We’re approaching the end of the year and fall is in the air – along with consumer financial uncertainty. Economic stressors persist and are likely contributing to many consumers relying on credit to cover expenses, while the resumption of student loan payments adds another financial obligation to the mix. For consumers, the conundrum of balancing finances continues as the holiday spending season sneaks up. If you’re a creditor or collector working with financially distressed borrowers, considering consumer situations and preferences when collecting is critical to your success.
Read on for our take on what’s impacting consumer finances and our industry, how consumers are reacting, and why employing digital strategies to boost engagement is more important than ever for debt collection in 2023 and beyond.
What’s Impacting Consumers and the Industry?
People are watching inflation and interest rates like hawks as effects from previous rate hikes slowly set in. The PCE price index excluding food and energy increased 0.1% in August, lower than the expected 0.2% gain. On a 12-month basis, the annual increase for core PCE was 3.9%, matching the forecast and coming in as the smallest monthly increase since November 2020.
While recent indicators suggest that economic activity has been expanding and the U.S. banking system seems sound, inflation remains elevated. Tighter credit conditions will likely impact economic activity, hiring and inflation, but the extent of these effects is unpredictable. While the Fed’s latest move in September was to maintain the existing rate of 5.25-5.5%, the end goal is maximum employment and inflation at the rate of 2% and they are closely watching indicators to determine future rate changes.
Since April 1, more than 7 million Americans have lost Medicaid coverage since the forced hiatus of cancellations during the pandemic ended. Many people lost their coverage because their income is now too high to qualify for Medicaid, but a larger share have been terminated for procedural reasons and states are now seeing increased appeals and complicated legal processes.
After three years of relief from payments on $1.6 trillion in student debt under the CARES Act, student loan payments resume this month. 40+ million borrowers who paid $200 to $299 on average each month in 2019 will soon face the resumption of a bill that is often one of the largest line items in their household budgets. For a deeper, data-driven analysis of how student loans impact consumers with debt in collections, read our report, “Consumer Finances, Student Loans and Debt Repayment in 2023”.
Meanwhile, the Consumer Financial Protection Bureau (CFPB) has been looking at lending practices, advanced technology considerations and credit reporting that impact consumers. Of note for lenders, it issued guidance about certain legal requirements for specific and accurate reasons when taking adverse actions against consumers that lenders must adhere to when using artificial intelligence and other complex models. Bottom line: “the algorithm said so” doesn’t qualify as a reason.
The CFPB also started the process of issuing a rule barring reporting medical debt collections through the credit reporting system. The CFPB’s rulemaking would block credit reporting agencies from including medical debts on consumer reports that are used in making underwriting decisions. The proposal would not stop creditors from medical bill information for other purposes such as verifying the need for loan forbearance or evaluating loan applications for medical services.
Key Indicators and Consumer Spending
According to the New York Fed’s Quarterly Report on Household Debt and Credit, total household debt increased in the second quarter of 2023 by $16 billion (0.1%) to $17.06 trillion. Credit card balances increased by $45 billion from Q1 2023 to a series high of $1.03 trillion in Q2, a 4.6% quarterly increase. Other balances, including retail credit cards and other consumer loans, and auto loans also increased by $15 billion and $20 billion, respectively.
With increased balances, delinquency remains a concern as it simultaneously continues to rise regardless of product type. Experian’s Ascend Market Insights for August reports overall delinquency (30+ DPD) rose in August, with a 2.81% increase in delinquent units and an increase of 3.11% in delinquent balances month over month. Serious delinquency (90+ DPD), which has been rising for all products, now exceeds pre-pandemic levels for auto loans and unsecured personal loans and is approaching pre-pandemic rates for bankcards, retail cards and secured personal loans.
In August, the Fed reported that at the 100 largest banks, charge-off rates have been rising, most notably with credit cards. The charge-off rate for all consumer loans was 2% at the end of the second quarter, up from 1.1% a year ago. As for credit card debt, the charge-off rates stood at 3% in the second quarter, up from 2.75% in the first quarter, and up from 1.7% a year ago. Putting this in perspective, amid the Great Recession the overall charge-off rate hovered near 8% while the rate for credit cards hit 9%. While comparatively the situation may not seem as dire, the increasing trend on charge-offs is worth watching.
After bottoming out in September 2021, analysts at Goldman Sachs report that since Q1 2022, credit card companies are seeing an increasing rate of losses at the fastest pace in almost 30 years, on par with the 2008 recession. Losses currently stand at 3.63%, up 1.5% from the bottom, and Goldman sees them rising up to 4.93%.
Also in August, Americans’ $2 trillion in pandemic savings was nearly exhausted, with the current remainder of $190 billion projected to be spent down by the end of the third quarter. This has started showing up as roughly 114,000 consumers had a bankruptcy notation added to their credit reports in Q2, slightly more than in the previous quarter. And approximately 4.6% of consumers had a 3rd party collection account on their credit report, with an average balance of $1,555, up from $1,316 in Q1.
Elevated inflation continues to strain budgets – the level of inflation in July meant families spent $709 more per month than two years ago. Battling the current economic challenges, consumers still have to make essential purchases and pay bills. According to PYMNTS, 43% of Gen Z consumers have been using their credit cards more often, and 66% of this segment lives paycheck to paycheck, up from 57% last year. Upon the resumption of student loan repayments in October, this group could lose as much as 4.3% of discretionary spending power, leaving less money on hand to pay back debt.
Gen Z isn’t alone – Gen X borrowers with federal student loans on the books could see their discretionary income decrease by as much as 8.8%. With a similar proportion of this cohort living paycheck to paycheck, 71% of Gen Xers reported actively using credit, with 26% reportedly using credit more often than normal for everyday purchases. And according to a recent report from PYMNTS, this group has started embracing Buy Now, Pay Later (BNPL) as a strategic tool to manage spending and cashflow. 14% of Gen Xers said they had used BNPL – that’s more than the amount of Baby Boomers, less than millennials (20%), and roughly the same as Gen Z.
Consumer Sentiment on Financial Outlook Deteriorates
As more consumers are turned down for much-needed loans due to financial tightening and using more credit options for everyday expenses, the general sentiments around financial wellbeing aren’t very positive. According to Deloitte’s State of the Consumer Tracker, 38% of Americans feel their financial situation worsened over the last year and less than half feel they can afford spending on things that bring them joy. A similar 48% are concerned about their level of savings and only 44% feel they can afford a large, unexpected expense.
The Federal Reserve Bank of New York concurs – in its August 2023 Survey of Consumer Expectations, income growth perceptions declined that month, and job loss expectations rose sharply to its highest level since April 2021. Sentiments are down across the board: Perceptions about current credit conditions and expectations about future conditions both deteriorated, and households’ perceptions about their current financial situations and expectations for the future both also deteriorated.
The key takeaway: many consumers are feeling stressed about finances and are uncertain about their financial future, which will impact their payment decisions and willingness or ability to engage with debt collectors.
Preparing for Debt Collection in Q4 and Beyond
As we approach the end of the year and enter the holiday spending season, businesses should prepare for the possibility of increased delinquencies as consumers reach a tipping point in savings and expenses. Last year marked a particular surge in consumers putting seasonal spending on credit, with 41% of Americans putting more than 90% of their holiday expenses on their credit cards, and nearly 42% anticipated going into debt—understandable as the average US shopper took on more than $1,500 in holiday debt in 2022.
Compound the holiday expenses with resumed student loan payments, persistent inflation and high interest rates and the consumer financial outlook appears fragile. So what’s the best way forward in engaging customers in debt collection who are balancing a delicate financial situation? Any or all of these best practices can help:
- Go digital with communications. The numbers speak for themselves: 59.5% of consumers prefer email as their first choice for financial communication compared to only 14.2% who prefer to receive a phone call. Factor in working hour considerations and it becomes even more difficult to engage consumers via phone. Further, contacting first through a consumer’s preferred channel can lead to a more than 10% increase in payments.
- And digitize payments, too. Consumers have long been transacting online for purchases, and now three in five Americans expect all payments to be digital. The benefits of online payment options range from customer ease-of-use and adoption to operational cost reduction while offering increased payment volume to boot – 14% of bill-payers prioritize payments to billers that offer lower-friction payment experiences.
- Stay top of mind, respectfully. There’s a lot on consumers’ minds in today’s economy, and your bill may not be at the top of their priority list. When engaging delinquent customers, there are strategies to getting your message across that are better for maintaining customer relationships while effectively collecting debt. It’s important for both your customer relationships and compliance considerations to keep in mind the tone and content of your messages along with the cadence of your communications.