With the market in flux and inflation nearing a record peak, it’s fair to say that many borrowers will need help in the coming months. Auto finance companies are used to fluctuating market conditions around this time, but the recent rise in auto defaults, coupled with the current economic backdrop, are ominous signs of difficult times ahead for borrowers and loan servicers alike.
Smaller tax refunds won’t offset holiday spending
Historically, a vast majority of borrowers rely on their tax refund to pay down credit card debt or catch up on skipped or missed payments at this time of the year. Tax refunds often provide a reprieve from holiday expenditures, however with the child care tax credit being accelerated in 2021, many will receive lower refunds than usual, and possibly later, while the IRS works through its backlog.
Some borrowers will take the initiative and reach out to their loan-servicers to arrange loan modifications or ask to skip a payment, or even request a voluntary repossession. Unfortunately many others won’t reach out at all – often out of shame, or a lack of understanding that their auto lender might have some form of hardship program to help them. The reality is we will see more customers requiring help in 2022, the scale of which is not yet known.
Rising operating costs and the great re-negotiation
Financial institutions, for their part, are also facing challenges – chief among them being staff shortages, increased operating costs, and aging tech stacks that are ill-equipped to pick up the slack.
In recent months, financial institutions have scrambled in response to rising COVID-19 infections and exposure among their employees, with some temporarily closing offices or switching to drive-thru service as the omicron variant took hold. Bank of America temporarily shut down some branches, and instructed customers to visit a nearby ATM or use its digital banking tools. JPMorgan Chase announced closure of a small number of branches, pointing to staffing shortages and orders that require unvaccinated employees to stay home. Almost all ran into some level of worker-fatigue, which affected morale and impacted staffing in two major ways – one, The Great Resignation, and following on from that, two – the Great Re-negotiation, where staff are using the labor shortage to increase earning power.
Employee compensation and benefits – typically the largest costs at a financial institution – grew at a faster rate during the pandemic than they did previously, according to data from the Federal Deposit Insurance Corp. Industry-wide salaries and benefits rose to $189 billion through the third quarter of 2021, up 6.6% from the first nine months of 2020, the FDIC data shows. One year earlier, the comparable increase was 4.7%, and the year before that it was 3.3%.
When higher operating costs are tied to revenue growth, for example new technology to service higher loan volume or costs tied to M&A that bring new customers and efficiencies, there is less cause for concern. However, when the increase is tied to staffing up and higher employee compensation to service existing customers, it’s time to take a good, hard look at new cost-saving strategies.
Old playbook strategies are no longer go-to, sustainable options
In truth, the whole business of loan servicing has historically been analog and inefficient. Interactions that should be simple, like requesting a real-time payoff amount on a loan, often require multiple handoffs. Even in the absence of a pandemic, the status quo approach is expensive and error-prone, and antiquated.
That being said, current market conditions are prompting executives at auto finance companies of all sizes to revisit their emergency playbooks and shift gears. During ‘normal’ high volume events, or market shifts, servicers have always felt forced to hire more people or do more with less. But old playbook strategies (even staffing up with remote workers) are no longer go-to, sustainable options. For one, it’s hard to find qualified staff. Second, new hires now come with a much higher price tag than they did before the pandemic.
With defaults on the increase, and precious staff time taken up with hardship requests, the old ‘staffing-up’ model will leave even less time to attend to other back office requests, such as payoff quotes or refinancing, let alone cross-sell to qualified customers.
While the sky’s not falling – early signs of renewed loan demand, and used-car values do provide some insulation to credit risk and profit margins – in the face of impending borrower hardship, continued staff shortages and increasing operating costs, finance companies would be well served to preserve credit performance and customer experience. One way to do this is to stop adding people to help with labor intensive servicing tasks – and instead automate and move these tasks online so borrowers can self-serve, especially for hardship relief.
By automating tasks that normally require phone calls or emails, borrowers will get answers faster, and will be more motivated to communicate with their lender. This in turn frees up servicing teams to manage more complex tasks, increase efficiency and reduce operating costs.
Market fluctuations are here to stay for the foreseeable future – and the same-old approach of ‘guess work’ and staffing up doesn’t need to apply. For questions or comments regarding this article, please do not hesitate to email me at [email protected].