Creditors of all stripes spent much of 2020 bracing themselves for a delinquency tsunami as consumers dealt with the financial consequences of the COVID 19 pandemic.

In September of last year, we here at Scorenomics got a glimpse into consumer sentiment during the pandemic through our COVID-19 Financial Health Check—a simple tool that provides tailored advice to consumers as they navigate the financial effects of the pandemic. We found that an overwhelming number of consumers—46%– reported they would have trouble paying their bills during the period of October 2020 and and January 2021. This led us to believe the overall rate of delinquency would increase at the outset of 2021.

New data reveals that the anticipated delinquency tsunami is yet to materialize. Reflecting trends across the industry, Bank of America reported that early stage delinquencies in the fourth quarter had fallen below pre-pandemic levels. This flies in the face of our traditional view on delinquencies. In the past, rates of unemployment and delinquency rates were tightly coupled—if more Americans lost their job, rates of delinquency increased. As seen in the graph below, delinquency rates decreased across 2020 even as the unemployment rate peaked.

There are several reasons for this. Stimulus money provided an urgent lifeline to consumers. Consumers also deserve much of the credit—they spent their money well keeping their accounts up to date. Just as importantly, financial institutions employed mass payment deferment and forbearance programs delivered through rapidly-built online tools.

Recently, we collected refreshed consumer sentiment data to see whether consumer’s responses reflected the trend above. We once again asked: if you received no further relief from the government, when will you have trouble paying your bills? If our assumptions are right, a lower percentage of consumers should report an inability to pay bills relative to our September data.

Interestingly, this did not prove to be true: in a representative sample of the United States, 46% of consumers still report they’re likely to run out of money before in the next four months. This percentage jumps to 68% when we look at consumers who report themselves as feeling somewhat or very anxious about their financial situation.

This data tells us a few things. First, it shows just how crucial the stimulus money continues to be. Indeed, without government assistance, our data implies consumers would enter early stage delinquency at way higher rates than they have been in the past few months.

The data also forces us to question whether this decrease in early stage delinquencies make up the whole story.

Take into account this complicating statistic: while early stage delinquencies are down to pre-pandemic levels, the rates of serious delinquencies (90 days or more past due, including loans in foreclosure) has not followed suit. In the housing market, for instance, rates of serious delinquencies are almost reaching their August 2020 high. Serious delinquencies are at 4.3%, which is about 1.3% points higher than at the same time in 2019.

Typically, delinquencies 90 days or more past due are the hardest to resolve. By the time a consumer falls into that level of delinquency, they owe three cumulative payments (assuming a monthly payment cadence). Some creditors set up programs to break these amounts up into smaller payments, but the sooner we can get consumers to reach out, the lower the barrier they will have to cross.

It seems that despite the work banks have put in to mitigate delinquencies, we still haven’t cracked the code on how to keep more of these consumers from advancing from early to serious delinquencies.

Why it might make sense to give money away in collections.

The hard truth about hard-to-treat delinquencies is that underlying them is a cash shortfall. It means the most powerful way to prevent consumers from advancing further into delinquency is to provide a cash break. That is, using cash to incentivize them to pay before they fall into a situation that is too expensive to address.

Collectors, we have found, are especially reticent to incentivize payments using dollar offers. Part of this reticence is cultural—it seems counterintuitive that we should reward late payers with cash offers. But the other part of this problem is technical: how can we incentivize consumers in early stage delinquency with cash offers without breaking the bank? How do we know which accounts will be worth the investment, which accounts won’t be worth it, and which accounts don’t need it at all?

BackOnTrack, our collections software, solves that problem. When our clients implement BackOnTrack, they offer statement credits in exchange for completing a short interactive experience and getting an account up to date. (Note: statement credits typically can’t be applied to past due amounts, but I offer this example to gesture at how such an intervention might work.)

Clients feel comfortable doing this because BackOnTrack serves as a filtering mechanism, ensuring that consumers are only credited when they complete the program, and they bring their account up to date. The result is that only the most conscientious consumers are rewarded, and our clients save money by not investing in other accounts. As the accounts age, fewer of them advance toward later stages of delinquency, solving the problem creditors are finding themselves in today. The results speak for themselves: even though clients spend money on incentives, the cash incentive combined with BOT’s behavioral treatment delivers spectacular ROI.

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