but part of it could be signs of financial strain.
[EK]: That's great. And I think you summarized the sort of opening of that webinar really succinctly. A link to that webinar will be available in the copy for this interview. So if you're interested in listening or watching that webinar, feel free to do that.
Moving on to some more specific questions. How might or should those trends affect debt collection strategy for collections companies and executives?
[MB]: Well, at a portfolio level, I think there's good news, right? I do not expect that the consumer's ability to pay has yet degraded to any significant degree. So in aggregate, collectors should have just as much success as ever in getting to payment. They should remain confident and keep working accounts to success. But a consideration is that now may be a better time for these consumers than six months from now, as the impact of inflation and interest rates starts to take a toll. That might suggest that settlement offers, or higher upfront payments may be important tools to consider. Those interest rates that are increasing mean that many households will start sending more money to creditors, leaving less leftover for everyday spending.
[EK]: That's interesting and certainly something to keep in mind. I want to go back to something you mentioned briefly in your first answer, which is inflation. Can you tell me a little bit about how the average consumer has been affected by inflation?
[MB]: Consumer spending, as I mentioned, is up. Debt overall is up, and that's weighted to a few asset classes, but in spending certain categories are really more impacted by inflation than others. Obviously home equity and mortgages are higher and that's important, but for debt collectors that's less impactful. I think in a couple slides in the presentation, Josie highlighted the uneven impact inflation has on lower earners in categories with the greatest inflation such as rent, food, and energy making up a very considerable portion of the budget for lower income consumers. Where this will show up for debt collectors is in rising delinquency rates, particularly on things like unsecured personal loans and potentially automotive loans. We're already seeing delinquency rates on unsecured personal loans hit levels not seen since 2018.
[EK]: Wow, that’s super interesting. To tie that into some actionable and practical advice for collections companies and executives, how should consumers’ response to inflation affect debt collection strategy?
[MB]: That's an interesting question. For debt collection organizations, for the leadership, there may be increased opportunity coming in certain trades such as utilities and automotive and those unsecured personal loans.
Are you positioned as an organization to target and serve those markets? For everyone in the industry, the real potential for economic weakness should present an opportunity to evaluate your collection strategy.
How will you adapt if a 20 to 30% increase in volumes comes? What about working accounts with smaller balances, which we've seen more of since the last larger recession? Experian offers software and decisioning solutions that can help debt collectors optimize their strategy for that greatest return on investment, knowing that you can't always work every account equally.
[EK]: Yeah, and I imagine, Matt, that having really good data on consumers helps you to craft that strategy. What consumer specific data can help lenders predict when consumers might end up in distress?
[MB]: As an originator, the first approach to consider should be leveraging new types of data that again, were not available during the last recession, such as trended data and alternative finance activity, both which can provide leading indicators that someone is becoming more risky before they go delinquent once accounts have become past due.
Using third party data really enables a comprehensive view of each consumer. Advanced analytics scoring models from a partner like Experian can help give focus to those accounts that are more likely to be recoverable. We even have a new scoring model that uses a complex blend of attributes to assess each trade's history and the position in wallet that will predict the likelihood of that account self-curing that helps to separate the accounts that need the most attention from those that maybe just need more time. Finally, Experian can also help complement your digital engagement strategy with improved contact data so you can reach the right party via phone, text or email at the time and channel that they prefer.
[EK]: Those are excellent points, Matt and I think there are great investments for collections companies as we enter this next potential recession. Did you have any closing thoughts for the audience?
[MB]: No, just to thank you Erin for the time today. I hope everyone has a chance to check out the webinar you mentioned on the macroeconomic and credit trends. I have. There's some great insights there from Jim and Josie and Experian provides content like that on a monthly basis for those that are interested in following us. And if anyone has any questions about our products or offerings from Experian, please go to our website or reach out to me directly.
[EK]: All right, Matt, well thank you so much for your time and your thoughtful responses today and I hope everyone enjoys that webinar. Take care. Thanks so much.
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