How to recover consumer debt after the holiday season

The holiday season is upon us, which is good news for everybody: consumers, businesses, and financial institutions. This is particularly welcome given that consumers are spending more than ever before, which is due in large part to the rise of BNPL.

Consider the following facts:

1. According to Deloitte, “An average holiday budget is expected to increase by 5% from 2020. Retail executives are also optimistic about the holiday sales – 7 out of 10 executives expect consumers to spend more this year (2021) as compared to the previous year.”
2. While Adobe figures suggest that this year consumers will spend $21 billion more than they did in 2020.
3. NPD data shows that “86% of US consumers expect to spend the same or more on holiday gifts than they did last year.”

The rise of buy now pay later (BNPL) services has had a huge impact on customers’ holiday spending habits. BNPL allows consumers to purchase goods without having to pay the entire cost upfront, incentivising consumers to buy more than they usually would. 

This blog will examine the impact that BNPL is having on consumer behaviours before delving into how financial institutions can recoup this increased debt after the holiday season ends.

The impact of BNPL on consumer holiday spending

While holiday season spending has increased steadily over the years, it’s clear that innovative technologies have exacerbated this trend. For example, the rise of the internet (and e-commerce and m-commerce specifically) meant that consumers could buy goods from anywhere in the world—and have them delivered straight to their door.

But now there is a new trend in town. BNPL means that consumers can buy goods, receive them almost instantly, but pay back the cost in a series of instalments. In other words, they can purchase items that they cannot currently afford. It has therefore led to the emergence of 4 key phenomena:

1. Large basket size

Traditionally, consumers were only able to buy goods they could actually afford—unless they paid for it using credit. However, BNPL is far more attractive than credit given that it is often interest-free. This means that consumers can buy more goods (especially during the holiday season), leading to larger basket sizes than in the past.

2. Repeat purchasing

BNPL functionality has become incredibly popular, especially for the younger generations. In March 2021, 61% of US-based consumers aged between 18 - 24 said that they used BNPL to purchase goods—this figure is up from 37% back in July 2020.

This rise is hardly surprising. Consumers no longer have to save up until they can buy something—they can instead just pay it back month by month. BNPL has increased the likelihood that consumers will make repeat purchases. If a company offers a BNPL service, customers will continue to purchase from that company in the future.

3. Attract new customers

BNPL is incredibly attractive to consumers. The convenience and simplicity of BNPL services make consumers' purchase much easier. Therefore, companies that offer BNPL services tend to attract a steady stream of new customers.

4. Increase conversion rate

Consumers often abandon their carts, especially when they realise that they can’t afford the final bill. BNPL solves this situation once and for all. When consumers know that they can indeed obtain what they want right away and schedule the payment afterwards, they end up converting instead of bouncing.

Why financial institutions should care

Increased holiday sales might sound like a win-win situation for both retailers and financial institutions, such as BNPL companies. However, there is a slight danger here. Financial institutions need to make sure that they can recoup all that they are owed. If they cannot, then they will end up spending more time, money and effort recovering the debt from customers. 

In 2020, US holiday debt averaged $1,381 per person, while over 50% of American customers have used BNPL in the past to pay for things that they could not afford. When you consider these two statistics, the scale of the problem becomes obvious.

In fact, a recent report published by lendingtree shows that “13% of (American) consumers are still paying off last year‘s holiday bills”, and 41% of Americans think that "it’s at least somewhat likely they'll incur holiday shopping debt” again in 2021. 

This situation is not unique only to America; instead, it is a global concern. This is why British lawmakers have recently suggested regulating BNPL services to avoid people spending more than they can actually afford.

How to recover the increased debt after holiday season

By leveraging the following 4 functionalities in your collections management system, financial institutions can make sure they increase their overall recovery rate.

1. Self-service

Self-service functionality gives consumers control over their own debt—this makes it more likely that customers will engage in the dunning process. They can pick a time and a repayment method that suits them. It also means that customers can avoid embarrassing conversations with debt collection agents. They can even set up instalment plans and schedule a repayment amount that works for them.

2. Flexible segmentation

You need to ensure that every dunning message you send out appeals to every individual past-due customer. Of course, this is impossible with one-size-fits-all strategies. You therefore need to segment your consumers according to a variety of factors: their demographics, repayment amount, behaviours, and preferences.

Once you understand the strategies that each of your segments respond best to, you can then make sure to tailor your messaging appropriately. This will drastically increase your repayment rates.

3. Machine learning/AI 

By leveraging machine learning and AI capabilities within your collections process, you can stay on top of exactly how your customers behave. You can see whether or not they opened your last email—and if they did, why they didn’t pay. This will reveal areas where you can improve your own recovery operations.

By using machine learning & AI capabilities, your collections approach will no longer be ‘hit or miss’. Instead, it will be targeted, tailored, and effective.

4. Account management

Individualised account management capabilities allow you to view customers’ contact information, instalment plans, repayment history, and their interaction with collections employees in one single platform. It saves your collections agents time and effort sorting out information from different systems.

Hence, your collections team can see every precise detail about all of your past-due customers. Agents can then work out who the customers are, how they behave, and how to encourage them to pay back what they owe.

Get started

Get your collections approach right before the upcoming wave of holiday debt. Book a demo with a member of our team to learn more about receeve’s unique collections management solution.