In Q3, originations dropped, delinquencies continue to rise, and the cost of purchasing debt is normalizing. In this 3 minute video, Mike Cassidy, Managing Partner at M&G Solutions, breaks down the three biggest collections & recovery trends in Q3, including:
- What’s driving the dip in originations, especially for subprime borrowers;
- Where lenders are investing to deal with the increase in delinquencies;
- How, even though prices are normalizing, debt sale remains a critical strategy to lenders
Click to watch, or read the full transcript below.
1. A Dip in Originations (Especially to Subprime Borrowers)
This is certainly true in the unsecured personal loan space, and somewhat in the card space, we are seeing a decline. For three of the past four months through August, we've seen a decline in the unsecured personal loan space. August was a positive point because there was a month over month increase from July, but July was at such a depressed level, it's still low.
Overall drivers for this trend are what you would expect. Lender [interest] rates have increased concerns around elevated delinquency and other related factors. And the fintech lenders in particular, who are dependent on capital markets, are just more heavily impacted in this area.
They're also seems to be a shift away from lending to the lower FICO scores. Lenders heavily invested in the lower FICO band through 2021 and into parts of 2022, but we are starting to see them shift back away from it.
2. Delinquencies Are Driving Investments in Digital Debt Collection
The next trend on the delinquency side is no shock: delinquency levels through July and August reflect sustained pressure. This is definitely true in the card and unsecured personal loan space. This is not exclusive to fintechs. You’re seeing all the major banks reporting elevated delinquency on the card side. This is a continuing trend. Once again, the lower FICO (660 or lower) seems to be most heavily impacted in terms of delinquencies.
In response, we continue to see those lenders, and the collection agencies even, continue to invest very heavily in digital capability and self-service. The ability to service the elevated levels in a more efficient and more effective manner that continues, and will likely continue to be heavily invested in space.
3. Debt Sale Pricing is Normalizing
We’re back to talking about debt sales, something we spoke about earlier in the year. Debt sale is still a huge part of the strategy in the fintech space, but the pricing, as expected, is shifting back down to normal or more historical levels. This is in response to the same factors we just mentioned. Economic pressures, the uncertainty and the awareness that volumes are increasing. We are seeing that natural pull back on some of the pricing. That's not changing the strategy in the short term or maybe even medium or long term.
Lenders are still heavily focused on debt sales, especially in the fintech space. We are seeing a lot of first time buyers still coming out. As a result, you're going to see more fintech paper out there. You're going to have more potential fintech buyers on the debt sellerside, which means buyers are going have to get used to the nuances of that asset. The lenders are going to have to get used to managing a debt sale portfolio.
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