Life is more expensive now. At least that’s what we’ve all been led to believe in the last few months by a constant barrage of media speculation. But while it’s always healthy to take such proclamations with a pinch of salt, there is definitely truth behind the scaremongering.
The cost of living crisis catalysed by pandemic-induced supply chain backlogs, worker shortages, and the war in Ukraine is a global problem with no simple solution. Inflation is a natural and healthy aspect of any economy but for dozens of countries across the world, substantial increases in the cost of everything from food and fuel to housing have become untenable for millions.
As ever, it’s the developing nations that are feeling the pinch most profoundly, with some countries seeing prices of basic food raise by as much as 85%. But that’s not to say the first world has managed to avoid the fallout. In the UK, for example, the crisis is constant headline news, with the Office of National Statistics estimating inflation has reached its highest-ever recorded level.
All of this financial strife will eventually find its way to lenders when consumers buckle under the weight of increasing living costs and can no longer afford to pay their debts. But how can we ensure the situation doesn’t spiral out of control?
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Inflation rates globally have never been higher. In the US, the annual inflation rate sat at around 8.3% back in April and global inflation is set to reach 6.7% later this year. While there are some local and regional factors to take into account (Brexit in the UK, for example), the global factors attributed to the global hike are as follows.
The troubles arguably began with the onset of the coronavirus pandemic in March 2020, with closed borders and shut businesses leading to a pretty severe economic shock. However, it was only once the world started to slowly recover from the virus that inflation really started to kick in as short-term inflation was starting from a much lower base rate.
With travel restrictions still in place in many regions (such as Japan and China), we are still suffering the effects of the pandemic today. The “zero-tolerance” COVID policies being instigated by China and continued lockdowns in major cities have also resulted in global supply chain problems
When Russia invaded Ukraine in February it took an already uncertain and unstable economic future and threw another monumental spanner in the works.
Russia has always been a key exporter of energy and sanctions placed on the country due to a completely unprovoked invasion of their neighbouring country have led to a situation where companies across the world are struggling to wean themselves off Russian energy. This has, understandably, led to massive energy and food price increases.
Climate change is a hot topic issue that appears to have almost been put on the back burner in the wake of the pandemic but unpredictable weather events caused by global warming have had a demonstrable impact on the cost of living.
The Indian government, for example, has been forced to ban wheat exports due to a record-setting heatwave. Given that India accounts for a third of global wheat exports, that’s certainly something of an issue. Brazil is another country and major exporter that’s suffered, with major droughts crippling the agricultural sector. Some are referring to this “greenflation” as a temporary problem but the climate crisis is likely to be one that far outlasts the cost of living crisis.
Many economists have argued inflation itself is actually driving further inflation as businesses start setting higher prices in preparation for it. This is a sort of self-fulfilling prophecy that can lead not only to rising costs but a rise in the value of a local currency.
In some countries, meanwhile, as their currency isn’t worth as much as it was a few years ago, import costs rise exponentially. In Turkey, for example, the lira’s value has plummeted, resulting in annual inflation of almost 70%. Interest rate increases will also hit countries already saddled with debt, making it harder for them to provide inflation relief.
Read more on the future of debt collections and new trends in customer service
With the cost of living at an all-time high, it’s not only “the usual suspects” that are falling into debt. While many self-employed workers and renters are, of course, finding themselves struggling to fulfill their financial obligations, there has also been an increase in wealthier households being unable to pay their debts.
Roughly 13% of new customers fall into this category and these are debtors essentially not used to being in debt and not fully aware of how to handle it. Debtors with costs that exceed their income are also rising and, as the cost of living continues to increase, this category is only going to expand.
Consumer expenditure is expected to increase even further throughout 2022, with many individuals projected to miss payments that might never have missed payments before. For lenders, this presents a two-pronged problem.
On one hand, they are dealing with existing debtors spiralling even deeper into debt, and on the other, they have this new batch of debtors who don’t know how to be in debt. These customers are going to require a little more help when it comes to organising their debts. This is where debt collection software comes into its own.
Debt collections has evolved over the last decade or so from a back-office operation to a more proactive challenge. With the cost of living leading to a rise in desperation borrowing as households struggle to make ends meet, things are only going to get worse and lenders need to step up their operations to meet increased demand.
Good practice is, as ever, always going to be crucial in times of hardship, and cultivating a smoother debt collection process is one-way lenders can ensure they have the best possible chance of reclaiming payments.
Debt collections software consolidates the collections process into one connected system that lets you know when to reach out to debtors and how they prefer to be reached. It also promotes digital payment as an option, which is a definite benefit given that primitive cash collection methods are generally more likely to incur bad debts.
Long gone are the days when customers expected intrusive phone calls offering ‘gentle’ reminders. Today, customers expect to be able to manage their debts from their phones, contact AI help 24/7, and have every possible stage of the process automated for maximum efficiency. This is something only possible with digital transformation and debt collections software.
If the cost of living crisis is troubling your debt collections teams, contact us at EXUS today for more information on our industry-leading debt collections solutions