You can spend your entire career in the Financial Services industry and never hear the word “shame” within a work context. The Covid-19 pandemic, along with the social and economic disruptions caused by it, has made it vital for banks to understand how shame might be affecting their clients. In this blog post, we will discuss the rise of shame, why it needs to be understood, and how financial institutions can apply this research to improve treatment of their customers at the present time.
The Surge of Shame
In the coming months, an increase of delinquencies is expected due to the Covid-19 pandemic. These delinquencies will now include an unprecedented class of borrowers—the involuntarily delinquent borrowers. With previously excellent payment and credit histories, and profitable for banks, these borrowers have had their income and/or wealth unexpectedly impacted by a sudden suspension of commercial activity. The degree of economic hardship suffered by these involuntarily delinquent borrowers will vary by country and industry sector, in accordance with the different methods and the severity of social restrictions imposed by different communities.
The collection efforts of banks and specialized third parties, which are based on practices proven to be successful in the past, are likely to be ill-suited for these involuntary delinquents. This is because there is no precedent to predict their mental, emotional, and economic behavior. Furthermore, many involuntary delinquents could quickly return to valued customer status once economic activity relevant to their income and/or wealth resumes. These customers will regain their status, and creditworthiness, and will again be profitable for the banks. At this juncture, banks need to avoid any resentment, and could increase their share of wallet with profitable segments of the market.
Shame Shields: How Shame Manifests Itself in Collections
The collections process can be a distressing event that causes customers to put-up a shame shield as a way to help cope with the negative emotions that stem from shame. As defined by Dr. Brené Brown, a shame shield is a type of defense mechanism that we use to protect ourselves during a distressing event, which triggers our primal fight, flight, and freeze response. By recognizing which type of shame shield a customer exhibits, banks will gain the ability to choose the most effective approach during collections.
There are three different kinds of shame shields that customers use, depending on their response:
- Shield #1: Moving away from shame by withdrawing, hiding, keeping secrets, or staying silent. This shame shield is most similar to the flight response, where individuals seek to distance themselves from the threat. During collections, this shame shield is reflected by customers avoiding contact by not responding to texts, letters, or calls.
- Shield #2: Moving towards shame by seeking approval and belonging from the source of their shame. This shame shield is used to appease the threat and buy some time. This is reflected in customers trying to appease and please by promising to follow a repayment plan, but not doing it.
- Shield #3: Moving against shame by trying to gain control and power over others or by being aggressive. This shame shield is similar to the fight response, where an individual seeks to overpower and “win” against the threat. During collections, customers using this shield are generally more aggressive and make conversations with their bank unpleasant.
The Solution: Utilizing Insights About Shame
Financial Institutions can approach the different challenges that each of these shame shields brings through a combination of insights from research into shame, customer research, and advanced dynamic analytics. Our solution consists of three stages:
Stage One: Establish New Analytical Segments
Identify new customer segments for involuntarily delinquent borrowers through data analysis, characteristics in a situation with high vulnerability, and careful documentation of the new class of borrowers for reference.
Stage Two: Create Collection Best Practices
In addition to the research collected in stage one, use existing scripts and previous calls to identify successful patterns and best practices that can be implemented to improve engagement with delinquent borrowers.
Stage Three: Test Collection Strategies
After creating and establishing best practices for collection in the previous stage, test the new collection strategies alongside traditional collection strategies. Use the tests and evaluations to improve and fine-tune the new collection strategies.
From Shame to Recovery
Through our proposed solution, we see the addition of shame to financial institutions’ vocabulary as an essential tool to empathetically and respectfully reach those who have been greatly affected by the pandemic. There will be a lot to learn from testing and re-testing, but this will be a necessary step in learning how the collection process can be improved for current and future times of disruption. Instead of seeing collections as a means to an end, financial institutions can use this as an opportunity to forge and revitalize their relationships with customers.