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The economic impact of COVID-19 has cut a huge swath among car-loan borrowers. Some need long-term deferrals. Others can’t pay now but hope to within weeks or months. Meanwhile, leaseholders clamor to renegotiate their terms.

Faced with so many contingencies, auto lenders’ core problem is to match each customer with the right payment plan strategy — and to do so quickly.

Loss mitigation has suddenly become urgent for auto lenders. At $1.3 trillion, auto loans represent the third-largest debt category in the U.S. April 2020 saw five times as many auto loans in hardship as with March. Because the loans don’t fall under the Coronavirus Aid, Relief and Security (CARES) Act’s forbearance provisions, it has fallen to lenders to proactively devise assistance programs. Most have suspended collections and permitted borrowers to skip payments.

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Now it’s up to lenders to work with borrowers to find the right remedial actions to minimize losses and maximize payment resumption.

The bright spot for lenders is that consumers typically prioritize their auto loans over credit cards and mortgages. Our team’s analysis, however, shows that servicing the enormous number of auto loans in default will likely impact all aspects of lenders’ value chain, with customer service as a hot spot.

Using personalization to boost loan payments

We believe there are three customer-focused areas in which personalization can help lenders better work with auto loan borrowers:

1    Better handling of call volume surge.

Lenders tell us their call centers are already overwhelmed by customers requesting payment deferrals or late-fee waivers. Some Lenders have deployed chatbots to handle the influx of calls, but these systems often aren’t optimized and need tweaking.

How personalization can help: Data-gathering and analysis are the keys to better understanding the nature of contact-center calls and how chatbots can be used in more targeted ways. Many companies still skip this step. Yet taking time now to analyze customer inquiries (whether they come in by phone, web, email or social channels) will provide insights that make your customer service operations more efficient during the heavy call volume expected in coming months. Intelligent interactive voice response systems and deployment of chatbots equipped to answer post-COVID-19 queries can help borrowers by routing them to the agent best trained for their particular situation.

2    More granular customer segmentation.

Auto lenders typically rely on traditional segmentation variables such as income, credit score, and loan-to-value ratio. Now, managing long-term delinquencies is providing the impetus many lenders need to get more granular in their customer segmentation. Advanced analytics can combine new details — such as recent evictions, address changes and utility payments — to bring lenders closer to micro-segmentation and more targeted interventions.

How personalization can help: More granular segmentation, combined with artificial intelligence (AI), is a powerful combination for financial services companies. For example, a national lender sought to better understand why some customers make timely payments and others don’t. By applying an AI-powered causality engine, we were able to better predict who will be late and who won’t, and to then redirect the company’s collection efforts. The provider then sorted accounts with a high probability to “self-cure” (that is, to pay on their own with few reminders) and focused its attention on those requiring additional intervention. The new system resulted in greater success in payment collections and reduced collections expenses by 30%.

3    New categories of customer risk profiling.

Customer profiling goes a step beyond segmentation: It achieves a deeper understanding of customers by layering on details such as anonymized behavioral data and lifestyle information from third-party data providers and social media. Most lenders have risk-profiling strategies that cover categories such as income, assets and debt. But the economic impact of COVID-19 creates new categories. For example, job segment is now a potential red flag, as borrowers in hard-hit industries such as travel and hospitality face extended unemployment.

How personalization can help: When it comes to creating successful payment plan strategies, every customer detail counts. AI can help lenders determine whether they’ve put these details together to create solutions that resonate for borrowers — all in an automated way. Intelligent AI platforms can monitor whether borrowers have agreed to the new payment plans and are making timely payments. If the new plans aren’t accepted by borrowers or if borrowers fail to make payments, the machine learning-enabled system amends the offer on the fly (for example, by lowering the monthly payment and extending the life of the loan).

While the coronavirus pandemic remains a global tragedy, it has prompted forward-looking businesses in nearly every industry to examine and update their practices, with an eye toward both empathy for customers and increased efficiency. We believe auto lenders are on the cusp of significant improvements.

To learn more, visit the Banking section of our website or contact us.

This article was written by Renuka Kambli, a Director in Cognizant’s Banking & Financial Services Consumer Finance Consulting Practice.