20 Jun 2023

Direct interaction with bank employees speeds up loan repayments

Banks increasingly manage customer relations through automated letters or online notifications. However, a personal conversation with bank employees can positively influence the behavior of defaulting borrowers

Investor relations by Scott Graham/Unsplash

A telephone conversation between bank employees and defaulting debtors is crucial for the latter to clear their arrears more quickly than defaulting borrowers who simply receive an automatically generated payment request from the bank. Personal contact makes a difference. This is the result of a study by researchers at the Leibniz Institute for Financial Research SAFE and the University of Washington, which is forthcoming in the Journal of Finance.

“Face-to-face communication increases the likelihood of on-time loan repayment by 34.4 percentage points,” says Christine Laudenbach, Director of SAFE’s Research Department Household Finance and co-author of the study. In addition, the probability of default decreases by 23.8 percentage points and that of the bank's early termination of the loan by 12.4 percentage points. The positive impact of direct contact extends into the future, as delinquent borrowers who talk to bank employees are much less likely to default again.

The social aspect is decisive

“Interestingly, these positive effects cannot be attributed solely to the fact that debtors are reminded to pay or that they notice that the bank is keeping track of their arrears,” Laudenbach elaborates. Instead, the social aspect is decisive: 84.5 percent of customers who had talked to bank employees with a pleasant voice on the phone paid the outstanding installment within six weeks. Among bank customers whose interlocutor did not have a friendly voice, this proportion was only 71.6 percent.

The study looked at small loans with installment payments processed through a bank that consumers can take out directly at the point of sale when purchasing goods such as furniture, household appliances, or electronic items. The credit data come from a large German bank, one of Germany’s five largest private banks. For their study, the researchers looked at 3,448 consumers who took out small loans between January and June 2012 and had no other account with the bank.

According to bank data, eight percent of consumers defaulted on their installment payments. For the study, they received an automated letter from the bank informing them that they were in arrears and requesting that the borrowers pay the installments within a certain period.

Find the paper here

Scientific Contact

Prof. Dr. Christine Laudenbach

Director Research Department "Household Finance"