Shifting U.S. consumer debt trends requires new collections approach

Following a sustained period of high interest rates, U.S. consumers have felt the effects of inflation and higher borrowing costs, with many turning to secured and unsecured credit to navigate the rising cost of living. Yet, despite the financial pinch, consumer spending has continued to increase, mainly on the back of record levels of credit card debt.

The state of U.S. consumer spending

According to the U.S. Commerce Department's Bureau of Economic Analysis (BEA), consumer spending increased 3.7% in the third quarter (Q3) of 2024, the most since early 2023, thanks to rising incomes, the Federal Reserve's easing of monetary policy, and rising consumer sentiment following the recent election outcome. This rise in spending coincides with an increase in consumer credit during this period as consumers turned to unsecured lending to get them through the financial bumps in the road.

According to a Federal Reserve Board report, consumer credit rose at a seasonally adjusted annual rate of 3.2%, with revolving credit increasing at a rate of 2.8% while non-revolving credit increased 3.4%. These increases pushed US consumer debt to an estimated $17.943 trillion, with consumers credit card debt rising $24 billion in Q3 2024, 8.1% higher than 2023, to reach a record $1.166 trillion. While consumers mainly focused on essentials in the first half of 2024, particularly among lower-income households, discretionary spending has been growing.

This rise in credit card debt means delinquencies have also increased marginally, continuing a trend that spans the last eight to 11 quarters, according to the Federal Reserve Bank of New York's Equifax Consumer Credit Panel report. The report states that although widespread, the increase is more notable in the poorest ZIP codes, where delinquency grew from 11% in the second quarter of 2021 to 17.4% in the first quarter of 2024, which equates to 58% in relative terms.

While only a marginal deterioration in creditworthiness, with consumers generally able to pay a large portion of their debts, the challenge credit providers face is ensuring they are at the top of the list in the payment hierarchy.

The evolution of debt collection

For collection agents, focusing on early-stage collections between 0-90 days typically yields the best results, as consumers are strained but not underwater. In this regard, contacting consumers is often the biggest challenge for collection agents, primarily due to a historical reliance on voice calls. Understanding the different engagement preferences among the different consumer segments increases success rates.

Engagement channel preferences vary among generations, with the emerging credit-active consumer segment of Gen-Zeers and Millennials less likely to take phone calls compared to Gen-Xers and Baby Boomers, yet the U.S. sector still relies predominantly on outbound voice channels and letters to drive inbound contacts for debt collections.

This propensity for call avoidance means multi-channel capabilities are becoming more important, with data accuracy and analytics critical components to understanding consumer communication preferences. 

Another key consideration is the economic viability of the collection channel, with web or digital channels offering ideal failovers in instances where calling fails to connect with a debtor. These channels are also better suited to the higher volume, lower quantum collections in the low-income segment.

Faced with these market realities, creditors and their collection agents need omnichannel capabilities and data analytics capabilities to implement multi-channel pathways to boost resolution rates. However, many collectors do not have the capital to invest in technology, with a large portion of spend allocated to regulatory compliance in this highly regulated industry. As such, outsourcing is becoming a primary strategy to mitigate the costs associated with building these capabilities in-house.

Key benefits for outsourcing debt collection

Outsourcing can fast-track a collection agency's digital strategy to facilitate the massive leap needed to deliver more efficient debt collections, particularly amid increasingly stringent regulations. For instance, the implementation of Regulation F by the Consumer Financial Protection Bureau to regulate debt collection practices means collection agencies can now only contact someone seven times in seven days. These regulatory amendments have rendered traditional debt collection pathways that used diallers to connect with as many people as possible obsolete.

Every attempt to contact a customer needs to be laser-focused with the highest likelihood of eliciting a response at every touchpoint, which requires working with the right partners that can implement a multi-channel strategy. The success of this strategy is predicated on the ability to segment accounts and understand customer data to develop customer propensity scoring while standardising engagements at scale.

Leveraging data analytics to analyse consumer data, historical interactions and identified preferences gives collection agencies the ability to define collection pathways and be laser-focused with every contact. Analysing campaign data across voice and digital channels also allows collection agents to track where consumers are in the credit cycle, providing context that can support the flow of the conversation or recommend the most appropriate channel, be it an AI-enabled chatbot or an AI-assisted live agent, to improve collection outcomes in every consumer segment.