Text, Don’t Call
The digitization of collections. Competition from fintechs and digital banks.
Did you know that Verizon discontinued its collect calling service (which it inherited through its acquisition of MCI) in 2016? The service had been on life support for years, as most consumers had long ago switched out their landlines for mobile and VoIP. But it wasn’t until 2016 that Verizon officially asked for the FCC’s permission to pull the plug.
This was one of the first things I thought about after I read the CFPB’s proposed rules for third-party debt collection. Among other things, this proposal would clarify how and when debt collectors can utilize newer communication technologies like emails and text messages.
For me, this proposal illustrates an obvious truth—debt collection is stuck in the past. Even as delinquency rates and overall borrowing continue to rise and banks pour billions of dollars into digitally transforming their organizations, the process of contacting delinquent borrowers and convincing them to make their payments remains virtually unchanged since the days when collect calling was common practice.
It’s time for digital transformation to hit collections.
There are plenty of innovative ideas—some leveraging behavioral economics—to drive more effective collection treatments. The analytics and decision technology needed to refine and operationalize those ideas certainly exists (DM me on Twitter if you’re curious to see a demo of what FICO can do in this area).
The question is when will banks decide to make it a priority?
Leslie Parrish (@ParrishLeslie) at Aite Group wrote a report for FICO on the current and future state of collections operations among large U.S. lenders. It has some great data on where collection executives are placing their bets.
The Good: if you’re curious to see what a positive, forward-looking approach to debt collection looks like, follow Ohad Samet (@ohadsamet), CEO of TrueAccord and watch his presentation from CB Insights’ Future of Fintech conference.
The Bad: the CFPB is suing a third-party collection firm used by several large U.S. lenders, the owners of a set of third-party debt collection firms have been banned from the industry for life, debt-collection lawsuits are on the rise, online lenders in the Philippines are ‘shaming’ borrowers by texting their contacts about their debts, and a Chinese app takes debt shaming one step further by alerting you if you are within 500 meters of a debtor.
And The Weird: as part of its exit from the market, Chase Bank canceled all the outstanding debts on its two Canadian credit cards. Trust me, this story has everything. Pessimism about the Canadian co-brand credit card market, an inexplicably generous business decision, and a long-haul trucker spending C$6,000 on electronics and supplies for his six dogs.
Looking to build an app to help consumers’ better manage their debts? You might want to talk to Plaid about their new Liabilities product.
They’ll never leave me
Confirmation bias—the tendency to search for and interpret information in a way that confirms your pre-existing beliefs—is a remarkably powerful thing.
When it comes to the competitive threat posed by fintechs, there’s plenty of data that banks can choose to view as evidence that fintechs aren’t (and never will be) a serious threat. A few of the most popular:
4% of consumers switched primary banks in 2018 according to JD Power. This was the lowest level of switching ever recorded by the research firm, down from a 2016 high of 8%.
Just 3% of Millennials have their primary checking accounts at digital-only banks like Simple, Moven, or Chime according to Cornerstone Advisors. In contrast, more than 4 in 10 Millennials have their primary checking accounts at just three banks—Bank of America, JPMorgan Chase, and Wells Fargo.
Also according to Cornerstone, 49% of young Millennials (21-29) and 54% of older Millennials (30-38) cite convenient branch location as one of the three most important factors in selecting a checking account provider.
79% of small businesses that borrowed from small banks came away satisfied, compared to 67% for large banks and 49% for online lenders according to the Federal Reserve.
And yet, when we remove our ‘confirmation bias glasses’ a different picture emerges:
According to Ron Shevlin (@rshevlin) at Cornerstone Advisors, consumers may still have their primary checking accounts with banks but a lot of the money in those accounts is being moved to more valuable spots including P2P payment apps like Venmo, merchant apps like Starbucks and Walmart, robo-advisors like Wealthfront, automated savings services like Acorns and Digit, and digital banks with superior rates and rewards like Ally and Marcus.
According to Visa, 5% of the credit card market is now being disintermediated by fintechs offering point-of-sale lending and installment lending. Indeed, according to Visa the percentage of installment loans made by fintechs increased from 1% in 2010 to close to 40% in 2018.
And according to that same Federal Reserve study on small business lending, even though SMEs find online lenders unsatisfying to work with (largely due to high prices and unfavorable terms) they are still flocking to them. 32% of small businesses applied for credit from online lenders in 2018, up from 24% in 2017. This growth (which banks and credit unions failed to achieve) was driven by online lenders’ high approval rates and underwriting speed.
Looking for a regulatory fix to the threat posed of online lending? U.K. researchers think that setting a curfew might be a good idea.
Chris Skinner (@Chris_Skinner) asks a really interesting question—how do you define a primary account? Are challenger banks like Monzo becoming the primary deposit account providers for consumers or are they providing supplementary ‘lifestyle’ accounts? And if it’s the latter, how will that impact traditional banks that hold on to the primary transactional accounts?
Speaking of Monzo, it (along with N26 and Revolut) recently expanded to the U.S. Chris Skinner and Ron Shevlin had an interesting across-the-pond debate on Monzo’s U.S. prospects.
And as if you didn’t have enough new competitive fintech threats to worry about, the Medicis (the Italian family that ruled Florence and Tuscany for 200+ years) are starting a challenger bank according to reporting from Penny Crosman (@pennycrosman).
Spend the next free 30 minutes you have reading this oral history of Amazon Prime. The service has 100 million paying members today, but in 2005 the idea was not at all obvious or guaranteed to be successful. Anyone trying to think differently about customer loyalty, retention, or rewards should read this.