What’s Next in Default Management: Reducing Cost & Risk with Better Digital Experience

Debt collection is challenging even in times of economic expansion, so when a recession hits, banks and lenders (and the customers you serve) are even more constrained. Higher interest rates are making loans more expensive and potentially more challenging for customers to stay on payments, especially when facing job losses or other consequences of the recession. This means that defaults are on the rise. Meanwhile new (and constantly changing) regulations put banks at risk of heavy fines for breaking the rules, especially around consumer protection.

This current economic reality means that banks, lenders and credit servicing agencies need to take a closer look at the way they communicate with borrowers, especially in default or collection scenarios. To be sure, improving the content and delivery of your communications has positive short-term effects. But it can also result in greater long-term loyalty when the customer wants to use the credit again in the future. If you treat a customer well during financial difficulties, it can make a lasting impression that results in additional revenue down the road.

So how can you reduce your risk of potential loss and improve the customer experience while complying with the Consumer Financial Protection Bureau (CFPB) and other regulators? The research is clear: Traditional methods are no longer working. According to EY Parthenon, even before the pandemic, the average collection rate was less than 20 per cent, the lowest in 25 years. Furthermore, banks’ outbound collection strategies are costly and inefficient, with a success rate of about 5 percent. Despite poor response rates, 65 percent of bank-initiated contacts related to debt collection are still through “traditional” channels (phone, voice, mail or letter). Meanwhile the CFPB has already placed limits on channels such as phone calls.

With this, it comes as no surprise that lenders are turning to digital channels for communication:

• According to a 2019 McKinsey report, digital-first customers who interact electronically pay 12% more than those solicited through traditional channels.
• Lenders favoring digital-first solutions have seen portfolio monthly installment payments triple and collection costs drop by more than 15%, according to a McKinsey report.

Digital methods are not only more effective, but they also have the ability to demonstrate that empathy. Contact frequency, tone and the ability to “opt out” are more easily tracked through digital channels, with some technology solutions providing a full audit trail of every communication sent and received.

Modernization of Archive Communications

Leaders in lending and default operations should look to these four areas related to digital-first customer interactions to improve overall performance:

1. Think of a holistic collections customer journey that makes it easier (and less embarrassing) for customers to get online help when they need it, while improving the amount you can recover. Make it easy for customers to stay up to date on their payments with digital reminders. Make it easy Consider simplifying repayment with debt consolidation by pointing to digital resources. Replace paper or static web forms with smart digital interviews that guide borrowers to request skip-a-payment, loan deferral or modification. Equip your contact center with these as well, so that they can steer customers to the right offers.
2. Make it easy to update the language in your communications on every channel. The more you can empower business users – rather than IT – to drive change in slick letters and digital forms – the greater the business agility. At the same time, give your contact center reps a place where they can personalize correspondence with the individual to provide a better customer experience, while locking down other sections to ensure compliance. Make it easy for the customer service person to see which communication was sent to which customer, in which channel. And find a solution that gives you a complete audit trail on who changed what, to support your compliance team.
3. Use content intelligence tools to optimize your collection communications for impact. Messages should be clear and easy to read. As mentioned above, it is also important for regulators. Content intelligence tools are popular for just that reason: they allow you to optimize the readability, tone, and emotion within your communications, enabling you to focus on what you’re striving for – fact. I connect with my customers. Artificial intelligence tools can help you coordinate across channels, so you could perhaps start with email or SMS, and then automatically print and mail letters based on customer feedback.
4. Look for customer communication solutions that are cloud-native and have API-driven integration with best-in-class tools and workflow automation. Many organizations are moving from on-premises credit management solutions to composable, cloud-native solutions, such as Salesforce or CGI Credit Studio. When you connect your CCM solution to a core collections system or process automation tool like this one, you can automatically initiate the right communication at the right time, which can help improve repayment rates.

Whether borrowers face financial challenges affecting their ability to make payments – or they lose track of the due date – it is important for lenders to communicate with empathy. This is especially important when it comes to vulnerable or at-risk customers. No one wants to end up in collections, but it can also represent an opportunity to build customer relationships.

Learn how the Smart Communications Conversation Cloud™ platform Enables banks and lenders to address these challengesAnd for more on our integration with core systems, download our eBook: Transforming the Lending Conversation.