Rising delinquencies among younger generations require modern collections strategies

We live in a time in which more generations are working side-by-side in the workplace than at any point in history. From Gen X to Baby Boomers, we’ve all experienced working with individuals from different generations, and that’s a good thing.

We know not all generations are the same. In general, perspectives of an individual from Gen Z (25 years and younger) is much different from Baby Boomers (57 to 75 years old), from Millennials (26 to 41), and so forth. The same is true for your members and borrowers. Members of each generation are at different stages of their financial lives. And that can influence how they prefer to interact with your credit union. This is especially important for your auto lending portfolio.

Generational Economics

Although there are signs of a turbulent U.S. economy, one semi-bright spot includes wage gains among Gen Z and Millennial workers. According to a recent Bank of America survey, Gen Z workers experienced a pay increase of nearly 20%, while Millennials realized wage gains that averaged 11% over the past year. Compared to Gen X and Baby Boomers, annual pay increases were below 8% and 6%, respectively.

While that may sound positive across the board, particularly for younger generations, most of these wage gains have been cut down sharply as a result of rising inflation, with the consumer price index hitting 9.1% in June 2022—the highest in more than 40 years.

How does this all impact your auto lending portfolio, specifically for Gen Z and Millennials?

Delinquency Hiccups

When looking at default rate data for Q1 2022, Gen Z saw an increase of 26% compared to pre-pandemic rates. Similarly, Millennials have experienced a 22% increase in default since 2019. What can explain this increase? It’s most likely a combination of increased prices of vehicles, increased costs for goods and services, gas prices, vehicle repair costs, rising housing prices, and little positive wage gain.

For many people across all generations, the struggle is real to balance expenses and stay in the black. However, the data reveals particular attention should be paid to the younger generations to help them stay out of delinquency to begin with.

Generational Collections Strategies

It’s no secret students often complain that there’s a lack of financial education available to them throughout their academic careers. From grade school to college, most schools don’t incorporate in their curriculums, basic life skills like balancing a budget, or even how to create one. Some credit unions have adopted an educational approach to financial literacy and would do especially well to target younger generations. The earlier your younger borrowers understand the impact defaulting on an auto loan, or any loan, has on their credit score, the better they can identify ways to stay out of financial trouble.

Beyond financial wellness education, if you find your Gen Z and Millennial borrowers regularly showing up in  your 30+ day delinquency queue and you’re having trouble getting this younger demographic to cure, consider how these borrowers prefer to communicate. Through this perspective, identify the best communication strategies to collect on your delinquent accounts.

Flexible Communication Outreach

If you have kids, young siblings, or nieces or nephews, you’ve probably witnessed first-hand that younger generations rarely answer the phone from a number they don’t recognize. Even worse, getting them to return a call back to another human, say your collection agents, is a huge task for these digital natives who have grown up with cell phones and tablets their entire lives.

In a research paper from Nova Southeastern University’s College of Engineering and Computing on Generational Differences in Text Messaging Usage and Habits, researchers found a direct correlation between the text message volume sent and received and the user’s generation identification. In short, the younger the generation, the more they relied on text message communication. And if we break it down further, regardless of gender, employment status, or education level, the consistency of usage remains unchanged for Gen Z and Millennials.

This is important insight into communication usage as it reveals that credit unions need to go beyond call agents to optimally engage the younger generations that are falling into delinquency at a greater rate. You might even argue that the younger generations are falling into default because their financial institution’s method of communication isn’t aligning with how they have been trained to communicate—via text.

That’s why deploying an omnichannel communication strategy for your collections outreach makes so much sense. It’s about adapting to changing communication habits of all generations, especially the coveted Millennials and Gen Zers and supporting them effectively and cohesively across all channels of communication. By using a collections outreach strategy that includes text messaging, email, IVR, and live agent, you cover all channels and give the borrower an opportunity to decide for themselves how they’d prefer to communicate with your credit union to resolve a delinquent account.

At SWBC’s Financial Institution Group, we’ve taken economic data from multiple sources, along with the help of our Chief Economist, Blake Hastings, to analyze the state of the economy and its impact on delinquencies in our latest white paper, Modernizing Your Collections Operation. We identify how consumers’ credit usage in conjunction with rising inflation can potentially have an impact on your collections queues, along with how you can leverage data, automation, and outsourcing to keep your teams flexible and in step with the rapidly changing economic environment.

Read the white paper, Modernizing Your Collections Operation to learn more.