Financial institutions are confronting a growing challenge in today’s uncertain economic environment — rising delinquencies and the need for effective, customer-centric collections strategies to respond to the increase. Collections has always been a delicate business to manage; however, there are practical, proven tactics that banks can easily follow to manage their collections approach without compromising their customers’ trust.
The outdated one-size-fits-all approach no longer works when it comes to collections. Modern collections demand tailored outreach, a clear understanding of compliance requirements, strategic use of third-party support and above all, empathy.
Here are five important practices to follow for financial institutions looking to refine their collections strategies:
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Embrace multichannel outreach. Phone calls are no longer the gold standard in collections — people simply don’t pick up the phone anymore. Instead, effective communication strategies now include a blend of email, SMS messages and phone calls.
Email has emerged as an effective — and underutilized — tool in collections strategies. Like phone calls and text messages, many people access their email on mobile phones, but emails are less regulated than texts. They are also much more effective, with open rates as high as 80%. Additionally, emails are often tied to longstanding accounts, unlike phone numbers, which are frequently recycled. This reliability, combined with the flexibility to include payment links and personalized messaging within an email, makes it an essential piece of any first-party collections strategy.
- Personalize contact by risk profile and loan type. The notion that every delinquent customer should be treated the same is outdated. Outreach should be tailored based on the age of the delinquency, the type of loan and the risk profile of the account. For example, early delinquencies might benefit from soft reminders via email and SMS messages, while high-risk accounts may warrant quicker escalation to phone calls and more assertive communication. This approach helps to “nudge” customers early (often before they realize they have missed a payment) while reserving more direct outreach for accounts that require intervention.
- Understand the regulatory landscape. With regulatory oversight from the Consumer Financial Protection Bureau (CFPB) and the Telephone Consumer Protection Act (TCPA), understanding the compliance landscape is essential. While email remains a relatively compliant-friendly channel, banks should still ensure opt-in language is embedded in loan agreements to authorize email and other forms of contact. For third-party collections, Regulation F introduces constraints like the “7-in-7” rule, which mandates no more than seven contact attempts in seven days, and “1-in-7,” limiting actual conversations. These rules have increased the importance of multichannel communication and strategic timing for financial institutions.
- Leverage the latest technology. From scoring accounts based on the likelihood to pay, to leveraging push notifications in mobile banking apps, new technology is making it easier to engage members and prioritize high-probability recoveries. For example, AI can help financial institutions identify the one out of 50 or 100 charge-offs that is most likely to pay. Rather than wasting effort on low probability accounts, collectors can leverage data-informed prioritization to invest their efforts where they can make the greatest impact. Push notifications also offer high trust and visibility, especially when paired with branded messaging through mobile apps. These push notification messages sidestep regulatory red tape while keeping customers engaged.
- Don’t wait too long. Financial institutions should understand that holding onto charge-offs for too long can cost them when it comes to customer engagement. Once an account reaches this stage, in-house teams often deprioritize it — and customers become desensitized to outreach. Quickly outsourcing after charge-off not only signals severity to the customer but also improves the likelihood of recovery. Banks should take advantage of the window of opportunity when customers are still reachable and willing to engage.
Customer Experience Still Matters
In a rapidly shifting financial landscape, banks can’t afford outdated collections strategies. Financial institutions can blend technology, personalized outreach and compliance rigor to improve recoveries – all while building trust. For banks in need of additional resources, outsourcing charge-offs can be a good option to enhance control and recovery.
Effective collections is not about being aggressive – it’s about being timely, respectful and, most importantly, human. Whether through flexible repayment options or seamless digital tools, the goal should always be to empathetically support customers through recovery – not punish them.
