Collecting a debt is a complex process that interweaves law and strategy. Unpaid invoices can be an obstacle for business success, but for a financial institution, collections is part of daily operations. Banks and credit unions make their money by lending, so even in the best economic environments, delinquencies are inevitable. The figures vary, but as of quarter 3 2019, the national delinquency rate for consumer loans is about 2.3 percent. While this is a lower number than the near five percent rate during the recession, it means that financial institutions need to create strategies to manage a regular collections caseload.
Successfully managing collections as a financial institution requires some steps. Some of these are similar to those any creditor would use, but there are a few differences based on banking relationships. Here are some ways to operationalize collections and maximize the likelihood that your borrowers and debtors will pay.
Without a communication strategy, collection is impossible
Many reasons can cause a customer to miss a payment. Part of the challenge is getting to know your customers’ financial struggles without bogging down your collection process. Communication is the best way to maintain a positive relationship with a customer that can weather financial struggles and lead to successful collection. There is an old adage in collections, that if you don’t call, you won’t collect; this holds true especially for lenders and other financial institutions.
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Strive to communicate frequently and proactively with customers. Encourage them to answer your calls and letters by adopting a collaborative tone. Be a resource for your delinquent borrowers by offering solutions. It’s a challenge, as debtors can easily enter a mindset of burying their heads in the sand. Show them a light at the end of the tunnel and they may be more likely to work with you. Even if your communication efforts fall flat, at least you have maintained contact and can leverage the information you obtain from your calls to power more advanced collection efforts.
Use a pooled approach for maximum efficiency
While it is crucial to maintain a positive relationship with your debtors, this nurtured relationship cannot be at the expense of efficient collections. Pooling collection resources is ideal because it allows you to reinforce consistency and leverage tools like a dialing system. The traditional method of financial institution collections involves assigning a dedicated agent. This traditional process has many benefits in the ability to nurture a close relationship, but the efficiencies of a pooled approach offset these benefits. A pooled approach also forces a financial institution to operationalize collection strategy — to make it uniform and regular.
Beyond uniformity and the ability to use a dialer, a pooled approach also has the advantage of data analytics. With all of your collections resources aimed at a common goal, and working on a common group of collection accounts.
Use collection tools and know the law
Creditors have numerous tools at their disposal for collections depending on the stage of the collection process. The overall goals are to obtain an agreement to pay the amounts due, or a portion, and fulfillment of the agreement. Collection tools that help reach these goals include the communication strategies we discussed but can also involve something unique to financial institutions — the right of offset.
Offset is when a financial institution can tap into deposits of a borrower to satisfy a debt. There are federal and state limitations on this practice, and financial institutions should become fluent in the applicable rules and regulations. For example, the Federal Reserve Board’s Regulation Z prohibits banks from using the right of offset for credit card debts. California state law stops a financial institution from depleting a debtor’s bank account to below $1,000. Other state laws protect certain deposited funds, such as disability, social security, or unemployment income.
Another tool is the use of credit reporting. Accurate credit reporting incentivizes payment and can be a tool to work with a delinquent borrower. For example, a financial institution should clearly communicate the ramifications of nonpayment and of entering a repayment agreement.
Engage the help of a collection agency for maximum results
Banks, credit unions, and other financial institutions are in the business of investing and lending money. While collections is a component of banking operations, it can also distract and bog down operations. By hiring a collection agency, banks can more efficiently operationalize collections, reaping the benefits of the tips we discussed and more. Professional collectors can execute an organized and well-managed communication strategy, pool resources for efficiency and effectiveness, and have the knowledge of tools and legal strategies to maximize recovery.
Credit card debt is the largest category of collections for banks, but the other two major ones would be auto and home loans. Home loan collections are often handled by servicing companies – but also for all types of bank collections there are at least 2 stages – collecting on a past due balance, then collecting on judgments and enforcing lines for secured debt. The 4 largest banks in the USA have 4 billion in credit card charge offs – a huge number.
For more information on how a professional collection agency can help your financial institution lower delinquency rates and increase collection revenue, contact us today.