Navigating Canada’s Consumer Debt Crisis: A Shift in Approach and a change in Mindset

As Canada confronts a growing consumer debt crisis, the way lenders and agencies engage with consumers and assess affordability must evolve too. Research shows that 1 in 3 households are struggling to pay bills, with increased reliance on credit for essentials and missed payments are on the rise. Mortgage payments are expected to surge, leaving many Canadians financially vulnerable. While the industry has embraced digital communication, widespread fraud and consumer mistrust require a rethinking of strategies. The integration of AI and personalized, multi-channel approaches holds promise, but understanding consumer affordability will be key to fostering sustainable financial habits and shaping the future of legislation.

According to research from leading debt charity Prosper 1 in 3 households are struggling to pay bills, and data from Equifax and TransUnion shows an increased reliance on credit cards for essentials, combined with increased missed payments on credit products. RateHub.ca is predicting that 23% of Canadians will renew their mortgages in 2024 and 50% within the next two years with the Bank of Canada forecasting median monthly mortgage payments could rise by as much as 54% by 2027.

The mantra for both lenders and their agency partners is to find smarter ways to engage is not new and most have acknowledged and deployed new processes. With 1 in 2 consumers now avoiding phone calls, the inevitable adoption of digital communication initially generated immediate success however has reached a plateau more recently. Widespread fraud in SMS and Email has led to consumer mistrust, requiring organizations to rethink both their messaging strategies and message content to re-enforce consumer trust in their brands. The key now lies in using a multi-channel approach, delivering personalized messages across all platforms and learning from customer experience data to form a more targeted approach.

AI has begun to play a role in this too, with 11% of U.S. collection agencies using AI and another 60% planning to adopt it to determine the next best action. In Canada, the emergence of AI has been slower and is predominately used by Agencies to replace outbound voice verification solutions. While AI-driven services have an obvious potential to offer a more personalized outbound engagement experience, there are still uncertainties from the regulators on its use and a lack of expertise to manage the models resulting in very few case studies to prove the value proposition.

The most immediate value of AI is expected to be seen in improving a consumer's inbound experience, particularly by reducing hold times. An AI agent can triage simple issues, saving costs compared to live agents, and better prepare and train agents to handle more complex conversations. An AI agent can also capture and summarize relevant details—like missed payments and financial challenges—so that agents can pick up where the AI leaves off, ensuring continuity and reducing the need for consumers to repeat themselves.

Understanding consumer affordability will play a vital role in once you have engagement to ensure a personalized plan of resolution can be formed. The UK's, “fair treatment” guidelines that have been in place for over a decade, have required both creditors and agencies to prove their understanding of a consumer’s true financial position before offering a payment option. Both open banking and digital affordability solutions has helped them both meet these regulatory needs and manage their operational costs, and will be central to navigate the new Consumer Duty Act, which mandates creditors to prove their decisions are in the consumer’s best interest.

While Canada is not expected to adopt this same model fully, there are lessons to be learned. If consumers are encouraged through a personalized digital journey to willingly share their affordability position organizations could significantly reduce broken promises, save time, and improve consumer outcomes.

Currently, according to research approx. 15% of Canadians have the financial literacy required to fully understand credit products which the Canadian government’s five-year plan, initiated in 2021, aims to address. This remains a huge task and may still take several years beyond 2025 to collate the data to reform legislation. Compelling this new immigrants coming to Canada and being able to access credit is also another concern for the government although new independent research has indicated 66% of newcomers move into a 'prime' credit criteria within 3 years.

While this moment brings numerous uncertainties and concerns, it could also offer a significant opportunity for creditors and agencies to influence and shape the future of legislation too. Rather than reacting to regulatory changes—as businesses in the UK were forced to do, often at great cost—Canada has the chance to proactively integrate smarter digital communication, affordability tools, and AI into operations collecting both data and proving best practice. This proactive approach could not only support consumers during these uncertain times but it may also promote greater financial awareness, overcome barriers for newcomers and encourage healthier financial habits for the future too.

About the Author

Simon Howard has over 20 years of experience in the credit, risk, and receivables industry, with a focus on digital transformation and customer engagement. He is passionate about leveraging technology, including AI and digital communication, to improve both consumer's financial literacy and to create sustainable solutions for managing consumer debt. Simon is a frequent speaker at industry events and is dedicated to helping organizations adapt to evolving regulatory landscapes while enhancing customer experiences.