Card issuing seems to no longer be a profitable business for both bank and non-bank issuers. The current payment landscape offers customers an increasing number of alternative payment mechanisms, and the card industry seems to be taking a hit. In addition, compressed fees and margins, and rising reward expenses have been affecting the profitability of card issuers. And to add to all this, a new problem is emerging in the form of rising card defaults and charge-offs.
In the first quarter of 2018, consumers were at least three months behind repayments on $11 billion in credit card debt, a seven-year high. Besides the rate of credit card delinquencies jumped 52 basis points in Q1 2018, and is expected to continue to increase over the next 12 months according to an analysis provided by rating firm Moody’s.
To overcome the challenge of increasing Card defaults and charge-offs, Credit Card Issuers are now focussed on strengthening their collection strategies. Several credit card issuers use their own employees and run in-house collection departments to manage collections from their delinquent accounts, but with competitive pressures, card issuers are now choosing outside providers.
Strategies that cure the delinquency
In our experience operating call centers for the credit card industry, we have isolated a number of industry best practices that can help issuers reduce this risk.
1. Respond quickly with outreach via multiple channels
Always maintain an open channel of communication with the customer. Today’s credit card users are used to receiving frequent marketing messages from their issuers. As soon as a delinquency is detected, the issuer or its representative should be in touch with the borrower through multiple channels like text messages, email, and calls.
Maintain communication with customers and reach out via multiple channels as soon as a delinquency is detected.
2. Set up triggered automation to route borrowers quickly and effectively
When a delinquent borrower does make contact with the issuer, it is important to get the conversation started as quickly as possible. If outdated call routing technology frustrates the consumer, the company will lose the opportunity to discuss a plan for getting the borrower back on track.
3. Train the collections staff regularly
Near constant employee training is a hallmark of the very best companies, but rarely is it as important as it is for collection personnel. Our ability to provide frequent opportunities for skill development, testing the effectiveness of training and constant monitoring has been a major contributor to our own success in this area.
4. Monitor results and promises kept
A successful call should lead directly to a successful result, but only by carefully measuring and tracking results will the company know whether the consumer’s promise has been kept. It’s still important for management to track this metric to see that the team is following up with delinquent borrowers effectively.
The CFPB reported that more than half of the issuers it surveyed used a third party collector to deal with their collections.
5. Work with partners who are expert in recovery
Another mistake we see often is that issuers attempt to collect on their delinquent accounts internally. Unless the issuer has the capacity, skills, and experience, this may not be effective. In recent times, we see that issuers are now outsourcing their debt collection activities to third-party firms. The Consumer Financial Protection Bureau reports that more than half of the issuers it surveyed used a third party collector to deal with this problem. This makes sense as it is far better for the issuer to use specialized skills to collect on delinquent accounts, rather than to adopt one of the three most common pre-charge off loss mitigation strategies the CFPB says are in use today: re-aging, forbearance, and debt settlement. While these strategies can be used to save an account that might otherwise be charged off, it is far better to work with a professional collection team to help get borrowers back on track.
Issuers are rarely staffed for managing collections in-house and end up experiencing higher losses than they would have, had they outsourced it to a specialized and professional team, with the experience and capacity to manage the inherent risks in the collections business. This is the biggest reason more companies are relying on companies like SLK Global, with licensing in all U.S. states and with a global workforce to optimize costs, to support their credit card collections efforts.
Following these best practices, typically using a professional collections service provider, will help any issuer reduce the risk inherent in their delinquent accounts.