A recession is coming next year.
A recession is coming this fall.
Nobody knows exactly when a recession will happen, but most economists agree that one is likely on the horizon. Public- and private-sector debt levels are high, many experts believe that assets are currently overvalued, and wage pressure is expected to continue to rise.
In the United States, credit card charge-offs, seasonally adjusted among the top 100 U.S. banks for the second quarter of 2018, decreased 16 basis points over the 1Q 2018 but increased 8 basis points on a year-over-year basis.
Recession or not, personal debt is rising worldwide. And many lenders are preparing themselves for an economic downturn, whenever it comes. Let’s look at the data in some major world markets and then consider how lenders can prepare themselves.
The average Australian household owes A$250,000. This equates to an average household debt to income ratio of 200 percent, one of the highest in the world. Much of this has been driven by property debt. Australia’s booming property market translates to higher prices and larger loans. This increase definitely makes households more vulnerable in the event of an economic downturn.
Some good news for Australians is that they have been paying off their credit card debt (Finder, 2018). In 2017, Aussies paid off more credit card debt than they ever have before. The average balance accruing interest has also dropped since 2012. But younger consumers owe a lot more than do Baby Boomers. In fact, 24% of Gen Xers carry credit card debt of more than A$5,000.
Personal debt in the UK has hit a 30-year high. The average resident owes £30,455, and this is expected to climb with rising inflation, flat wages, increasing credit card rates, expensive auto loans, and individuals dipping into their pensions pushing many over the edge.
The rate at which personal debt in the UK is rising is particularly startling. From the end of 2016 to the end of 2017, debt per individual grew by £1,106. Add this to the fact that individuals pay on average £981 a year on interest payments and the future looks bleak.
Before the 2008 financial crisis, unsecured consumer debt peaked at 45% of household income in the UK. This number dropped following the crash as people started saving more and spending less, but it’s on its way back up again and projected to reach 47% by 2021.
It’s a similar story in the US, where household debt hit a new record in the first quarter of 2018. Credit card and auto loan debt is rising by more than 7 percent per year, and Americans now have more outstanding credit card debt than ever before. Auto loans increased by $8 billion in the first quarter of 2018, and auto loan delinquency rates rose as well (Center for Microeconomic Data, 2018).
One of the scariest debt statistics in the United States relates to student loans. In 2014, student debt surpassed credit card debt. By the first quarter of 2018, student debt had already climbed to one-and-a-half times total credit card debt. This means that Americans owe more than $1.5 trillion in student debt, and 20% of borrowers are behind on their payments.
Looking Ahead with Katabat
At Katabat, we’re finding that many marketplace lenders are increasingly concerned about the situation, given that their early emphasis was on building their account acquisition and pre-charge-off collections operations. And now, they’re faced with the prospect of having to charge off seriously delinquent accounts.
For many of these lenders, the answer has been (1) selling the debt for pennies on the dollar; (2) managing their recovery processes manually; or (3) doing nothing. But increasingly, they’re looking at the numbers and wondering if there is a better option.
While we cannot predict exactly when an economic downturn will occur, we do know smart lenders are preparing to work with their customers when it does occur…and here are a few steps you can take.
- Beef up your digital and web presence. Ten years ago, there was more inventory (delinquent accounts) than there were people to hire. Today, the ability to research offers and resources online is not a convenience; it’s an expectation. If your plan is to rely on dialers and letters in the next recession, you’re going to struggle.
- Start vetting a collection agency or agencies. Run a few agencies through your Compliance, Procurement, and Vendor Management areas so you’re ready if inventory suddenly spikes. You will always have to call and getting out in front of potential demand is critical. Vetting and testing agencies is a great idea now.
- Get consent NOW. Gathering consent to use channels such as email, SMS, and social media is a problem that is not going to go away. We know our next wave of delinquent consumers will demand this type of communication and regulations dictate that we’ll always need consent. Don’t push off solving this problem today!
- Line up your payment-program offers now. Make sure you’re ready to roll out a full arsenal of payment programs to the floor and on the web. Ask yourself: If our losses were to double, what would I be willing to offer?
- Make sure your account-scrubbing processes are tight and look for efficiencies. When times are good, and people are paying, you may not worry as much about processes like updating contact information on your customers. Make sure you’re set up to filter bankruptcy filings and other public record filings near real-time or next day and take advantage of demographic-update services that can alert you to changes in customer-contact information.
How can we help?
Katabat Restore supplies debt management and collections solutions for you and your customers. It provides a comprehensive view across all stages of collection management, digital collections, debt placement, hardship, and recovery accounting on a single integrated platform. Restore gives lenders a 360-degree view into the customer relationship and account data.
And for marketplace lenders that want to focus only on their post–charge-off recoveries, we have carved out a simple Recovery Accounting package that enables you to cost-effectively automate the process and recover more.
Both Restore and Recovery Accounting use a machine learning engine that continuously learns from each customer interaction to determine which collections or account recovery message resonates, driving response rates and payments.
For more information on the Recovery Accounting product, download a product sheet.
Mike D’Andrade is General Manager of Katabat’s North American operations.