The Federal Reserve Bank of New York has reported that consumer debt reached a record high during the third quarter of 2021, amounting to $15.24 trillion. That's an increase of 1.9%, or $286 billion, from the second quarter of 2021.

With the holiday shopping season in full swing, retailers are forecasting strong sales. While this is good news for retailers, more shoppers are taking advantage of flexible financing options offered at the point of sale "buy now, pay later" options and taking on more debt by opting to choose flexible paying options rather than pay for gifts outright for their holiday shopping this year

Fast forward a few months and you can picture an army of debt collectors calling one customer after another, chasing them for payments. But that’s the old way of doing it, as banks and other businesses need to think differently about collections. It’s time to shift collections from a negative interaction to an opportunity to engage customers with empathy and solutions.

Many banks lose sight of the fact that delinquent account holders are still customers. Even if these individuals paid their delinquent balance, it was assumed that any future financial activity would occur with some other bank – but not your bank. By better understanding the individual, historical trends and potential financial shortfalls, collections is becoming a critical part of the customer journey.

Just consider the fact that 75% or more of customers who find themselves contacted by bank collectors are good customers with a temporary problem – and they have future value. Ultimately, collections represent an opportunity for banks to show that they care, they understand, and they have solutions to help.

To get started, banks are digitizing their collections processes and looking for ways to infuse data, analytics, and artificial intelligence (AI) to gain a complete view of the customer. Using those insights, financial institutions have a significant opportunity to extend the omnichannel experience from the front-end to the back-end to ensure a seamless customer experience across all touchpoints to bolster retention rates and reduce the cost of churn.

Banks also realize the value of looking at the long-term, end-to-end view of the customer. Using AI and analytics, advisors are harnessing data on behavior, sentiment, and the tendency to default based on financial health and special circumstances (job loss, natural disaster, etc.) as critical considerations in the collections process. Using these insights, advisors, and customers can build pre-delinquency strategies to reduce pain points well ahead of the point of default and develop a relationship of transparency and empowerment.

So how can banks transform collections to build lasting customer relationships while improving their operations and costs?

Provide solutions as a trusted advisor

By tapping into multiple data sources, including demographics, customer touchpoints, locations, and communication, banks can gain actionable insights to build innovative and flexible payment programs—before the point of collection.

Take a proactive approach to risk mitigation 

Financial institutions can use AI to analyze an immense amount of data from diverse sources, revealing new insights about delinquency risk and how to manage at-risk accounts. Another emerging use case for AI in collections is to automate the construction of tailored payment plans for delinquent borrowers.

Be where the customer is

With 76% of consumers more willing to pay off debt if the experience is friendly and personalized, banks are investing in text messaging, email, and chatbot capabilities to reach customers with direct, actionable messages and two-way communications. Streamlined communications can reduce friction, increase collection rates, and improve customer retention rates. 

Make it easy with self-serve options

Customers don’t want to spend an hour on the phone or searching for an email. Providing self-service options make it quick and easy for individuals to access information and take action. Banks can boost collections rates by giving customers access to self-service portals to monitor and act on these plans. This strategy helps preserve customer relationships while freeing up agents for more complex cases.

Since The Great Depression, when banks relied on foreclosures to collect debts, the collections side of finance has suffered from an overall negative public perception. The beauty of technology is that it can liberate us from traditional ways of thinking. As it evolves, we can transform operations to remove the stigma around debt and help customers through their financial burdens. Using the power of AI and automation, financial institutions can better understand customers and their financial health and take proactive measures before reaching collections.

The end goal for collections hasn’t changed: Reach delinquent borrowers early and find ways to collect as much of the delinquent debt as possible. But banks are embracing new approaches and embracing a new collections culture. Business leaders now realize that both the bank and the customer can win and prosper after a well-conducted collection interaction.