The year 2017 was full of intriguing developments in the US debt collection industry.
- The Consumer Financial Protection Bureau published a report that revealed debt collection was the issue most complained about by American consumers. Along with mortgage-related complaints, debt collection makes up about half of the 1.2million issues raised with the CFPB since it started accepting complaints in 2011.
- The Federal Communications Commission adopted a new set of rules aimed at shutting down robocalls, an engagement method which has long been used by traditional collection agencies.
- And, despite a growing regulatory pressure matched by increasing consumer demand, the pace of technological and product innovation in the space remained slow.
As we move through the early weeks of 2018, it is time for us to assess how the debt collection landscape might change and advance in the coming year. Here are our predictions for the rest of 2018.
Levels of consumer debt in the United States will continue to rise
Midway through 2017, Nasdaq.com commented that consumer debt in the US was rising at an “alarming” pace. In the second week of 2018, it was clear that that trend shows no sign of slacking, as NowThis reported that credit card debt had reached an all-time high of $1.023trillion. Student loans have become the largest source of household debt outside of mortgages. The most recent reports indicate a total US student loan debt of $1.48 trillion – that’s an average of more than $37,000 per graduate. And the student loan delinquency rate is 11.2%. Car loans are also rising. Automotive News confirmed in September that Americans owe $1.1tr in auto loans – a new record. At the same time, the cost of consumer goods and services is also increasing. The cost of several major areas of household expenditure – including medical expenses, housing, and food and beverages – has increased faster than income growth since 2007. The American economy is strong and shows every sign of remaining so in the coming months. And while the economy remains strong, people across the nation will keep spending. The need for a new generation of consumer-centric, automated, technology-driven debt collection experiences has never been greater.
Traditional methods of debt collection will become progressively less effective
The total recovered by debt collectors has declined steadily in recent years, falling from $13.3billion in 2012 to $11.4bn in 2016. At the same time, the CFPB reports that the net credit card charge-off rate – a handy barometer of the efficiency of debt collection – has risen gradually from a low of 3.8% in the second quarter of 2015 to 4.9% in the second quarter of 2017. One of the reasons why less debt is being recovered is the methods which have traditionally been used. Telephone calls and letters are not how modern consumers want to be approached. They find it easier to block phone calls; they want an interactive, user-friendly solution that is tailored to their needs and allows them to use their preferred technology in a way and at a time that suits them.
There is an app for everything these days. The average internet user now spends more than two hours a day on social media and messaging services. All consumers are spending more and more time online and millennials, the largest demographic in debt today, spend an average of 223 minutes each day – more than three-and-a-half hours – on their mobile devices, up from 188 minutes in 2016. And yet the debt collection space has not seen the sort of technological innovations that will allow it to keep pace with this new mobile-first age. Agencies are reacting by consolidating for scale but, as the CFPB report stated, they are still using the same methods for collection.
The debt collection industry will need to start investing in technology and creating customer-centric experiences
To counter the above trends, it’s imperative that debt collection agencies invest in data-driven technology that allows them to learn about, and understand, the behavior of the consumer. In short, they need to ask themselves the following questions:
- How can we have a conversation with consumers?
- How do we track their behavior?
- How do we then adjust our strategy to ensure better results?
It’s not just millennials. Older demographics also want a more customer-friendly, consumer-focused approach that is driven by digital technology. Consumers want to pay off their debt, but they want to do it in a way and at a pace that is convenient for them. There needs to be a shift in creating tools that make it easier to pay off debt, so more people will do it. That means investing in the technology that allows for a user-friendly, omnichannel approach. Flexibility, convenience and a great user experience are key to more debt being recovered. The industry has to begin its shift to use technology, automate and implement user-centric approaches to collections to keep pace with increasing levels of debt and consumer preferences.
The pace of Fintech innovation will continue to be high
While the gap between spending and debt collection by traditional agencies continues to grow because of a reliance on outdated methods, in the banking and investment spheres there has been a large number of entrants that have quickly gained market share. The wealth management space has seen disruption by newcomers such as Wealthfront, RobinHood, and Betterment offering financial planning and investing for just about anyone. By lowering the barrier to entry and creating great user experiences they have been able to quickly penetrate the market and to go head to head with the more traditional established firms. Challenger brands such LendingClub and SoFi are also re-imagining the lending pace, making it easier for consumers to access alternative loans. These disruptors are bringing great marketing and compelling user experiences as a way to differentiate and gain market share with much smaller teams. As a result, they are challenging and changing consumers’ behavior. The debt collection industry needs to aspire to a similar agility simply to be able to keep pace with this hi-tech innovation.
Emerging companies will need to devise strategies to tackle debt collection
Emerging brands in the consumer space who are looking to grow retention and advocacy will need to address the issue of debt collection. They need to absorb the lessons of the current landscape and integrate optimal collection practices into their customer proposition sooner than later. As well as recovering more debt, this process will by definition help to increase customer retention. Emerging brands tend to focus first on growth and, as a result, they lack the expertise to carry out collections in-house and do not relate to traditional agencies’ methods and values. While they are focusing on their core offering, it is important that they embrace a more forward-looking method of debt collection. They will need collections processes that align with their organizational core values and their customer’s preferences, putting more pressure for innovation in the collections space.