The Future of Collections
Over the last two decades, the way consumers interact with the world has shifted dramatically. Here are a few examples from non-financial industries:
- In 2006, digital music sales accounted for ~17% of all music sales. In 2016, digital music sales accounted for ~80% of the market.
- In 2003, only ~2% of American adults lived in a wireless-only home. By 2013, that number had reached nearly 40%.
- In 2011, 35% of American adults owned a smartphone. In less than five years that number nearly doubled, reaching 68% by mid-2015.
- In 2004, Blockbuster had 9,000 stores worldwide and nearly $6BB in annual revenue, today…well, you get the point…
For the banking industry, adoption of more advanced “digital” capabilities to meet new consumer expectations has seemingly been a bit slower, but has gained pace over the last several years. This is due partly to the emergence of non-bank “FinTech” competitors, but is also significantly shaped by the overall change in consumer expectations from non-financial industries.
Banks have invested billions of dollars into their digital servicing capabilities to maintain parity with other industries, but we have seen less investment and change occurring in collections organizations – outbound phone-based dialing and written communications are still the dominant strategies when customers become delinquent. And while it is true that collections tactics have certainly changed in recent years, becoming less aggressive in light of regulatory pressures, many organizations’ strategies have been fundamentally the same for quite some time. However, we know this will change – it is not a matter of if, but a matter of when.
Factors Contributing to the Future of Collections
Three core factors are likely to shape the future of collections: Customer Expectations, Technology, and the Regulatory Environment.
Likely the most obvious of the three – customer expectations have changed. Customers expect convenience, a driving factor behind the increasing number of transactions completed via digital and mobile channels, so why would collections be any different? If you work at a financial institution, you are likely to see this trend by looking at your originations or customer services functions. How many paper or phone applications are you receiving today compared with a decade ago? How about inbound calls to check balances?
We have always viewed collections as a marketing function – that is, what can you do to sell your customer on continuing the relationship and maintaining payments even during tough times? With today’s customer expectations, collections organizations who can reach out to customers in a way they want to be contacted, with offers that are tailored to their unique situation, are those who will maintain relationships and obtain payments.
To illustrate the impact of convenience further, one organization that implemented email campaigns within collections saw that 93% of payments generated from that campaign occurred within 48 hours of sending the email – indicating that email activity had a direct impact to customer payment behavior. For that same population included in the campaign, the average late-stage payer had over 48 contact attempts prior to paying on the web.
The most significant change in technology that will impact the future of collections is the way telephones are used. In addition to the trends in smartphone and landline usage outlined in the introduction, caller-ID is now commonplace, minimizing the effectiveness of outbound dialing. Further, more and more transactions are taking place via mobile devices. According to a Federal Reserve report, 39% of all mobile users made a mobile payment in 2015. This number is expected to rise, making it a channel where collections organizations will want to capitalize in the future.
Perhaps the newest development that will push the collections industry to more quickly embrace a fresh approach is the regulatory environment. At the highest level, we have seen an increase in consumer-focused activity and regulation at the state-level with Attorneys General, more directly at the federal-level with the creation of the Consumer Financial Protection Bureau (CFPB), and internationally in the UK with the establishment of the Financial Conduct Authority (FCA). Both the CFPB and FCA are generally focused on customer experience, consumer outcomes and doing the “right” thing for the customer. If outbound dialing and written communications are not the best way to help cure a customer when they have fallen delinquent, we would expect both these regulators to be in support of alternative communications channels as charging-off debt is a poor outcome for the consumer and the financial institution.
However, more specifically in the US, two federal regulations (one existing, one pending) are also shaping the future of collections.
First, TCPA, which prohibits auto-dialing to mobile phones without prior consent. Thus, as landline use falls and mobile-only households rise, financial institutions will be taking on an increasing amount of inherent risk as they continue to place outbound calls. All this occurs while costs to place outbound calls has risen in light of TCPA compliance standards.
Second, the CFPB released their Advanced Notice of Proposed Rulemaking (ANPR) for third-party collections in July of 2016. While they have delayed the ANPR for first parties until a later date, much speculation has been stoked that a contact frequency limit will eventually be implemented. The proposed rule would cap the number of outbound calls a collector could make at six per account per week (if the collector does not have confirmed contact – this cap would be lower if they do have confirmed contact). It is also worthy to note that the CFPB’s ANPR is on top of existing state laws already implemented to limit contact attempts. For example, Massachusetts state law limits creditors and collections agencies from calling a consumer at home more than two times for each debt in a given seven-day period. We have seen this in other states, which indicates outbound dialing’s effectiveness is already being reduced, regardless of where the CFPB lands with their proposal.
However, if contact attempts were to be capped at the federal level for first parties, the effectiveness of existing collections strategies would be severely impacted, making alternative approaches far more attractive.
So, What Does the Future Look Like?
The factors outlined in this blog paint a clear picture that the future of collections will be different than it is today. But what will the future hold? Here is what we know:
- The tools and channels used in originations and servicing will need to be incorporated into collections – this includes Email, Chat, Text, Mobile, Web, and Video at a minimum.
- Contact/offer strategies will be more complex and tailored to each customer’s unique value proposition to drive action. For example:
- A customer who has a hectic life and forgets to make payments may simply need to receive a push notification on their smartphone to remind them to make a payment. Value proposition: make life easy.
- Customers who are overwhelmed with debt and have been avoiding the bank have often demonstrated responding to digital channels. The power of enabling customers to address their financial obligations without person-to-person contact is significant. Value proposition: a different form of make life easy.
- Incentives are powerful: A customer may react to a $20 account credit incenting them to place a call into the collections group to learn more about their full debt burden and discuss ways the bank can put them in a program to help. This may be best communicated via email or text.
Value proposition: need help now.
- The collections process will include more customer education and support tools (e.g. checklists, timelines, budgeting tools) than it does today as organizations position themselves to “meet their customers where they are” and “demystify” the collections process. These tools may also provide options for customers to initiate contact when they get off track.
- The resource mix of collections groups will shift – there will be less agents in seats making outbound calls and more high-powered analysts developing tailored strategies to get in touch with customers.
- Those who are on the phones will be handling the more complex accounts and may be more akin to a “counselor” than a traditional collector.
- The “future collector” will need to be incented differently than they are today.
- The strategies outlined above will be more challenging to implement if an organization is not aligned across all products – therefore, it is likely many large organizations will move towards multi-product collections that incorporate a holistic view of the customer.
The future may be daunting, but it is also exciting and inevitable, making it more important than ever for organizations to embrace what the future holds and to develop a customized, realistic, future-state vision to take their collections organizations to the next level. New technology, data, resources, and a significant investment in time will be required – however, those who get there first, will win the true award, which is maintaining more customer relationships and payments even when customers run into financial difficulties.
 From CMC Agile (https://cmcagile.com)