With a recession on the horizon, the landscape for financial institutions will become more difficult for the rest of 2022 and into 2023. Rising delinquencies, tighter margins driven by an inverted yie...
Over the past several months, I've had the opportunity to speak with several leaders in the consumer credit and collections industry. In addition, I've scoured the 2021 TransUnion Consumer Credit Forecast and analyzed the Cox Automotive Forecast. Based on that information, as well as conversations I’ve had with financial institution leaders, here is what I expect to see in 2021:
When it comes to auto loan portfolios, lenders are going to focus on originating low-risk loans with credit profiles in the prime and super prime area. In addition, used car values are expected to increase. As a matter of fact, in mid-March we saw used car values increase by 3.74% over the same period of February, according to Manheim. Overall, delinquencies are expected to remain relatively flat.
Throughout 2021, we expect to see more of what we saw in 2020. While there may be some concerns regarding loans and loan-modification programs, the industry leaders I’ve spoken to don't seem to think loan modification is going to have a significant impact on delinquencies because by and large, these credit union leaders have always been focused on their philosophy of ‘people helping people.’ So, whether they offered their borrowers extensions, reduced loan payments, reduced rates, etc., they expect to maintain loyalty from their account holders because there is already a strong foundational relationship. And while they expect they're going to see some delinquency, it certainly won’t be what they had initially anticipated as it relates to credit card portfolios. With credit underwriting standards tightening, balances are expected to continue to decline.
Declining credit card balances have been a consistent theme for several months—even prior to the pandemic. Severe delinquency is expected to decline. It's expected to come in around the 1.3-1.5 range. Interestingly enough, expectations are that card originations will increase for the year. As it relates to consumer confidence, the consumer confidence index is trending in the right direction. In February 2020, we were at 100.2; the low during the pandemic in May 2020 was 97.6, and then February 2021, we were at 98.7. I’m excited to see the Consumer Confidence Index trend upward; it’s certainly in the right direction!
The unemployment rate in March 2021 was reported at 6%, compared to 4.4% in March 2020. During the height of the pandemic, there was a high of around 15%, so we're certainly seeing an improvement in unemployment numbers. There were 916,000 new jobs added in March 2021, compared to March 2020, when we lost more than 700,000 jobs.
The stimulus package, tax season, and the Payroll Protection Program have all proven to help keep consumer delinquencies low. All in all, we’re seeing very positive trends up to this point, and I suspect overall delinquencies should remain relatively flat for 2021.
When you know where we’ve been, and generally what we can expect to happen from an economic and delinquency standpoint, it becomes easier to plan ahead and build a strong roadmap. Based on the information I shared above, here are a few projects I recommend you consider for your roadmap:
Data-Driven Collections Strategy
The first thing I think you should consider is the importance of understanding your data. Start by creating a data-driven collection strategy. There are a significant number of benefits for leveraging data in your collections strategy, one of which is that it will allow you to prioritize your accounts. Based on this prioritization, you can determine the appropriate collection strategies. Likewise, you can align your agents’ skillset with the proper account. Using a data-driven collections strategy allows you to optimize your operating efficiencies.
You can accomplish this in a couple of ways:
Leverage propensity to pay or recovery scores from TransUnion, Experian, Equifax, or FICO. These organizations all offer off the shelf scores that give your financial institution insight into how likely it is that a borrower will pay their bill.
You can actually go a step further if you have ample data at your fingertips. You can create custom-built behavior scores to further refine those off-the-shelf scores. One thing that's growing in popularity is leveraging machine learning to better understand a borrower’s propensity to pay. Machine learning is an application of artificial intelligence that uses cognitive learning methods to program and discover hidden patterns in the data. It allows you to really refine your collection strategies by identifying borrower payment preferences. If you bring on a third-party to assist with your collection efforts, you can leverage their reporting and continue to refine your data and create additional process efficiencies, as well as identify low-, medium-, and high-risk accounts.
Omni-Channel Communication Strategies
Omni-channel communication should absolutely be on your roadmap. This includes texting, email, IVR, dialers, live agents, ringless voicemail messaging, and even direct mail campaigns. When it comes to collecting on delinquent accounts, there is not a one-size-fits-all solution. I know texting is the bright, shiny new toy—and it is definitely a great tool—but it can't be the only tool.
It’s important to leverage all of these channels because every borrower and every loan portfolio is different. If you can use your data to better identify preferences on how people like to be communicated with, you can really refine your collection strategy and maximize your contact and collection rates.
To summarize, your roadmap should include capturing your data, leveraging that data, and finally, having the appropriate communication channels to execute your collection strategies.
Jeff Mortenson is VP/client relations for AutoPilot® services. Jeff is primarily responsible for client relations surrounding SWBC's financial institution group's AutoPilot services; a suite of risk and account management services designed for financial institutions that want to more effectively manage the way they interact with consumers.