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Four Ways Financial Institutions Can Prepare their Collections Strategies for a Potential Recession

Debt collection is vital in a recessionary period, as mitigating charge-offs directly impacts profits

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  • Written by  Angela Granger, Experian’s Vice President of Analytics
Four Ways Financial Institutions Can Prepare their Collections Strategies for a Potential Recession

It’s been more than a decade since the Great Recession in 2008. So much time has passed that the struggle and restlessness of the situation may seem like a distant memory for many financial institutions. In fact some organizations, such as fintech companies, may not have even been around long enough to experience it. And while the economy is undergoing one of the largest periods of growth on record, the financial hardships experienced by many can never be forgotten.  

There were critical lessons learned during the last financial downturn that all financial institutions should take into consideration in preparation for the next recession – specifically around collections strategies.

It may seem counterintuitive to prepare for the next financial downturn while we’re in an extended period of growth – the longest period of continued growth on record. However, according to the Federal Reserve, the probability of the recovery ending in any given year is 23 percent. To be clear, that means it’s not a question of if another recession will happen, but when.

Debt collection is vital in a recessionary period, as mitigating charge-offs directly impacts profits. After all, each dollar collected is a dollar profit. There are four key considerations for financial institutions as they look to recession proof collection strategies. 

Review current strategies and stress test portfolios 

It may sound elementary, but the first step should always be to examine previous strategies. In some cases, these strategies haven’t been reviewed since the last downturn – which means the approaches are likely more than a decade old. These strategies need to be reassessed and refreshed. And for those companies that didn’t experience the Great Recession, it’s imperative to uncover industry best practices to ensure they’re adequately prepared. 

Part of the review process for financial institutions to consider is to stress test their portfolios. The ability to identify how portfolios will perform under multiple scenarios, including a financial downturn, can help financial institutions determine how to treat specific customers. An optimized treatment plan can lead to an improved customer experience – a priority for many organizations across the spectrum. 

Factor in the customer experience 

Historically, the collections process has been perceived negatively by most individuals. Frequent phones calls and letters from debt collectors can often fracture an organization’s relationship with a customer. Experian analyzed the impact of traditional collection methods and found that three percent of 30-day delinquencies in card portfolios closed their accounts after paying their balance in full. And, 75 percent of those closures came shortly after the account became current. Additionally, the propensity to close accounts were four times higher in the young, urban, affluent population than in others.

Every customer and their situation is different, and financial institutions need to factor these differences into their collections strategies. It’s important for financial institutions to understand if an individual merely forgot to make a payment, or is actually experiencing financial hardship. How does the individual interact with the organization? This deeper level of insight can help an organization craft a more personal message, engage an individual on preferred channels and connect with them at the most appropriate time of day. In the end, it could lead to a customer that stays with the financial institution for the long haul. 

Leverage machine learning and artificial intelligence

Considering the last recession started right as smartphones were introduced to the world, gives some perspective into how technology has changed over the past decade. Financial institutions need to leverage the same technological advancements, such as artificial intelligence and machine learning, to improve their collections strategies. These advanced systems and technologies can be used to understand customer preferences, as well as automate the collections process.  

Some financial institutions have always approached higher volumes of delinquent loans by rapidly hiring inexperienced staff. With these new advancements, organizations can reduce overhead and maintain compliance through the collections process. Additionally, advanced analytics and technology can help financial institutions manage customers and their situations through the credit life cycle. 

Minimize fraud exposure

Fraud comes in many shapes and sizes, including first-party fraud, third-party fraud and more specifically synthetic identities. And each can present a unique and substantive risk to an institution’s bottom line and operational resources during the collections process. For instance, first-party fraud takes the shape of a normal transaction, however the individual may have no intention or the wherewithal to repay the loan. On the other hand, synthetic identities make it difficult to track down an individual because the offender doesn’t exist. Organizations need to continuously monitor their portfolios throughout the lifecycle to detect any suspicious activity and address it. Debt management treatment strategies must be tailored to, and aligned with, one of these three categorically diverse fraud risk types. The segmentation of fraud risk type based on a breadth of data assets and advanced analytics is paramount to optimized action paths. 

Preparation is the key to success – particularly with in a financial downturn. A recession-proof collections strategy isn’t an expense, it’s an investment. An investment in the technology to help a financial organization weather the storm and create a positive customer experience, given the circumstances. The right approach could lead to sustained performance throughout the next recession and an improved relationship with customers. 

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