In 1977 when the FDCPA became law, the first Apple II computer went on sale, a gallon of gas was 65 cents, Elvis Presley died in Graceland and Jimmy Carter was elected president. Forty-two years later the receivables industry is on the cusp of seismic disruption due to an updated FDCPA and financial institution financial reporting mandates. As the CFPB recognizes the pivotal role collections provides, communication technology will help resolve complaints and improve consumer credit worthiness.
It’s a brave, new world where I can hear, “free at last,” ringing in my ears. I can also tell you that 2019 is just the beginning. Four letters: CECL are being referred to as the biggest accounting change in banking history, the most profound revolution in financial services since the FDIC secured deposits. The Financial Accounting Standards Board (FASB) introduced Current Expected Credit Loss (CECL), part of ASU 2016-13, Financial Instruments: Credit Losses, as the new accounting standard for the recognition and measurement of expected credit losses (ECL) for loans and debt securities. CECL takes effect in 2020, following global accounting rules under International Financial Reporting Standard 9 (IFRS 9). Both standards will have drastic impact on how financial institutions report loan losses and collection departments who can reduce them.
The absence of agents or dialers may become a reality for first parties as international companies comply with the 31-day “time bomb” under IFRS 9. To prevent accounts from rolling to Stage 2, and recording a lifetime expected credit loss impairment, creditors in the financial services industry are expected to accelerate collections by assigning more accounts to collection agencies.
Instead of throwing bodies at this opportunity, collection agencies can use artificial intelligence on accounts not only to prevent 31-day delinquencies but to collect more. Using AI will be transformative to increase right-party contacts, free up agents from busy work and overcome agent mistakes in compliance and creating dialer queues.
In a world where most financial matters take a few taps on an app, collections is stuck in the last century limited to the telephone and letters. Phone calls may soon give way to emails, texts and even social media-direct messages as the CFPB updates the FDCPA. Collections that utilize machine learning and artificial intelligence could follow under a separate CFPB proposal to create a regulatory sandbox program for financial innovation. This regulatory sandbox would provide a two-year “safe harbor” trial period for determining whether these practices are profitable while the CFPB evaluates whether they benefit consumers.
Through the sandbox program regulators seek to gain a working knowledge of new financial technology before its full implementation. Many of today’s consumer-facing financial technologies, such as online banking and mobile electronic payments, would not have existed if regulators had not fostered an innovative market, but instead solely relied on enforcement measures.
There are many drivers for this shift towards greater investment in collections. As delinquencies and outstanding debt levels across most consumer lending categories trend upward, collection departments will face larger workloads in the next 18 months. As that happens, banks will be unprepared to handle the problem due to rising acquisition and reward expenses for credit cards. Slowing revenue growth prevents card issuers from investments in receivables management.
Additionally, the concept of collections within banks’ customer relationships is changing as banks modify their services to drive better financial outcomes for their customers. Increased customer loyalty extends to debt collection, especially technologically enhanced collections.
Consider this alone, FICO recently commissioned a global telecom research report that showed 94% of global service providers are using text messaging to communicate with their customers, but less than one in five are personalizing these communications for late payments.
Artificial intelligence and machine learning will articulate a methodology to set the stage for the disruptive technological advancements of 2020. In 1977, there was no email, no cell phones and very little bad debt. According to the Federal Reserve, in 1977 there was $37 billion in outstanding revolving debt mainly credit cards. As of March, 2019 there were $1.057 trillion in revolving credit outstanding. I am not saying categorically that if communication rules had stayed current these outstanding levels may not have exploded, but I am saying that if I said, “Ladies and gentlemen, Elvis has left the building,” most people would not know what I was talking about.