Q4 Industry Insights: Cautious Optimism with a Side of Holiday Hangover

By on January 10th, 2024 in Industry Insights

2023 brought a whirlwind of an economy, and we spent most of the year trying to predict when things would finally turn around. The good news is that things are looking up, and so are consumer sentiments on their financial outlook. Despite the optimism, consumers are still battling high prices and interest rates, though the holiday shopping numbers would make you think otherwise. For consumers, the challenge of balancing finances persists and holiday spending hangovers are adding to the swing. If you’re a creditor or collector working with financially distressed borrowers, considering consumer situations against the economic landscape and accommodating their financial needs 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 2024 and beyond.

What’s Impacting Consumers and the Industry?

After a lengthy struggle against inflation and high interest rates, the economy is showing welcome signs of strength and stability, ending the year in a far better position than most predicted. Headline PCE fell 0.1% in November and was up only 2.6% from last year, unemployment remained flat at 3.7% and the economy grew at an annual rate of 4.9% from July to September. The Federal Reserve has indicated that the rate hikes are finished and it will be looking at cutting rates starting in 2024, an encouraging sign for the economy and consumers.

The fourth quarter marked the resumption of student loan payments for 22 million Americans, but repayment results were low. In October, the first month of resumed payments, 8.8 million borrowers missed their student loan payment—that’s 40% of loan holders. Some of this miss is attributed to an overwhelmed system and people making use of the Education Department’s 12-month “on-ramp” period, which guarantees that missed payments will not be reported to credit agencies until September 2024, protecting borrowers from the harshest consequences of missed payments like delinquency, default and collections. But interest will continue to accrue and only time will tell how much of this miss is actually due to inability to repay and what that will mean for those who can’t.

The Consumer Financial Protection Bureau (CFPB) has had its hands full overseeing actors across sectors–from regional and large banks to auto and online lenders to mortgage and credit agencies–in an ongoing effort to protect consumers in an ever-growing landscape of financial product offerings. And as offerings grow, so do the issues the CFPB must watch. In Q4, the CFPB issued statements and proposed rules relating to accelerating open banking, oversight of big tech companies and other digital financial service providers, and discrimination concerns. Bureau director Rohit Chopra himself has an eye on the future, saying he’s concerned that a handful of firms and individuals could wield “enormous control over decisions made throughout the world” with advances in artificial intelligence.

The CFPB also took a close look at fees and interest rates, issuing guidance to stop large banks from charging illegal fees for basic customer service and finding that many college-sponsored financial products offer students unfavorable terms and unusual fees. And despite recent changes at banks and credit unions that have eliminated billions of dollars in fees charged each year, a December report found that many consumers are still being hit with unexpected overdraft and nonsufficient fund (NSF) fees. A reported 43% were surprised by their most recent account overdraft, while 35% thought it was possible and only 22% expected it.

Key Indicators and Consumer Finances

According to the New York Fed’s Quarterly Report on Household Debt and Credit, total household debt increased by $228 billion (1.3%) in the third quarter of 2023 to $17.29 trillion. Breaking it down, credit card balances increased by $48 billion to $1.08 trillion in Q3 2023, showing a 4.7% quarterly increase while auto loan balances rose by $13 billion and now stand at $1.6 trillion. Student loan balances also increased by $30 billion up to $1.6 trillion. Other balances, which include retail cards and other consumer loans, increased by $2 billion. 

Experian’s Ascend Market Insights for November reports overall delinquency (30+ DPD) rose in November, with a 7.26% increase in delinquent units and an increase of 3.54% in delinquent balances month over month. Serious delinquency (90+ DPD) continued to rise month-over-month for all products except auto loans, which appear to be stabilizing. Credit card delinquency rates, on the other hand, rose sharply in Q3, landing at 5.3% and up more than 2% from the previous year. Notably, according to a Liberty Street Economics blog post examining the composition of newly delinquent credit card borrowers, the rise in credit card delinquency rates is broad across demographics, but is particularly pronounced among millennials and those with auto loans or student loans.

After months of increasing delinquency rates, it’s not surprising that charge-off rates are following. The charge-off rate for all consumer loans was 2.41% at the end of Q3, up from 1.32% a year ago. As for credit card debt, the charge-off rates clocked in at 3.79%, up more than a half point from Q2 2023 and up from 2.1% a year ago.

The savings rate fell to 3.8% in Q3, down from 5.2% in Q2, while consumer spending jumped by 4%. This spending helped drive up the quarter’s GDP growth rate, but less saving could be a sign of financial strain amidst nagging high prices. And the excess savings from the pandemic? Americans outside the wealthiest 20% of the country have run out of extra savings and now have less cash on hand than they did when the pandemic began, which could spell trouble for consumers in the event of an emergency or unexpected life event. About 116,000 consumers had a bankruptcy notation added to their credit reports in Q3, slightly more than in the previous quarter. And currently, approximately 4.7% of consumers have a 3rd party collection account on their credit report.

Consumer Sentiment on Financial Outlook Improves

The economy’s resilience seems to be encouraging for consumers, with Americans’ perceived likelihood of a recession in the next 12 months falling in December to the lowest level seen this year. In fact, the Conference Board Consumer Confidence Index® increased to 110.7, up from a downwardly revised 101.0 in November. The overall increase in December reflected more positive ratings of current business conditions and job availability, combined with less pessimistic views of business, labor market and personal income outlook over the next six months.

The Federal Reserve Bank of New York’s November 2023 Survey of Consumer Expectations supports the optimistic findings. The report found that median one-year ahead inflation expectations declined by 0.2 % in November to 3.4%—the lowest reading since April 2021. Combining economic optimism with a decline in expected spending, the result is a 0.2% decrease in the average perceived probability of missing a minimum debt payment over the next three months, which is good news for lenders.

Similarly, Deloitte’s ConsumerSignals financial well-being index, which captures changes in how consumers are feeling about their present-day financial health and future financial security based on the consumer’s own financial experience, increased to 101.4 in November, up from 99.1 last month and up from 97.6 a year ago. The overall takeaway is that many consumers are feeling better about their financial situations and are more optimistic about the future of the economy.

Preparing for Debt Collection in 2024

Optimism about the economy’s turnaround hasn’t hit wallets just yet—consumers are still feeling the financial pinch of the high costs of rent, groceries and other basics that haven’t started retreating to pre-pandemic levels. But that didn’t stop holiday shopping—U.S. consumers spent a record $9.8 billion in Black Friday online sales, up 7.5% from 2022. Cyber Monday numbers were even stronger—consumers spent $12.4 billion, up 9.6% from the previous year. And those figures don’t include the ​​118.8 million Americans who spent money at brick-and-mortar stores on Black Friday weekend. 

Today’s consumer is using more and different financial products to cover the cost of the holidays, and Buy Now, Pay Later (BNPL) was a big driver of purchasing power this year amidst elevated interest rates. BNPL purchases, which allow shoppers to buy items on short-term credit and frequently with no interest, also reached a record high on Cyber Monday, making up $940 million of the total online spending—an increase of 42.5% over last year. While a helpful product for consumers, BNPL can be tricky as it doesn’t show up on most credit reports and can be an invisible and unaccounted-for debt burden. 

Every year, an estimated one-third of American adults go into debt to pay for holiday expenses. Growing debt balances, stubborn interest rates and elevated prices are still a thorn for consumers, and contribute to their overall financial stability. For lenders, service providers and debt collectors, guaranteeing repayment will still be a challenge as we start into 2024. So what’s the best way forward in engaging customers in debt collection who are balancing expenses and a bit of a holiday shopping hangover? Here are some things to consider:

  1. Prepare for timely factors. Keep in mind post-holiday bills can make January a difficult month to collect from consumers. But tax season is almost here, when consumers’ refunds create a better scenario for repayment of past-due balances. Plan for this time accordingly and ensure your engagement strategy is in place before February. 
  1. Consider email deliverability. Just sending emails doesn’t guarantee your message will reach your customer. With inundated inboxes, your outreach strategy needs to include how to cut through the clutter and ensure successful email delivery of your customer communications. Learn more about deliverability, the most important debt collection metric you probably aren’t measuring, and how it impacts your debt collection efforts.

  1. Options are your way forward. If there’s one thing we’ve learned from our consumer interactions, including the 16.5 million we added in 2023, it’s that no two consumers are the same, and what works for one may not work for the next. That’s why options are so important—in communication channel, customer support method, and perhaps most importantly, in repayment. Give your customers options for engagement and payment (think partial payments, payment plans, etc.) and you’ll likely see better collection results and customer experience.

Q3 Industry Insights: Preparing for Credit Card Bills, Student Loans and Holiday Spending

By on October 10th, 2023 in Industry Insights

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:

  1. 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.
  2. 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.
  1. 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.

Q2 Industry Insights: Higher Monthly Expenses for Consumers, Regulatory Guidance for Financial Institutions

By on July 13th, 2023 in Industry Insights

With tumult in the banking industry in Q2 and inflation and economic stressors persisting, the financial outlook for American consumers remains uncertain. The ending of various pandemic-era benefits including the pause on student loan payments will impact consumers in the coming months. Student loan holders hoping for financial relief were disappointed in a Supreme Court decision that rejected President Biden’s plan to cancel more than $400 billion in student loan debt for millions of borrowers. Lawmakers are looking for other relief options, but in the meantime, many consumers will face higher monthly scheduled payments than they can cover, leading to delinquencies across credit types. If you’re a creditor or collector working with financially distressed borrowers, considering consumer situations and preferences when attempting to collect and employing digital strategies to boost engagement are more important than ever. 

Read on for our take on what’s impacting consumer finances and our industry, how consumers are reacting, and what else you should be considering as it relates to debt collection in 2023.

What’s Impacting Consumers and the Industry?

High inflation and interest rates hung around in the second quarter of 2023. Inflation continued to ease month over month in May, landing at 4%, which is still double the Federal Reserve’s target of 2%. The CPI rose 0.2% in June on a seasonally adjusted basis, after increasing 0.1% in May, according to the U.S. Bureau of Labor Statistics. The index for shelter accounted for more than 70% of the increase, with the index for motor vehicle insurance also contributing. 

In June, after 10 straight rate hikes, the Federal Reserve left the policy rate unchanged at the 5%-5.25% range, to allow time to see impacts from previous rate hikes. But “a strong majority” of Fed policymakers expect they will need to raise interest rates at least two more times by the end of 2023. Showing unexpected resilience despite higher interest rates, a late-June Commerce Department report showed the U.S. economy grew at a 2% annual pace from January through March as consumers spent at the fastest pace in nearly two years despite ever-rising borrowing costs.

In Q2, the pandemic-era benefit around Medicaid came to an end and has impacted more than 1.5 million Americans who lost health insurance coverage in April, May and June. Because only 26 states and the District of Columbia had publicly reported this data as of June 27, the actual number of people who lost coverage through the government’s main health insurance program for low-income people and people with certain disabilities, is undoubtedly much higher. The federal government has projected that about 15 million people will lose coverage, including nearly seven million people who are expected to be dropped despite still being eligible.

On the regulatory front, data protection is making headlines. Updates to the Gramm-Leach-Bliley Act (GLBA), the Safeguards Rule, provide financial institutions, including those in the accounts receivable management industry, with requirements on how to safeguard customer information, went into effect on June 9. The amendments lay out a more prescriptive recipe for the safeguards financial institutions must have in place around collecting, storing and transmitting consumer information. Several states have actively been considering and passing new legislation requiring additional policies, controls, and practices not only in the data security space but also for data privacy and data breaches.

Meanwhile, the Consumer Financial Protection Bureau (CFPB) published a Small Entity Compliance Guide covering the amendments to the Equal Credit Opportunity Act and Regulation B, requiring that financial institutions compile and report certain data regarding certain business credit applications, including examples that explain how the requirements should be applied. 

There were also a couple of notable court decisions impacting debt collectors last quarter. First, the 6th circuit court of appeals determined that one phone call under the Telephone Consumer Protection Act (TCPA) is enough to establish standing, meaning the suit is based on an actual or imminent alleged injury that is concrete and particularized and, for the plaintiff in Ward v. NPAS, Inc., to establish a concrete injury. 

Second, and in a victory for TrueAccord, the Northern District of Illinois showcased the benefits of digital collection as the court found that receiving an email about a debt is less intrusive to consumers than receiving a phone call. In the Branham v. TrueAccord opinion, the court found that unlike telephone calls, two unwanted emails are insufficient to confer standing and wouldn’t be “highly offensive” to the reasonable person.

Key Indicators and the Student Loan Predicament

According to the New York Fed’s Quarterly Report on Household Debt and Credit, total household debt increased in the first quarter of 2023 by $148 billion (.9%) to $17.05 trillion. Debt increases showed up across almost all categories, with larger balances for mortgages, home equity lines of credit, auto loans, student loans, retail cards and other consumer loans. Looking like an outlier, credit card balances were flat at $986 billion during Q1, but reading between the lines, this is the first time in more than 20 years that there hasn’t been a seasonal outright decline in that category.

And demand for more credit continues, which will drive household debt balances up farther. According to Experian’s June Ascend Market Insights report, new account originations were up 3.5% month over month with related balances up 7.7%. Breaking this down, auto loan account originations were up 0.7%, first mortgages were up 18.2%, while personal loans, HELOCs and second mortgages all grew significantly as well.

Indicators show that delinquency is here to stay. Experian reports that overall 30+ days past due (DPD) accounts showed a 0.4% increase month over month in May. While unsecured personal loan delinquency, which grew quickly in 2021 and 2022, has fallen for the fourth month in a row, this may be due to accounts progressing through delinquency – collections and charge-off rates for unsecured personal loans have grown to nearly 8% of balances. Auto loans, and particularly those in the subprime category, are seeing delinquency rates surpassing levels last seen during the Great Recession, coming in at 1.69% for 60+ DPD in Q1 2023.

Experian also reports that 1% of all consumer accounts rolled into higher stages of delinquency in April, which is in line with pre-pandemic norms and significantly higher than it was during the pandemic. Notably, 0.29% of accounts rolled into a lower delinquency status during May, a sign of collection effectiveness and of the relative financial health of delinquent consumers. This metric is still far below its historic norms and will be an important metric to watch as millions of consumers face higher monthly scheduled payments later this year tied to student loans.

After three years of relief from payments on $1.6 trillion in student debt under the CARES Act,  student loan debt is scheduled to begin accruing interest in September 2023, with payments due starting in October. 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. 

What’s more, research shows that student loan borrowers used extra space in their budgets during the pause to increase their leverage. Rather than paying down other debts, those eligible for the pause increased their leverage by 3% on average, or $1,200, compared with ineligible borrowers. According to the CFPB, as of September 2022, 46% of student loan borrowers had scheduled monthly payments for all credit products (excluding student loans and mortgages) that increased 10% or more relative to the start of the pandemic. 

The CFPB also reports that approximately 2.5 million student loan borrowers already had a delinquency on a non-student loan as of March 2023. That’s an increase of around 200,000 borrowers since September 2022, and that’s still without a monthly student loan payment obligation. This signals that many borrowers aren’t or won’t be in a financial position to repay or will face delinquencies on other loans in order to do so. For a data-driven look into this topic, read our report, “Consumer Finances, Student Loans and Debt Repayment in 2023”

Consumers Feel a Pinch but Remain Optimistic

As daily life continues to be more expensive for everyone, PYMNTS’ research finds that 61% of consumers lived paycheck to paycheck in April 2023, similar to the year prior. And the data shows that consumers in urban centers are especially feeling the financial crunch, likely due to a connection to cost of living, with 7 in 10 living paycheck to paycheck. Wealthier consumers comprise a growing portion of the paycheck-to-paycheck cohort, with the share of consumers annually earning more than $100,000 who live paycheck to paycheck increasing 7% from April 2022.

The US personal savings rate hovered at 4.6% in May, which is double last year’s record lows but still down significantly from pre-pandemic averages. Easing inflation seems to be improving consumers’ financial outlook, with fewer respondents citing concerns around savings levels, delaying large purchases, and worsening personal financial situations. However, the number of consumers feeling anxious about their job or employment situation steadily increased to 25% in May, up from 18% in February. 

According to the Federal Reserve Bank of New York’s May 2023 Survey of Consumer Expectations, the average perceived probability of missing a minimum debt payment over the next three months increased by 0.7% to 11.3% in May. The increase was largest for respondents below the age of 40 with no more than a high school education, and those with a household income below $50k. Additionally, households’ perceptions and expectations for credit conditions and their own financial situations all deteriorated slightly.

For Debt Collection, Digital is Now a Must-Have

While consumers balance budgets amid high costs of living, more and more are using streamlined, digital payment methods. New studies show consumers are embracing the convenience of digital payments via payment portals even for healthcare bills, noting how it can minimize pain points in the payments process. Today, 9 out of 10 customers want an omnichannel experience with seamless service between communication methods, and transacting where it’s convenient for them, on mobile devices, is even better.

According to the Pew Research Center, reliance on smartphones for online access is especially common among younger adults, lower-income Americans and those with a high school education or less. In fact, 87% of TrueAccord consumers visit our web portal from their mobile devices and tablets, not their desktop computers. Choosing not to engage via digital methods can hurt vulnerable populations of consumers who primarily conduct most of their affairs digitally. 

If your business has been relying on calling alone for customer communications, it’s time to shift gears to a more effective way of maximizing repayment and conversion rates in a challenging financial environment. For lenders or collectors engaging with distressed borrowers, here are ways digital can boost your efforts:

1. Cost-effective customer communications at scale. When almost all communications with consumers can happen electronically via email and SMS with no human interaction, the cost of agents, who now only manage inbound emails or calls from already engaged customers, is reduced. Lenders that have implemented digital-first solutions have seen their cost of collections fall by at least 15%.

2. Online payment portals. When consumers can make payments online when it’s convenient for them, they’re more likely to repay. Add options like payment plans and flexible payment days to appeal to distressed borrowers and see repayment and liquidation rates improve.

3. Code-based compliance. When compliance is coded into an algorithm that helps make decisions on customer engagement in debt collection, you can ensure that all digital communications fall within federal and state laws and regulations. Compliance built into the code can help prevent costly mistakes especially with the complex patchwork of regulations.

Q1 Industry Insights: Economic Stressors Persist while Pandemic-era Benefits End

By on April 5th, 2023 in Industry Insights

It’s tax season again, which can mean tax refunds for consumers that have historically been leveraged to stabilize finances or pay down debt. But with inflation and economic stressors persisting into the new year, many consumers are conflicted on their financial outlook and spending behavior is hard to predict. With uncertainties about how the end of various pandemic-era benefits will impact consumers, it’s more important than ever for creditors and collectors to implement strategies that consider consumer situations and preferences when attempting to collect.

Read on for our take on what’s impacting consumer finances and our industry, how consumers are reacting, and what else you should be considering as it relates to debt collection in 2023.

What’s Impacting Consumers and the Industry?

High inflation and interest rates persisted in the first quarter of 2023. While inflation eased for an eighth straight month in February at 6%, price increases rose sharply again on a monthly basis – prices grew 0.4% following a 0.5% increase in January, driven by higher gasoline and rent prices. In response, the Federal Reserve continued its battle against high inflation in March by raising its key interest rate by another .25% despite concerns around the turmoil that has shaken the banking system, landing it at 4.75-5%.

At the beginning of March, the federal government ended pandemic-era payments for low-income families on the Supplemental Nutrition Assistance Program (SNAP), causing nearly 30 million Americans to lose increased food stamp benefits. The extended payment boost was credited with keeping 4.2 million people out of poverty, with the average household expected to lose upwards of $95 per month in benefits with the program’s end.

In early Q2, another pandemic-era benefit around Medicaid will come to an end that will impact millions of consumers over the coming months. An estimated 15 million low-income Americans who were able to keep Medicaid coverage during the pandemic without needing to renew coverage or despite no longer qualifying will find themselves without health insurance. The Department of Health and Human Services estimates that in the end, more than 5 million children will have lost Medicaid, and predicts that Latino and Black beneficiaries will be disproportionately removed.

On the regulatory front, the Consumer Financial Protection Bureau (CFPB) hit the ground running for 2023 with new guidance on subscription fees, proposed rulemaking on non-bank company terms and conditions, and issued an annual report sizing up the three credit reporting companies. Directly impacting creditors and debt collectors, a January ruling from the District Court of Puerto Rico found that sending debt collection communications prior to any knowledge of a debtor’s bankruptcy filing is not a violation of the Fair Debt Collection Practices Act (FDCPA).

For businesses using pre-recorded messages to contact consumers, the Federal Communications Commission (FCC) published a new rule specifying that to be exempt from the Telephone Consumer Protection Act’s (TCPA) consent requirements, callers are limited to three pre-recorded non-commercial, non-telemarketing, or non-profit calls per 30 days, and would need to include an opportunity to opt out of prerecorded calls as part of the message. The final amended rule will go into effect on July 20, 2023.

Meanwhile, eyes are on the Big Apple as the New York Department of Financial Services (DFS) and the New York City Department of Consumer and Worker Protection are simultaneously engaged in amending their consumer debt collection rules. The DFS amendments would be an overhaul of its existing regulations and would include new debt types, while both amendments would introduce new disclosure requirements and additional restrictions on communications – specifically extending the existing requirement for direct consent to send email and text messages.

Key Indicators and a Heavyweight Court Decision

According to the New York Fed’s Quarterly Report on Household Debt and Credit, total household debt increased in the fourth quarter of 2022 by $394 billion (2.4%) to $16.90 trillion. Balances now stand $2.75 trillion higher than at the end of 2019, before the pandemic. In the same time period, the Federal Reserve reported that household net worth rose 2% to $147.71 trillion, driven by the value of equities holdings increasing $2.7 trillion offsetting a drop in real estate values by about $100 billion.

Consumers trying to make ends meet have continued turning to credit cards and other credit types to bridge the income to expense gap. According to the Federal Reserve Bank of New York, U.S. consumer credit card debt has increased to nearly $1 trillion. Credit card balances jumped more than $60 billion over Q4 2022, lifting the total amount of U.S. credit card debt to an all-time high of $986 billion, the report found. Home equity loans and lines of credit continue to be an attractive option to homeowners, though high interest rates may make opening a new account less appealing in 2023.

Diving deeper into credit cards, Experian’s March Ascend Market Insights report found that credit card balances, while slowing slightly from previous months as seasonally expected, were up 18.8% year over year in February 2023. Additionally, the report found that there were 7.2% more open credit cards in February than there were a year prior. These balances and new cards coincide with an increase in interest rates, raising the stakes for delinquent accounts. According to a January 2023 Bankrate survey, 35% of Americans carry credit card debt from month to month, up 6% from 2022.

And delinquency is trending. Experian also reports that early-stage delinquency is nearing or exceeding pre-pandemic levels for most credit products, with exceptions for first and second mortgages, Home Equity Lines of Credit and student loans. 30+ day past due accounts showed a 2.12% increase month over month in February, while 90+ days past due unit delinquencies for auto loans and personal loans are higher than they were in 2019. Additionally, roll rates show 1.06% of consumer accounts rolled into higher stages of delinquency in February. Revolving credit utilization continues to slowly increase, as well. The same month, 63% of consumers had utilized 20% or less of their revolving limits, while 21% of consumers had utilization of 60% or more.

The student loan forgiveness debate continues into 2023 as the nearly 19% of Americans with student loans wait to see how the case shakes out with the Supreme Court. If successful, many consumers will see their overall debt burden decrease. If unsuccessful, those consumers will see no reduction in their debt and will be responsible for resuming payments that were deferred or went into forbearance during the pandemic. A ruling is expected sometime in Q2 2023.

While student loan delinquency rates have been almost nonexistent since payments were paused, the delinquencies in mortgages, auto loans and credit cards have been trending back to pre-pandemic levels, which doesn’t bode well for student loan holders with other debts. When student loan payments resume, consumers will have to prioritize debt repayment, leading to higher delinquency rates for other debt types. For a data-driven look into this topic, read our latest report, “Consumer Finances, Student Loans and Debt Repayment in 2023”

Consumers Sending Mixed Signals About Finances

As the cost of living remains high, 62% of Americans said they are living paycheck to paycheck in February, up from 60% the month prior, according to the latest Paycheck to Paycheck Report from PYMNTS.com and LendingClub. According to Deloitte’s State of the Consumer Tracker, consumers are feeling slightly more optimistic about their personal finances and the direction of the economy, but are also signaling stronger intentions to save versus spend. 

But Bankrate’s 2023 Annual Emergency Savings Report shows that growing debt is hurting consumers’ ability to save, with 36% of Americans reporting having more credit card debt than emergency savings, the highest on record since 2011. The report shows that consumer concern about finances is high, with 68% of people surveyed worried they wouldn’t be able to cover their living expenses for one month without their primary source of income, including 85% of Gen Zers — the most concerned of any generation. Unsurprisingly, 74% surveyed said economic factors, inflation and changes in income and employment are causing them to save less right now.

What Does This Mean for Debt Collection?

So far in 2023, the economic landscape isn’t cutting consumers any breaks. With persistently high inflation and interest rates, the impending threat of a recession and a number of pandemic-era benefits coming to an end, consumer finances will likely be impacted and stretched in myriad ways this year. For lenders or collectors engaging with distressed borrowers, here are a few things to keep in mind:

1. Meet consumers where they are, compliantly. While regulations and compliance impacted both phone calls and digital channels in some way in 2022, our takeaway is that a one-size-fits-all approach to debt collection communication won’t work at scale in 2023. By using an omnichannel approach, collectors are more likely to engage a customer on their preferred channel and open the door for engagement. For a closer look at what using an omnichannel approach means in debt collection, check out our latest eBook.

2. Give consumers agency to engage on their own time. What do emails and online payment portals have in common? Consumers get to decide when and where they use them. Just because a call center operates from 9-5, doesn’t mean consumers do. Remember that everyone’s situation is different, including when they can (or want) to address their debt. 

3. Give consumers flexibility on repayment time and terms. Higher monthly financial obligations make it harder for consumers to absorb unexpected expenses or carve out funds for debt repayment. Patience will be key in engaging distressed borrowers – give them payment plan options for when and how much they repay, which could mean smaller payments, shifting payments to align with their cash flow schedule or skipping a payment without penalty so they can get back on track.

Q4 Industry Insights: Economic Challenges, Big Unknowns and Worried Consumers

By on January 17th, 2023 in Industry Insights

In 2022 we started to see the toll inflation and economic stressors are taking on consumer finances. Inflation remained a top concern as the Fed tried to rein it in with rate hikes, and the higher costs and interest rates may have caused consumers to stretch their budgets as far as possible (or farther – holiday spending, anyone?), leading to a precarious financial outlook in 2023. As we start the new year with the continued threat of a recession and a shrinking employment market, building strategies that take consumer situations and preferences in mind is key, and of course, finding ways to work with distressed borrowers is the best path forward.

Read on for our take on what’s impacting consumer finances, how consumers are reacting, and what else you should be considering as it relates to debt collection in 2023.

What’s Impacting Consumers?

Compounding inflation and higher interest rates continued to be hard on consumer finances in Q4 of 2022. Inflation has been slowing, but still came in up 6.5% year over year in December, dropping 0.1% from November and driven by lower fuel costs. Food and housing inflation continue to rise at 10.1% and 8.1% annually respectively, and gasoline prices in January have already been rising. Interest rates sit between 4% to 4.25% after the latest 50 basis point rate hike, and the Fed projects raising rates as high as 5.1% (raised from a 4.6% projection in September) before ending the campaign to beat inflation.

According to Moody’s, while higher-income households saved more during the pandemic and are far less sensitive to rising prices, lower-income families are bearing inflation costs unequally and drawing down excess savings more quickly. Households earning less than $35,000 annually saw their excess savings shrink the most out of all income cohorts — their excess savings depleted by nearly 39% from Q4 2021 to Q2 2022 and was expected to run out by the end of the year.

Tasked with making ends meet and running out of savings, many consumers have turned to credit cards for extra funds. Credit card balances continued to climb for the ninth month in a row in November, up 16.9% year over year. According to Experian’s November Ascend Market Insights, there were 6.2% more open credit cards in October than there were a year prior and 11.1% more than at the end of October 2019 (pre-pandemic). Read: more credit cards with higher balances. 

And many of those credit cards belong to subprime borrowers who are more financially at risk to inflationary pressures and unexpected expenses. Equifax data reported by Bankrate shows that about 3.95 million traditional credit cards had been issued to subprime borrowers (consumers with a VantageScore 3.0 below 620) in Q1 2022, jumping by 18.3% and representing an overall credit limit of $3.29 billion, compared with the same period in 2021. And those balances will get more expensive as interest rates go up. According to Bankrate, credit card rates have risen to the highest levels ever since it began measuring the data in 1985, with today’s average annual credit card rate at 19.42%.

Credit cards aren’t the only option – consumers have other ways to access credit like personal loans and home equity lines of credit (HELOC). But these products are showing similar use trends, too. TransUnion reports that as of Q3 2022, 22 million consumers had an unsecured personal loan, the highest number on record, while total personal loan balances in the same quarter continued to grow, reaching $210 billion – a 34% increase over last year. Similarly, Experian reports that HELOC balances grew by 1.5% after increasing over 9 of the last 12 months. With HELOC originations down, the increase in balances is attributable to homeowners tapping into existing lines of credit as the cost of living rises.

Higher prices didn’t stop the holiday shopping – holiday sales rose 7.6% last year despite inflation, and much of that was online. Consumers spent a record $9.12 billion online shopping during Black Friday and another record $11.3 billion on Cyber Monday. Buy Now, Pay Later (BNPL) products, which help consumers with flexible payment plans, played a big role. From Black Friday through Cyber Monday, BNPL payments through leading providers jumped 85% compared with the week before, according to the most recent data from Adobe, with corresponding BNPL revenue rising 88% for the same period.

Key Indicators and a Big Unknown

According to the New York Fed’s Quarterly Report on Household Debt and Credit, total household debt increased by $351 billion (or 2.2%) during the third quarter of 2022. Household net worth, which showed a record loss in Q2, continued to decrease in Q3 by another $392 billion (.3%). The value of equity holdings dropped $1.9 trillion and the value of real estate held by households only increased $820 billion.

Financial pressures mean consumers have less, if any, to save. The U.S. savings rate fell to a 17-year low in October, with the personal savings rate as a share of disposable income dropping to 2.3%. The latest Paycheck-to-Paycheck Report from PYMNTS and LendingClub shows that in November 2022, 63% of U.S. consumers were living paycheck to paycheck, a 3% rise from October. Spending more and saving less means many Americans may be at risk for financial hardship in 2023. 

Unsurprisingly, delinquencies are on the rise. According to Experian’s November Ascend Market Insights, there have been increases in 30+ days past due unit delinquency rates for six consecutive months, with those accounts showing a 3.28% increase month over month in October. This goes for both early-stage delinquencies, which are nearing or exceeding pre-pandemic levels for automobiles and unsecured credit products, and 90+ days past due delinquencies for auto and personal loans (higher than pre-pandemic). Experian’s data on overall roll rates also show that 1.32% of consumer accounts rolled into higher stages of delinquency in October 2022, representing the highest level of that metric since February 2020. 

But delinquencies haven’t peaked yet. TransUnion’s 2023 forecast, based on its latest Consumer Pulse Study, projects that both credit card and personal loan delinquencies will rise in 2023 from 2.1% to 2.6% and 4.1% to 4.3% respectively. If those projections come to bear, it would represent a 20.3% year-over-year increase in delinquent accounts. According to the report, Americans took out a record $87.5 million in new credit cards and $22.1 million in personal loans in 2022.

The big unknown around student loans will impact many consumers for better or worse. As President Biden’s student loan forgiveness program meets legal challenges, tens of millions of Americans wait to see what it means for them. If successful, many consumers will see their overall debt burden decrease, which may help stabilize finances. If unsuccessful, those consumers will see no reduction in their debt and will be responsible for resuming paused payments, which may further stress their financial situation. We’ll find out sometime in Q1 or Q2 of 2023, but the result will likely have a big consumer impact either way.

Consumers Are Worried About Inflation and Credit Cards

How are consumers feeling about the economic landscape and their personal finances? TransUnion’s Consumer Pulse Study reports that 54% of consumers said their incomes weren’t keeping up with inflation, while 83% said that inflation was one of their top three financial concerns for the next six months. But despite concerns about rising prices, more than half (52%) of Americans said they felt optimistic about their household finances for the upcoming year, even though 82% of consumers believe the U.S. is currently in or will be in a recession before the end of 2023.

All those new credit cards are causing some concern for consumers, as well. An early December survey from U.S. News & World Report shows that more than 8 in 10 Americans who have credit card debt are experiencing anywhere from a little to a lot of anxiety about it. An overwhelming majority of respondents (81.6%), all of whom have credit card debt, express some degree of stress about it – from a little bit (33.1%) to a medium amount (27%) to a lot (21.5%). The combination of rising costs and insufficient income was the most common reason given for having credit card debt, with unexpected expenses a close second.

What Does This Mean for Debt Collection?

As consumers wake up in 2023 with a holiday shopping hangover and bills to pay, the economic landscape isn’t going to cut them any breaks. Consumers will have to prioritize what they can pay and when, which means repaying some debts may get moved to the back burner while food, housing and other basic needs are addressed. Will delinquencies rise as expected? Will consumers turn to more credit cards or BNPL for a stopgap? What happens to overall debt burden with all the unknowns? We’ll soon find out, but as a lender or collector, here are some things to consider:

Make it easier to engage. On their preferred channel, at a convenient time, with all the information they need is the best way to engage consumers. Bonus points if they can self-serve on their own time.

Make it easier to pay. Paying in full may be impossible for many people with tight budgets, and offering flexible payment plans or removing minimum payment requirements may make debt easier to tackle. Self-serve online payment portals are a win/win for your business and your customers.

Make it more empathetic. Balancing finances and being in debt is hard, and people are doing their best to keep up. Understand that you may not recover past due balances immediately and it may take time and patience. In addition to when and where, reconsider how you’re speaking to consumers and you may be surprised at how empathy drives engagement. Need proof? See how customers responded to TrueAccord’s digital approach to debt collection in our 2022 Year in Review.

Q3 Industry Insights: Economic Challenges, Compliance Considerations and a Silver Lining

By on October 12th, 2022 in Industry Insights

As we roll toward the end of 2022, the economic landscape continues to weigh on consumers, and companies who lend to or service those consumers are preparing for what’s to come. Simultaneously, regulatory activity in the debt collection space has also been on a roll as organizations try to make sense of how technology can (and should) be used to innovate the industry.

Read on for our take on what’s impacting consumer finances, how consumers are reacting, and what else you should be considering as it relates to debt collection in 2022 and beyond.

What’s Impacting Consumers?

It’s a no-brainer that inflation and higher interest rates are hard on consumer finances, and unfortunately, we’re not seeing them come back down to earth very quickly. These two factors compound to make it more expensive to be a consumer and harder to acquire credit needed to make ends meet. A report by Bank of America found that a large majority of workers (71%) feel their pay is not keeping up with the cost of living.

And that cost keeps rising. The consumer price index rose 0.4% in September, up 8.2% from a year ago, driven by increases in food and shelter costs, and despite falling gas prices. This unrelenting upward-cost march brings the threat of financial instability to many Americans as their money doesn’t get them as far as it used to. According to a recent LendingClub report as of August, 60% of Americans were living paycheck to paycheck, up from 55% last year. 

Interest rates keep going up, and they haven’t hit the top yet. In September, the Federal Reserve announced the third consecutive rate hike of 75 basis points (the fifth rate hike of the year) and signaled additional aggressive hikes ahead, landing the federal interest rate at 3-3.25%. These interest rates can cause economic pain for millions of Americans by increasing the cost of borrowing for things like homes, cars and credit cards.

Household net worth, which was previously holding steady, proved to be a lagging indicator that has now corrected and caught up with the market. The value of equity holdings dropped $7.7 trillion and the value of real estate held by households only increased $1.4 trillion, softer than recent increases as ​​higher borrowing costs suppress demand. The Fed’s Financial Accounts data issued in September reflected the largest quarterly loss in household net worth ever at a staggering $6.1 trillion in the second quarter. This comes after falling $147 billion in the first quarter, but the second consecutive drop was much more telling.

According to the New York Fed’s Quarterly Report on Household Debt and Credit, total household debt increased by $312 billion (or 2%) during the second quarter of 2022, and balances are now more than $2 trillion higher than they were before the pandemic.

Indicators and a Silver Lining

With prices increasing faster than income can keep up, consumers are covering the delta by pulling money from savings or putting expenses on credit cards, and it’s showing – consumer debt, including credit cards, is at an all-time high for the bottom 90% of US households. Credit card balances saw their largest year-over-year percentage increase in more than 20 years, adding $46 billion in the second quarter. High interest rates make credit cards a slippery slope for debt balances, and the latest interest rates have been over 20% for those with “good” or “fair” credit (FICO labels “good” credit scores between 670-739 and “fair” between 580-669).

Rising credit card balances aren’t the only thing to watch. Looking at month over month delinquency rates shows that consumers’ ability to repay is diminishing and they may be losing control over their debt. According to Experian’s Ascend Market Insights Dashboard from August, the end of Q2 saw 0.91% of consumer accounts rolling into higher stages of delinquency in July 2022, an increase from the month prior. There was also an uptick in 30+ delinquency rates in July, with 30+ day past due accounts increasing 7.33% month over month. And, collections and charge off rates for auto leases, personal loans and bank cards are higher than pre-pandemic.

Amidst all the economic gloom, there was a silver lining for many borrowers in the form of student loan forgiveness. In August, President Biden announced a student loan forgiveness of up to $10,000 for borrowers (or up to $20,000 for Pell Grant recipients). The New York Fed estimated that forgiving $10,000 per borrower would eliminate student debt for 11.8 million borrowers, or 31% of the total number. 

While this forgiveness may impact those borrowers significantly through credit score increases or stronger balance sheets, it likely won’t have as much impact on borrowers with higher balances as monthly obligations will remain. This is an ongoing initiative that is subject to change, and in the meantime, the COVID-19 pandemic-related program that paused federal student loan payments will end at the end of this year. Any borrowers with remaining balances after debt forgiveness must start making payments again in January.

Increased Regulatory Activity

In addition to announcing that they are mobile-first to align with consumer use trends, the Consumer Financial Protection Bureau (CFPB) has been busy this quarter with initiatives to protect consumers including around the Unfair and Deceptive Acts and Practices Act (UDAAP), credit reporting, and a closer look at Buy Now, Pay Later (BNPL).

Data and tech are a key focus. In August, the CFPB first announced that digital marketers who are materially involved in developing content strategies for businesses subject to CFPB regulation can face UDAAP liability for unfair, deceptive acts or practices and other violations. The very same day, they took action against a financial company for using a faulty algorithm that caused consumers to overdraft their accounts – underscoring their interest in “black box” algorithm decisioning. The next day, the CFPB published a circular about requirements to safeguard consumer data, specifically citing practices that “are likely to cause” substantial injury like inadequate data security measures.

And data concerns extend into BNPL. After first opening an inquiry into BNPL in December 2021, the CFPB in September issued a report that identified several competitive benefits of BNPL loans over legacy credit products, but also identified potential consumer risks: discrete consumer harms (i.e., a requirement to use autopay), data harvesting (i.e., lenders’ use of consumer data to increase the likelihood of incremental sales), and borrower overextension.

While the CFPB supports innovation in financial services that benefits consumers, their recent announcements make it clear that organizations that do not protect consumer data and use it fairly will be in violation of the UDAAP. Lenders and debt collectors should keep an eye on this area as the CFPB continues to examine and form opinions on data and tech in consumer financial services.

Also noteworthy in debt collection regulations: In September, the U.S. Court of Appeals for the Eleventh Circuit dismissed the Hunstein opinion, which is big news for the industry. While debt collectors initially breathed a sigh of relief, there might be more to come here in state courts. Debt collectors should proceed cautiously when changing their policies, processes and procedures in light of this ruling.

What Can You Do?

So here we go into Q4, or as many consumers see it, the spending season. Will holiday spending take a huge blow from the challenging financial landscape? Will consumers rely even more on credit cards or BNPL to help cash flow and spend just as much? We’ll soon find out, but as a lender or collector, there are steps you can take to prepare:

Make sure your practices are compliant. Compliance in debt collection is a huge undertaking and will continue to evolve, and the patchwork of federal, state and regional guidelines may get messier. For a good snapshot of what compliance looks like today, check out our Collections & Compliance page.

Cater to the distressed borrower in collections. Cash-strapped consumers will need affordable options if you hope to recover past-due debt. This could be options for longer payment plans for more affordable installments, deeper settlements for payment plans, ability to “pay what you can” toward your debt, or removing minimum payment requirements.

Remember that consumers are humans. With feelings, problems, lives and a whole lot of other financial obligations. Engaging with distressed borrowers can be difficult, especially when they aren’t able to pay. Kindness, patience and understanding will go a long way in these efforts. Consider a humane, digital-first approach to align with their preferences. TrueAccord can show you how.