By David LaRoche
Back in early August, a good friend of mine asked me to look at his collections shop. We focused on his technology and major operational strategies. The discussion was very productive because he’s an experienced executive who knows what he’s doing.
During the two hours we spent together, we identified three significant opportunities to improve call routing, targeting of hardship programs, and the distribution of his SMS/Email campaigns. We rolled out the changes using a 60% Champion/Challenger approach and received the results in early November. He saw an 8% improvement in Bucket 1 roll rates and an 11% increase in hardship enrollments.
We’ve seen an uptick lately in the number of bank and fintech clients and prospects who are twitching about rising losses and charge offs and looking for ways to reverse the trends in the face of a slowing economy and signs that consumers are being more cautious.
Third-quarter bank and fintech earnings reports from mid-October 2023 generally indicated that higher U.S. Federal Reserve interest rates had allowed them to charge more on loans while raising rates on deposits more slowly. Consumers were starting to deplete savings, the banks said, and Citibank and Wells Fargo among others noted that losses on credit cards and other debts were starting to rise.
Our partners in collections shops are calling us, as are their counterparts in the underwriting areas, as you’ll see here.
It’s important to note that the outlook was less negative than earlier in the year. JP Morgan Chase said its economists had upgraded their outlook to modest growth for a few quarters into 2024 rather than showing a mild recession.
At the same time, we’re seeing U.S. banks continue to allocate ever-greater provisions to address potential loan losses. By doing that, they seem to be acknowledging that further credit deterioration is coming.
On his earnings call, JPMorgan CEO Jamie Dimon said, “U.S. consumers and businesses generally remain healthy, although consumers are spending down their excess cash buffers.”
Translation: Spending growth has reverted to pre-pandemic trends, with consumers starting to use up their savings.
From PAG’s perspective, we’re cautioning customers and prospects to resist panicking. Yes, we’re seeing increases in delinquencies on consumer loans at U.S. commercial banks over the past 15 months, but they were still only 2.36%. For perspectives, that was still a bit lower than Q1 1990 (2.47%) and well below Q2 2009 when they hit a peak of 4.85%.
You should be keeping a close look at your trends and the quality of your consumer portfolio. During the third quarter, credit card balances hit a fresh high of $1.08 trillion, rising $48 billion from the prior quarter and jumping a record $154 billion from the year before, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit released Nov. 7.
That report also indicated that the rate of households becoming delinquent or entering serious delinquency (90 days or more past due) on their credit cards was the highest since the end of 2011. Subprime auto loans are worse now than they were during the financial crisis, most likely due to soaring car prices.
And the numbers indicate that more people are financing day-to-day necessities with credit cards, which means underwriters need to be paying attention too, given that there are more than 70 million more open credit card accounts today than there were in 2019 and student-loan payments started back up in October for 43 million.
Besides the steps we took at my friend’s bank – and frankly the need to pay more attention to lower-income earners, there are steps you can take (or that we can help you with using our proprietary GOBLIN data platform:
- Monitor your recent vintage bookings for First Pay Default trends.
- Identify payment pattern changes in your portfolio.
- Analyze changes in your customers’ debt profile and bureau status.
We visit 10-15 collection shops each year – and another dozen or so credit operations — to discuss how predictive analytics such as our proprietary Goblin platform (LINK) can help them see trends and opportunities they may have missed. If you’re looking for another set of eyes, we can help. Just click here and we’ll get back to you quickly.
David LaRoche is managing partner of U.S. Operations for Predictive Analytics Group.
