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Lightening the load of loans in default

Debt collection and recovery processes that are more streamlined, centralized and technologically sound must be a priority.

During the pandemic, observers predicted the percentage of loans in default would increase. In contrast, the Federal Reserve’s index detailing overall charge-offs and delinquency rates at commercial banks shows a sneaky and steady decline in the last two years or so.

Additional reports reveal that in the third quarter of 2021, nearly 64 million Americans had one or more debts in the collection process, dropping from 68 million in 2019. However, from another perspective, this still equals roughly 30% of all adults, which is an uncomfortably high percentage.

Many industry experts are still anticipating a rise in delinquencies and resulting charge-offs in the foreseeable future, and the truth is that the loan-default problem is unlikely to ever be eliminated. The incidence of debts in collection, however, can definitely be reduced and, by extension, the financial lives of more people can be improved.

Improvements in the field of predictive analytics, workflow automation and other digital tools present an opportune time to help lighten the number of loans in default. Streamlining collection and recovery operations not only position banking institutions to condense both the amount and length of time associated with delinquencies, but also increase revenue and minimize costs while reducing required loan-loss reserves.

Here are four business considerations for banks and credit unions:

Volatile economic conditions are hard on everyone

The recent shift in the economy has been realized across all industries, while inflation has put the squeeze on the wallets of tens of millions of Americans. This will likely lead to greater demand for smaller-dollar loans and higher loan losses.

By augmenting collections and recovery technology with data analytics and predictive intelligence, financial institutions can mitigate risk and make strategic decisions about future economic conditions through analyzing customers’ expenses over time. Machine learning and business logic automation capabilities allow FIs to track and manage loans more efficiently by continuously updated projections and redefined workflows based on variations in deposit and buying patterns.

Technology changes and evolves constantly

Despite existing economic conditions and an exponential number of loans on the books, banks and credit unions need a system that can both track and work the loans efficiently. Manual loan tracking systems are outdated, impossible to scale, and not well suited for the post-pandemic world. Automated loan collection technology helps FIs be more competitive in the face of increased consumer expectations, such as the ability to view delinquent loans in addition to analyzing different types of accounts. Better loan collection and communications technology will also help some struggling consumers do a bit better personally during a time of economic uncertainty.

Improving consumer financial wellness provides value across the board

Banking institutions that invest in predictive intelligence and data-driven risk scoring capabilities create a direct positive impact on customer financial health and wellness.

Effective communication with borrowers is powered by collected data to assess customers’ levels of risk, and when paired with predictive analysis, the FI can send payment reminders, payment confirmations and even extend a payment-due date. The predictable overall effect of this approach is a frictionless borrower experience, fewer loan charge-offs and a stronger customer relationship.

A healthier loan portfolio helps your institution

In a volatile, uncertain environment, every financial institution wants to be confident that its loan portfolio is sound and aggregate risk is acceptable. Using alternative data to assess risk and the likelihood of potential default allows FIs to adapt to evolving market conditions much more efficiently than tracking loans via spreadsheets and working through disparate systems or shared drives.

When FIs take more proactive means to monitor their portfolio in the form of alternative data, predictive analytics, and text-based communications, several good things happen, including:

  • You can accept and underwrite more loans;
  • You can manage risk by better predicting which loans are in danger of delinquency;
  • You can identify and assist customers before a loan goes delinquent; and
  • You can build stronger customer relationships.

All industries are feeling the current shift in the economy, but the business decisions this year should focus on modernizing debt-collection processes. With rising inflation and hardships resulting from the pandemic, updating debt collection and recovery processes to be more streamlined, centralized and technologically sound must be a priority.

Kris Bishop is CEO of FIntegrate.

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