Two years ago, delinquency rates on loans in the U.S. were the lowest they’d ever been. Financial stimulus packages, student loan deferments, and suppressed spending provided plenty of budgetary breathing room for households nationwide. It seemed easier for your members to prioritize their financial obligations. They were holding onto money like never before and their financial cushions were lined with savings.
Now, those savings have dried up and consumer debt is once again mounting as your members beat back against the pressure of an inflationary environment. Delinquency rates are climbing once again, student loan repayment is imminent, and a recession looms over the economy like a troubling cloud. Your members may soon have a harder time paying down their debt, but a digital-first collections strategy could be the key to helping them recover—and saving your credit union from heavy losses.
Members are under pressure
A report from Experian put recent stats to the situation we’ve been staring down since 2021: debt is rising as high prices swallow disposable income for many households. To compensate, your members are tapping credit cards, which is contributing to a total consumer debt balance that hit $16.84 trillion in Q2 2023 (a 4.5% increase from the previous year).
Credit card balances alone grew the most in 2023, up more than 16% over last year. Gen Z and millennials are seeing the fastest growth in credit usage with Gen X courting the highest balances. Elevated food costs and rent are largely to blame, forcing your members to overextend financially for discretionary purchases.
The downside is credit balances swell faster with compound interest and high annual percentage rates.
Walter Russell, CEO of financial advising firm Russell and Company, recently told USA Today, “Credit card debt is typically unsecured (doesn’t require collateral) and comes with high interest rates, often exceeding 20% APR.”
Members who are only able to make minimum monthly payments have a long road ahead when it comes to paying down debt in today’s market, a road that may likely involve a little nudging for payment.
Delinquency on the rise
Whether or not your members may require a collections effort on your part is not speculation. The writing on the wall shows our current economy is already making debt repayment a difficult go for many. At the end of 2022, the delinquency rate on consumer loans edged up to 2.36%, continuing an upward trend since 2021. Auto loan delinquencies specifically have returned to pre-COVID levels with Experian reporting 2.28% of auto loans at least 30 days past due.
How credit unions respond is important
Delinquent members know when they’re in arrears. It’s not likely they forgot to make a payment; rather, it’s an uncomfortable choice they made to accommodate more pressing financial matters (like keeping a roof over their heads or keeping the lights on).
Regardless, contacting someone for money they owe is a delicate business that, if handled with a digital-first approach, could be the difference between repayment and credit loss. Here’s what credit unions should keep in mind:
Empathy is key
There’s a human being on the other end of the phone or the keyboard that your staff is trying to collect from. Having the ability to understand their situation, even if your collections team hasn’t experienced it themselves, is vital to successful debt recovery. This seemingly simple yet crucial insight lies at the heart of any collections strategy.
Reframe the situation
Credit unions are, by nature, community-focused institutions that prioritize member relationships and financial well-being. So, it shouldn’t be a stretch to shift the approach from “You owe us money and we’re here to collect” to “We’re both facing a problem that we can work together to solve.”
A digital collections strategy allows the flexibility to empower your members to repay on their terms or establish a repayment plan that fits their financial circumstances. Work with your members to reduce barriers that may be preventing them from successful repayment.
The method matters
Members are more inclined to pay off delinquent accounts if they can do so using the payment channels they prefer. The key factor at play here is personalization.
Credit unions are competing with an array of digital services that deliver seamless online experiences to modern members. As such, members have grown accustomed to the ways these experiences have shaped their lives, whether it’s how they shop or how they interact with friends and family.
When it comes to collections, they expect a similar level of convenience and personalization. Being able to resolve delinquencies in a way that aligns with their individual circumstances can give them that.
Defining collections for a digital age
SWBC has its finger on the pulse of collections for its credit union and financial institution partners. As debt and delinquencies rise in today’s financial landscape, we continue to look for new ways to manage risk compassionately when it comes to debt recovery. Since 2019, we’ve partnered with FICO to build a modern omnichannel collection solution that puts members at its core. Our most recent collaboration, Preferred CollectTM, will take our comprehensive solution a step further by giving credit unions a next-gen digital approach to interacting with past due members. With greater empathy and less intrusion, Preferred Collect gives members repayment pathways via text, email, and interactive voice response (IVR) that allows them to fully resolve or make payment arrangements for past due accounts at their convenience—all without speaking to a representative. Additionally, credit unions will have enhanced reporting at their fingertips, with key insights and a channel-by-channel breakdown of payment successes so credit unions can determine the impact of the collection strategies and revise if needed.
To see how our enhanced collections offering can support your credit union’s operations and meet the evolving needs of your members, visit our website.