It’s Financial Capability Month, and many CUs are featuring financial literacy initiatives to celebrate the month's focus, underscoring the sector's commitment to financial wellness. This focus is a crucial differentiator, especially given the current economic challenges facing many Americans, often described through the lens of a K-shaped economy.
The wellness gap in collections
The primary challenge with most financial wellness strategies is their focus on prevention, often failing to extend support to members already experiencing financial distress. While many CUs offer preventive measures such as skip-a-pay, loan modifications, and debt counseling through organizations like Greenpath, the priority shifts dramatically when collections teams face a surge in delinquencies.
In these high-pressure situations, the focus narrows to recovery, often involving increased phone calls and even litigation. Just as members may feel embarrassed and become avoidant, the collections team can sometimes take a personal offense at the lack of response, leading to an approach in which financial wellness is sidelined in favor of immediate recovery.
Member expectations and the competitive landscape
Younger members, in particular, desire a collection experience that empowers them to self-cure based on their financial circumstances. They are open to financial literacy content and resources, but do not want it delivered during a collections call.
This disconnect is significant, especially as credit unions compete with megabanks and digital-first providers for younger adults. A Raddon (Fiserv company) study found that the majority of younger adults use a megabank as their primary financial institution, and fewer under 40 consider a CU their financial home. Although CUs are the primary source of auto loans for Gen Z (often through indirect channels), only 5% of indirect auto loan members subsequently use additional credit union products. Given that Gen Z also leads in delinquencies on auto loans and credit cards, a failure to proactively engage them during financial difficulty represents a missed opportunity for retention.
Shifting the collections mindset
A member's delinquency signals a likely change in their financial situation, introducing significant stress as they juggle debt and necessary living expenses. Collections, however, often focus solely on recovery, disregarding these stressors. For most Americans, personal finances are the number one source of stress, consistently ranking as the top or one of the top two reported stress categories nationally.
Our culture shuns conversations about money, yet judges those who lack financial understanding. This creates a barrier to seeking necessary help, especially during a crisis. Historically, collections leveraged this fear and pressure to compel action. However, today’s consumers value agency and are unlikely to be shamed into making choices, particularly if those choices negatively impact other life decisions.
A collections strategy focused on wellness
A more effective approach centers on psychology, personalization, and choice. In a society where convenience reigns, people will naturally pursue the path of least resistance—a path often reinforced by social media and AI, leading to avoidance and ease. This is why integrating financial literacy into the collections process is crucial. Members with damaged credit are acutely aware of the negative impact of their delinquency but often lack the information and clear path needed to make the best long-term decision. Without this guidance, the path of least resistance remains the most attractive option.
A financial wellness strategy that encompasses collections provides members with the tools and information necessary to make better-informed decisions for their future. While everyone wants to be debt-free, the urgency of that goal relative to other needs varies. Members at their lowest point may not fully grasp how choosing the easiest path now will negatively impact their future financial goals.
By incorporating financial wellness, a collections strategy offers the best opportunity for preserving the member relationship. For many credit unions, however, this integrated approach is not top of mind, resulting in the permanent loss of members, particularly younger members, who are desired for long-term growth and viability.
