How Financial Institutions Can Turn Debt Collections Into Win-Win Experiences
It’s a sad truth that a large percentage of Americans are in some state of debt collection. Whether caused by unforeseen events or unsound financial choices, millions of individuals are struggling with the burden of debt. In a Market Snapshot report, the Consumer Financial Protection Bureau (CFPB) found that over one-in-four consumers (28%) with a credit report had at least one third-party collections item on their file in 2018.
Debt collections has grown into a multi-billion dollar industry – but it also produces the most consumer grievances. According to the Federal Trade Commission (FTC), “Debt collectors generate more complaints to the FTC than any other industry.” Every year, consumers file hundreds of thousands of complaints about debt collection practices. This is a staggering fact that should drive us to consider why a good collection experience matters and how it is vital for your business’s bottom line.
We’ve Been Approaching Debt Collections the Wrong Way
You want your organization to have a good collections process – but what does that really mean? It mainly means getting the best possible results for your business, which depends on how effective your collections procedures are. However, when we talk about the collections process, people tend to focus on cold metrics and increasing efficiency on the operational level. In doing so, we ignore the importance of a positive collection experience from a consumer standpoint, and how that leads to better results for your portfolio.
The modern customer experience for debt collections is mostly terrible. In 2017, more than one-fifth of all consumer complaints compiled by the FTC’s Consumer Sentinel Network (CSN) Data Book were about debt collection – a total of 620,800 complaints (that’s 191 complaints per 100,000 people in the U.S.). The top six categories included:
| FTC: Top Categories of Reported Law Violations (2017) | Number of Complaints |
|---|---|
| “Calls After Getting ‘Stop Calling’ Notice” | 227,917 |
| “Calls Repeatedly” | 210,238 |
| “Makes False Representation about Debt” | 192,704 |
| “Fails to Identify as Debt Collector” | 84,364 |
| “Tells Someone Else About Consumer’s Debt” | 39,760 |
| “Falsely Threatens Illegal or Unintended Act” | 31,519 |
Debt collections has become a massive industry that negatively affects the lives of many Americans; but the cold, tactical practices must change if we are to create better outcomes for everyone. In a 2019 report titled Consumer Complaints about Debt Collection, the National Consumer Law Center (NCLC) states that “Contact with a debt collector is a common experience for Americans,” and “Consumer debt is pervasive and complaints about debt collectors are numerous.”
We should see this as an opportunity to listen and learn. Common sense tells us that using threats ruins a relationship because people don’t respond well when they feel they’re being bullied. Debt collection involves more than managing a losing hand just to minimize losses – it’s an opportunity for you to create trust. Nobody wins when an account goes delinquent; the goal is always a long-term relationship that is mutually beneficial.
Personal finance is an advice-driven business and building strong relationships requires emotional intelligence now more than ever. “You get more with honey than vinegar” is a sentiment that needs to be internalized if you want to have positive relationships with your customers and improve your collections results. To be truly effective, collection procedures must acknowledge and integrate the human aspect. Better experiences for your customers means better outcomes for your business.
Here are 3 steps financial institutions can take to refocus their collections practices, strengthen their portfolios, and address the millions of debt-holding consumers who are struggling today.
1. Apply the Best Solution for Each Type of Transaction
If we want to take collections to the next level, we have to rethink our approach and identify areas where we can humanize the process. That doesn’t mean avoiding technology and automation, but rather applying it to the right situations so there’s more time to focus on important customer interactions. The intelligent application of technology can drive better experiences and outcomes, and can actually help your organization be more human-centric.
You should determine the best solution for each type of customer interaction and transaction, whether that means providing in-person service or a digital element. Where necessary, invest in better technology that helps your employees be more efficient and increases customer satisfaction. Be prepared to acknowledge that, in certain cases, automation is the most appropriate solution. However, it’s wise to rely on automation only if removing personal touch from a particular part of the process actually results in better outcomes for both customers and the business.
2. Implement Automation That Allows You Prioritize Customers
The investments that you make in technology have a big impact on customer satisfaction and outcome-driven interactions. Intelligent automation lowers your operating costs (with less time/labor spent on routine tasks) and creates opportunities for more human-centric moments and interactions within the collections process.
When automation is applied to appropriate situations, it frees you up to work on more serious issues and engage in important customer interactions. Automating mundane tasks, such as checking an account balance or paying a monthly bill, lets your employees spend time on clients that need to be prioritized instead of being tied up with busywork. It also provides greater convenience to your customers and it means they’ll be able to get personal assistance if they have any problems they need to discuss.
Let your collections agents do what only humans can do and take care of situations that require empathy, sympathy, and guidance. Implementing the right automated solutions allows your employees to focus on the type of work that has a positive impact and makes their job more meaningful. At the end of the day, people like being able to help others and they want their jobs to matter. The more effectively your agents can work to nurture customer relationships, the more likely you are to keep those customers (and employees) long term.
3. Use Analytics to Enhance Interactions & Inform Your Decisions
To humanize the collections process and create better outcomes, banks need to determine how to best insert themselves to proactively help a customer and address a problem. This is where automated analytics can help us become better at predicting what’s going to happen. If we can better predict what’s going to happen, we can take more proactive actions to help drive better results.
Ideally, we want to be able to take action before the customer has a problem. The only way to be proactive is to get a sense of the issue before the customer expresses it to you. The data you gather on each client and customer – including subtle information such as their risk profile, timeline of actions, and slight changes (e.g., when a customer starts making minimum/late payments) – helps you evaluate an individual’s resiliency and prioritize who needs attention. A strong analytics solution will combine statistical modeling, forecasting, predictive modeling, response modeling, and optimization into a single framework to rapidly simulate multiple scenarios, and then recommend/deploy an optimal strategy. You can use automated analytics to inform your decisions and customer interactions, and to give yourself indications for when to reach out.
Analytics solutions can be scaled up to handle vast amounts of information while predicting oncoming problems and driving automated responses. Even though the technology replaces human intuition/insight on one hand, it actually allows you to act more empathetically by producing finely tuned strategies for precisely communicating and taking action with specific customers. The predictive response modeling tells you how people will behave and how customers will respond to certain offers. Using analytics to mimic human empathy at scale helps you get ahead of problems (such as pre-delinquency) and drives more human interactions.
Consumer Debt Is an Urgent Issue
In 2019, consumer debt reached an all-time high at $14.1 trillion, based on Experian’s annual Consumer Debt Study. Unfortunately, the COVID-19 crisis has only exacerbated the issue by eliminating jobs and increasing the rate of delinquencies. Many individuals have been able to temporarily defer their loans and collection deadlines, but those payment suspensions are ending and they will soon owe for previous unpaid months. This problem is now urgent, which means that financial institutions need to reevaluate their philosophy and their approach to collections, and figure out the best way to work with these customers.
It’s clear that we need to create better collections experiences. We’ve been treating debt collection like an exercise in operational efficiency, but it needs to be about more than the allocation of resources. The cold, rational approach can be counterproductive if it creates negatives outcomes because, functionally, we are trying to optimize human behavior. Many banks are already leveraging technology and analytics to boost their productivity by incorporating robust digital solutions – but if the whole point is to create better outcomes for both consumers and businesses, we need to start putting humans first.
There is a better way for everyone involved. For debt collections, it needs to start with a commitment to the financial well-being of your customers because that ultimately leads to better ROI for your organization. The right technology can facilitate more meaningful communications, thoughtful automation can give you time to be more human, and intuitive analytics can provide insight to inform your interactions and decisions. A win-win is still possible in nearly any situation, but we need to be more human than we’ve been in the past.
