Delinquent loans are a constant concern for lenders of all sizes. While some level of loan delinquency will be factored into every lender’s operations, if that level becomes too high it can have serious negative effects on your business, including increased collection costs and reputational risk.
While it’s common for lenders to impose penalties for late payments, too few lenders realise that simple improvements to payment experience can significantly reduce delinquency.
We’ve put together five playbooks on how improving the payment experience can reduce the rate of loan delinquency. But first, a little bit of context on what causes a borrower to miss a repayment:
There are, broadly speaking, two reasons a borrower fails to make a repayment:
They do not have the money to make their repayment
They have the money available but fail to carry out the repayment
This article won’t focus on borrowers who are having financial difficulties, but instead those who have the financial means but still fail to repay their loans.
This kind of borrower (especially a consumer borrower) is typically motivated to make their repayments, as missing them leads to black marks on their credit scores, potential fines and worse.
Blockers to successful loan repayments
With the above in mind, we can assume that one or multiple blockers are stopping the borrower from making their repayment.
We asked 400 borrowers, all of whom had missed a repayment, as to why they missed their due date:
34% suffered with technology issues when trying to pay
32% didn’t know the date a repayment was due
21% didn’t know how much to repay
21% didn’t realise a repayment was due at all
This says a lot about the current state of repayment experience, but the tactics below will help you address these blockers and improve your loan delinquency rates.
1) Offer payment methods with low failure rates
As listed above, one big cause of missed payments is simple technology failure, and when it comes to failed payments, not all methods are created equal.
Credit cards, for example, fail 5-15% of the time. This is down to the possibility of credit cards expiring or being cancelled after getting lost or stolen.
Failure rates for other methods, such as Direct Debit, are much lower. While some payments still fail, the success rate of Direct Debit payments done through GoCardless are as high as 97.5% in the financial services sector but can get as high as 99.5% after payment retries.
Standing orders and bank transfers also have high success rates but lack the visibility that allows you to easily measure your exact success rate. Tracking what percentage of payments go through successfully at the first attempt is one key measure of how effective your individual payment methods are.
2) Act quicker with increased payment visibility
We mentioned earlier that not all payments are created equal. This is also very true when trying to gain better visibility and information from each of your payment options.
Even if the vast majority of your borrowers are making successful payments ahead of their due dates, if you can’t tell who has not made their repayments, you can’t take action.
Greater visibility allows you to take action much quicker to rectify delinquent loan payments, and conversely, a lack of visibility leads to increased admin and the possibility of human error when trying to uncover if a payment has been successful or not.
However, to gather, analyse and take action on available information, you will need to integrate a payment provider, like GoCardless, into your tech stack.
“The whole repayment operation now takes much less time [using GoCardless], and we have greater control and visibility.” - Chris Latchford, Global Head of Payments Strategy, Funding Circle
3) Provide readily available and accurate payment information for the borrower
In a recent GoCardless survey of over 400 borrowers, 91% of respondents felt it was important to be able to see the status of their repayments.
Looking at your service, can a borrower, without needing to speak directly to one of your brand’s employees, find out exactly how much they’ve paid, how much they still have to pay and when each payment is due?
If the answer is ‘no’, then you have a major barrier to payment success.
Whether it’s through an online login or a mobile app, create a place where your borrowers will always know exactly what they need to pay and when.
To this point, the same survey found that 79% of borrowers would be more likely to use a service that offered the ability to manage repayments online.
4) Create a clear plan for payment reminders at every stage
For many lenders, reminders only begin when a loan has already become delinquent. Going a step further and offering reminders to your borrowers ahead of an agreed payment date is one way to reduce the likelihood of a missed payment.
To maximise the effectiveness of this technique, offer repayment reminders across the contact methods you have available for the borrower in question, including SMS, in-app messaging, email, post or even a friendly phone call to the most at-risk (while, of course, making sure you have permission to contact the borrower on each of these channels).
Always provide clear follow-up steps for the borrower to follow when sending reminders, which will further remove the barriers to them making the necessary repayment.
Other industries and business models also showcase potential payment reminder strategies. Reminders are a well-trodden path for businesses invoicing their customers, and the approach they take can be adapted to loan repayments.
Additionally, in the subscriptions industry, dunning emails are used to remind customers of upcoming payments throughout their lifecycle. Which can also be implemented into your current payment experience.
A systematic approach to remindes also helps when a customer is clearly having trouble repaying a loan. Peer-to-peer lender Funding Circle has implemented an online journey to help and remind borrowers to make changes to their repayments if necessary:
“We no longer have to send them a paper [Direct Debit] mandate to sign. We simply send them an online link to update their GoCardless mandate quickly. This helps us support our borrowers and prevent payment issues from escalating.” - Chris Latchford, Global Head of Payments Strategy,Funding Circle
5) Make it easier to retry failed and missed payments
While the above strategies are aimed at reducing the rate of loan delinquency, some payments will still fail. As mentioned above, payments can fail for a number of reasons.
But when payments do fail, what can you do to rectify the problem as quickly as possible, especially if the borrower had attempted to pay?
The most obvious solution is to retry the payment, but that can be difficult depending on the payment mechanism. If the borrower is paying by a ‘push’ method, where they initiate the payment, you will have to rely on them actively retrying the payment.
If they’re using a ‘pull’ method, such as Direct Debit, you (the lender) have the power to retry the payment. Direct Debit also provides information as to why the payment failed, such as insufficient funds, cancelled mandates or invalid bank details.
Payment retries - go further with GoCardless
With GoCardless it’s possible to easily retry a payment up to a maximum of three times. Each time you retry you’ll see a new charge date and you can follow the status of each retried payment.
Payment failures with GoCardless after three retries can be as low as 0.5%. That means only one out of every 200 payments ever requires action outside of the GoCardless platform.
Smart payment retries - where GoCardless schedules retries based on the most likely time to successfully receive the payment - is currently an experimental feature that will soon be rolled out to all customers.
Delinquent loans are a challenge that has no silver bullet, but implementing the above strategies will help your business reduce the number of borrowers missing loan repayments to the lowest possible level.
Better payments are a huge part of creating a great overall borrower experience. Here at GoCardless, we help you deliver a great payment experience to help maximise payment success, give you greater predictability over cash flow and reduce the admin costs of managing payments.
If you want to know more about how we could help you, fill in the form below and one of our payment experts will get back to you: