North America has felt the unfortunate wrath of Mother Nature over the past month, and our hearts and prayers go out to all of those impacted by the recent disasters. Beyond the devastation to personal and family lives, there will be significant economic impact felt from Main Street to Wall Street. Whether directly impacted by the recent events or not, though, many financial institutions face an impending challenge of increased loan delinquency rates. Abby Progin, Temenos' Product Evangelism Team Lead, presents a blog detailing the risks - and, more importantly, key steps financial institutions can take to prepare themselves to "weather the storm".
Following that piece, we'll share a blog and case study from Kris Frantzen, the VP of Product Strategy and Evangelism for the Lifecycle Management Suite. Financial institutions armed with the right systems and processes can apply relatively simple solutions to recognize significant benefit - for staff efficiency and common-sense, personalized account holder relations. You'll see how one customer has put data analytics to practical, meaningful use.
Finally, we'll turn our attention to re-building and moving forward - just as so many people and business have - in the wake of the storms. Temenos is proud of the part we play in providing solutions to Credit Unions and Banks, recognizing those financial institutions play such a significant role in the development of their communities and account holder bases. Product Evangelist Kevin Barth will conclude our blog series with a focus on how financial institutions can best position themselves to provide a helping hand to individuals looking to grow or re-build.
We are in what is known as the calm before the storm. We monitor the forecast and are preparing to ensure that we can come out with the least amount of scathing possible. This is a crucial timeframe and the steps you decide to take will impact your outcome, so what can you do to be ready?
As our country watched two major hurricanes batter our shorelines we saw preparation in action. Financial institutions are also facing an approaching storm and it could bring with it significant destruction and a need to rebuild. While this storm is not made of the same dire complexion of a natural disaster, it looks to bring a potentially significant and tumultuous forecast that warrants proper preparation.
According to the latest FDIC quarterly report, charge-offs are on the rise for the fourth consecutive quarter. With delinquencies rising due to sub-prime lending and other market factors, you can predict the continued upward path for charge-offs until they eventually level out. Of course this all depends on the economy's performance; which is why we find it important to focus on how to enhance the processes for debt recovery. This is also why proper planning and arrangements can make a big difference in how your financial institution weathers the storm.
Data published by the Federal Reserve helps us visualize the charge off trends both long and short term. Below, the chart on the left, shows the charge off rates on all consumer loans in 2010, the peak of charge off rates in our near past, as compared to today. You can see that in relation to the recession we are looking good. But looking at the charts on the right we can see that charge off rates over the past 2 years have seen a slight uptick. Is something brewing?
Figure 1: Trends of Overall Charge off Rates, Consumer Loans
Delinquency Rate Growth Predictions
With greater participation and consumer market growth, one thing that is top of mind for lenders is, what are the market trends going to do to delinquency rates? With data from Transunion, we can see serious delinquency rates for auto loans and credit cards showing growth year-over-year since 2012. Also, note the predicted rates for Q4 2017 - in the last column off to the right in Figure 2. According to Transunion's projections, we are seeing a significant jump from where we were at the end of 2016. It looks like the storm is strengthening.
For many financial institutions their priority is to focus on how to reduce delinquency rates and in turn lower the amount of potential charge-off accounts, and this is why.
Figure 2: Delinquency Rate Growth Predictions
Source: Transunion, "2017 Predictions: Consumer Balance and Delinquency Rates”
Focusing on auto loans, in the bar chart below we can see that the auto loan delinquency rate increased from 1.16% in Q1 2016 to 1.30% in Q1 2017. This is driven by poor loan performance in the subprime and near prime segments. Serious auto loan delinquency rates are approaching levels not seen since the recession. A contributing element to the forecast looming overhead.
Figure 3: Auto Loan, Delinquency Rate per Borrower
In addition to the delinquency rate increase, in the past 5 years the outstanding balance of auto loans has grown. We ended 2012 at 777 billion, and as of Q2 of 2017 we are at 1.113 billion. That is a percentage increase of 45%. Is this a sign of the eyewall strengthening?
Figure 4: Past 5 years, Auto Loans Outstanding
With all of the data pointing to a bleak forecast, we suggest taking the following steps to properly prepare for this impeding storm bound to make landfall in the banking industry.
1. Understand the landscape, do your research and don’t ignore what is coming. Major events can be fickle and the slightest change in elements can impact the path and intensity of the storm. One research tactic is to utilize data analytics that will provide insight into your account holder base. The focus should be on auto and credit card loans as these are the most vulnerable to delinquencies based on the trending data. But also expand to current trends of delinquency across the industry and then adjust credit policies and processes appropriately.
2. Know what you need to do to mitigate damage, protect yourself and your assets. Make a preparation plan and know your evacuation route. Take a thorough look at your current collection and recovery processes and focus on both technology and procedures. Are they ready to support increased volume and meet the evolving needs of the consumer expectations? What about effectively dealing with pre and post charge-off activities? Having the right tools will help your financial institution remain above water.
3. Take action. Don’t just make a plan, test it by running it through rigorous scrutiny. Employ solutions that can ensure consistency in process across all users, utilizing automation where possible to streamline. Also, make sure the appropriate visibility can be provided to the appropriate levels of management across the organization.
4. Be fluid and agile before, during and after the storm as changes to your plan (things like more fuel, water or an alternative shelter) may be needed. Use the transparency of the process with insight provided through solid reporting, to continuously optimize your processes and system approach. Look for technology that allow for agility in configuration. You will need this flexibility. Most importantly, make sure you have deep integrations to the other services you’ll need as part of your process. Think along the lines of a robust core and third parties for outsourcing collections activities and dialer campaigns.
Have we seen an event like this before? Yes, and the industry has survived much worse; however, taking the steps we have outlined can help better prepare your bank or credit union to weather the storm by developing an efficient action plan, especially when it comes to your collections activity.