From shifting borrower behavior to regulatory complexity and rapid advances in technology, financial institutions are being pushed to rethink how they approach delinquency. The most forward-thinking organizations are moving beyond reactive collections toward proactive, data-driven and customer-centric strategies.
Delinquency Is Changing — And So Are Its Drivers
One of the most important realities facing banks today is this: delinquency is no longer driven by the same factors it was even a few years ago. In many cases, it’s not that customers aren’t unwilling to pay — rather, they are simply unable to keep up with changing financial circumstances.
Across markets, financial institutions are seeing:
- Rising cost-of-living pressures, particularly in high-cost states like New Mexico, Louisiana and California
- Income disruption in traditionally stable segments, such as government and university employees or financial services workers
- Lingering effects from the pandemic, including inflated asset values and borrower over-extension
- Auto lending is showing signs of strain, with auto loan delinquencies hitting their highest level in 32 years. Vehicles purchased at elevated prices during supply shortages are now leaving borrowers upside down, contributing to increases in voluntary surrenders.
Understanding the “why” behind delinquency can better help community banks proactively work with customers before their delinquency situation spirals out of control.
New Challenges Keeping Leaders Up at Night
Collection leaders are navigating a growing list of concerns that go well beyond lending repayment. At the operational level, challenges include difficulty locating and recovering collateral quickly, rising costs and lower recovery success as timelines extend, as well as gaps in their collections strategy — especially in newer or evolving recovery programs.
Compliance risks are increasing, too. Many organizations are seeing a surge in credit reporting disputes and Fair Credit Reporting Act (FCRA)-related claims, adding pressure to ensure processes are airtight. And the compliance environment is constantly in flux, with a new CFPB Director nominated in July, changes to the CFPB consumer complaint system, more states enacting a comprehensive consumer data privacy law, and continuing shifts toward deregulation, regulatory streamlining and reconsideration of rules issued under prior leadership.
Looming over everything is the question of technology — namely AI. How should AI be used in the collections environment? Where does it create the most value? How can it be implemented safely?
The result of these challenges is a more complex collections environment, requiring strategic clarity and operational agility.
Table Stakes Have Changed: What Every Collections Program Needs Today
In the past, a strong collections team might have relied heavily on outbound calls and manual processes. Today, that’s no longer enough. Modern collections programs require three foundational capabilities:
- Omnichannel Communication — Customers expect flexibility in how they engage. That means using phone, text, email and other digital channels. More importantly, these channels must all be omnichannel — meaning integrated and working together as part of a cohesive customer communication strategy.
- Data-Driven Decisioning — The ability to segment accounts and tailor outreach is now essential. Financial institutions that can identify early signs of risk, analyze behavior patterns and prioritize accounts accordingly are better positioned to improve collection outcomes.
- Clear Metrics and Visibility — Tracking performance through KPIs like roll rates, contact rates and recovery metrics provides a real-time pulse on collections effectiveness — and enables banks to quickly pivot if needed.
What Sets High-Performing Collections Strategies Apart
While foundational capabilities are important, leading financial institutions are going even further by investing in tools and approaches that give them a strategic edge. For example:
- Smarter Use of Data. Advanced analytics, including propensity-to-pay models, are helping teams allocate work more effectively, focus on the right accounts at the right time and optimize outreach strategies.Perhaps most importantly, leaders in the collections space are shifting their focus — using behavioral indicators to identify risk before delinquency occurs. Changes in spending patterns, payment behavior or account usage can all signal financial stress. Acting early allows banks to support customers early — reducing delinquency rates while strengthening relationships.
- Advantages of AI: While AI-powered customer interactions often get the most attention, many banks are finding success in collections back-office AI applications, such as automating document collection and preparation, monitoring calls for compliance risks, supporting quality assurance processes and enhancing segmentation and targeting.AI can play a critical role in identifying the best time, channel and approach for customer outreach — helping teams connect more effectively and keeping with compliance regulations. However, challenges remain. Regulatory guidance is constantly evolving, so maintaining oversight and governance is critical. Banks should start where AI can deliver immediate, yet controlled, value – even if just for back-office operations. Then, slowly and carefully expand usage.
- A Focus on Compliance: As strategies and technologies evolve, so do compliance expectations. Banks are facing increased scrutiny around credit reporting accuracy, rising volumes of disputes and complaints and emerging regulations, such as those related to coerced debt.In this environment, one principle stands out above all — documentation is key. If it’s not documented, it didn’t happen. Strong policies, consistent procedures and thorough documentation are no longer optional — they’re essential safeguards against risk.
- From Outbound Pressure to Inbound Engagement: One of the more notable shifts in collection strategy is a move away from relentless outbound calling toward generating inbound engagement instead. Banks can leverage tools like voicemails, text messaging and email outreach to encourage customers to initiate contact on their own terms. This approach offers several benefits, including higher engagement from motivated customers, more productive conversations and easy-to-track compliance. It’s a shift from chasing payments to creating opportunities for meaningful interaction.
- The Growing Importance of Strategic Partnerships: As strategies become more complex, many banks are finding that they can’t — and shouldn’t — do everything themselves. Working with a partner can help alleviate pressure on internal staffing, but selecting the right one is essential. Key factors to evaluate include the alignment of values (Do they treat your customers the way you would?); transparency (Are processes and decisions clearly documented and shared?); responsiveness (Can they communicate quickly and effectively?); and compliance expertise (Are they equipped to navigate regulatory requirements across states?). The strongest partnership should feel like an extension of your organization.
At its core, collections is about people. Metrics matter and recovery rates are important. But the real goal is helping your customers navigate financial challenges and move forward. The question every bank should ask is:
If a customer has to interact with our collections team, how do we make that experience as positive and helpful as possible?
The most effective collections strategy isn’t just about recovering debt — it’s about building trust.
