Did you know that 33% of Americans reported that they were contacted about debt collection last year, and of these people almost 40% were contacted at least 4 times a week by a debt collection agency? This is just the tip of the iceberg when it comes to the loosely regulated, often predatory nature of the industry.
Despite so many Americans being affected by debt, there are surprisingly few quality tools that exist to guide and encourage customers to pay off their debt. This is why Cinch is leading the way, and using the latest in behavioral economics research to help protect customers from the multi-billion dollar debt collection industry.
Background: Debt Collection Industry
Let’s start with some background on the industry. Banks and original creditors can collect their own debts or hire one of more than 6,000 debt collection firms in the U.S. to do it for them. The Consumer Financial Protection Bureau (CFPB) recently did a representative survey of Americans with credit reports, the first of its kind to bring light to the consumer voice around debt collection. Below are some of the highlights:
- Most frequent debt-related contacts included credit cards (44%) and student loans (28%)
- 53% of people who were contacted said the debt was for the wrong amount, for a family member or was not theirs
- 66% of people said they were contacted by debt collectors too often
- 52% of people contacted have household incomes less than $20,000 and 40% were non-white
- About half of consumers said they received inaccurate information, were not treated politely and didn’t receive accurate answers to questions from debt collectors
The survey results, along with the fact that CFPB receives more complaints about debt collection than any other area, illustrate that the industry has been largely unregulated. To address this, the CFPB proposed an overhaul of the third-party debt collection industry – including a cap on the number of contacts a collector can make and assurance that companies are collecting the correct amount of debt.
Problem: Lack of Debt Reduction Counsel
Yet there are still wide-ranging needs for debt reduction advice and counseling, and very few tools to address this. Why? The planning and advice market focuses on people who have high net worths, are willing to pay a lot for services, and therefore the market focuses primarily on advice around wealth accumulation. There are some licensed credit counseling programs, but they don’t serve the millions of people in need because of stringent eligibility criteria. Other entities such as debt settlement companies offer poor quality advice.
Evidence-Based Solution: Cinch Financial
To address this issue, Cinch incorporates the latest in behavioral economics research into their product offerings. What does this evidence base look like? Let’s explore.
In 2012, MIT’s Abdul Jameel Latif Poverty Action Lab (J-PAL) conducted a randomized control trial to assess the effectiveness of various interventions on debt reduction. Most previous studies had looked at ways to accumulate wealth such as encouraging savings. This was the first study of its kind. The study piloted a program called Borrow Less Tomorrow (BoLT) during the 2010 tax season with participants who were receiving free tax-preparation in Oklahoma.
BoLT offered three specific services:
First, a marketer sat with each participant and worked with them to identify specific goals in terms of debt they could pay off.
Second, they offered voluntary participation to a commitment program where the participant’s peer could nudge them if they fell off track from their goals.
Third, they sent reminders to participants to pay off their debt.
Unlike other studies that rely on self-report, J-PAL pulled data on actual repayments from participants automatically with their consent. Key findings included an extremely strong demand for debt reduction services. They also found evidence that those in the program reduced their credit card balances over 12 months as compared to those who weren’t.
Although the study was conducted with a small sample of people, recommendations included testing different designs similar to BoLT for different populations. For example, study designers thought it would be beneficial to experiment with the content and frequency of reminder messages, and other options that might encourage someone to pay back their loans.
The latest research from CFPB supports this J-PAL research, and the power of reminders and other types of “light touch” financial education.
Cinch has heeded all of this fantastic expert advice, and is doing exactly this. Cinch designs challenges for customers, and provides them reminders to help them pay off debt, including credit card debt. All interventions include customized recommendations because just as the research suggests, different people respond to different types of nudges.
Cinch is not afraid to lead the way when others have been, and serve customers with what they truly need for their financial health.