And help their customers along with their own bottom line.
It is always a win-win for financial institutions to reduce loan delinquencies. This has become especially important during the post-pandemic world with a slumping housing market, high inflation, raising interest rates and high levels of consumer debt. During the economic shocks of the last few years, however, we saw an interesting trend in delinquencies.
Spanish philosopher George Santayana is credited with the aphorism, “Those who cannot remember the past are condemned to repeat it.” As we navigate our current economic challenges, looking back at our most recent economic downturn, the Great Recession in the late 2000s, might provide some helpful lessons.
In early 2009, I attended an economic forum with guest speakers from the banking, real estate, stock brokerage, and economic industries. At that time, there were many real estate properties in foreclosure, but the banks didn’t seem very interested in selling them. My favorite part of the forum is when the banking executive told me why. Banks had such an excess of properties in foreclosure on their books, that to sell them at their market value (about 40% less than book value), and write-off the losses would have rendered the financial institutions insolvent. So they just didn’t sell them.
During the pandemic years of 2020 and 2021, the unemployment rate from the Bureau of Labor Statistics showed both the unemployment rate at 6.2 percent, and the number of unemployed persons at 10 million.
However, loan delinquencies went down — even with the high unemployment rate and the strong historical association between the unemployment rate and loan defaults.
A 2021 article in Fortune Magazine, based on a study by business schools of Columbia University, Northwestern University, Stanford University, and the University of Southern California, found that in the Great Recession, mortgage delinquencies jumped from 2% to 8%. But in the pandemic’s first seven months they fell from 3% to 1.8%. “This is especially striking,” the researchers note, “given an unprecedented increase in the unemployment rate that reached almost 15% in the second quarter of 2020.” And, they found that the explanation went beyond just stimulus checks.
Fast forward to 2023. TransUnion’s (NYSE: TRU) 2023 Consumer Credit Forecast projects delinquency rates for credit card and personal loans to rise to levels not seen since 2010. Card delinquency, on the rise in 2022, is projected to increase to 2.6% through the end of 2023, which would represent a 20.3% increase year-over-year. This is attributed to persistent inflation and high interest rates.
Bloomberg predicts that credit-card rates are poised to hit a four-decade high this year. Bankrate predicts an average interest rate of 20.5% in 2023. And some retail-brand credit cards have already surpassed 30%. Just to give you an ideas, pre-pandemic credit card interest rates were around 17%, but fell below 16% when the pandemic hit. Which brings me to my point: the reason why credit card interest rates when down during the pandemic was to help people and help banks keep delinquencies low.
Banks and credit card companies now need to heed what they did during the pandemic to avoid a repeat of the Great Recession. Here are six strategies financial institutions, including credit unions, deployed during the pandemic that should stay in effect now:
1. Utilize forbearance. Instead of cracking down on delinquent borrowers, offer forbearance. That way, borrowers can delay loan payments without you declaring the borrower delinquent. It also improves your borrower relations by not diminishing the borrower’s credit rating. You will still take a hit on revenue, but only temporarily, and you don’t have to worry about a portfolio of foreclosed assets to liquidate.
2. Offer a variety of payment options. You can decrease your delinquencies by offering various payment options to your borrowers. Anyone struggling financially can pay principal-only, interest-only, or a combined payment. You could also reduce the minimum payments if possible. Be creative.
3. Encourage recurring payments. Offering recurring payments makes bill payments easier and more timely. This is especially helpful for busy borrowers or those who travel.
4. Encourage paperless adoption. Studies show that those borrowers who receive electronic bills tend to be more satisfied and reliable borrowers. According to an article from My Billing Tree: “By encouraging paperless adoption, you are in turn developing a more satisfied customer base. These customers, in many cases, are then more likely to be receptive to other types of account management features, including enrollment in recurring payments.”
5. Accept payments regardless of method or channel. In addition to different payment amount and delivery options, you can also provide different payment methods and channels. Borrowers can call and pay by phone, or even text to pay.
6. Improved information from technology. With online and mobile banking, borrowers can check their balances in real-time. Upcoming loan due date reminders can be emailed or texted to them. Pending payments can be posted to avoid overdrafts. We cannot overestimate the importance of technology in avoiding delinquencies and making borrowers happier.
Loan delinquency rates could improve more, due to robust employment numbers. The important thing to remember is that most borrowers want to pay their bills and pay them on time. With these proven methods, credit card companies and banks can do their part to help with the economic challenges their members have. By smartly learning from the past, financial institutions can improve their delinquencies, borrower satisfaction, and bottom line.
A previous version of this article was published on CheckAlt.
Stories and snippets of wisdom from Cynthia Wylie and Dennis Kamoen. Your comments are appreciated.