Author: Mark Ravanesi

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.