Walking a Financial Tightrope (Without a Safety Net)

I recently visited the community bank down the street.  While waiting on the branch employee to generate my paperwork, I noticed information on her desk about rates and the required minimums to open accounts.  I asked her about the $100 minimum to open a savings account, which also came with a $5 monthly fee.  “Do many people open savings accounts with those conditions?”

I was unprepared for her response: “No, that’s why I haven’t been able to open one.  Although I’d like to.” I had to wonder about the commercial viability of account design when a bank’s own employee believes that opening a savings account is out of her reach.

Many financial institutions have turned to account fees to help replace lost revenue streams. Non-interest income is vital to their sustainability, but at a time where most Americans are not saving enough, does it make sense to create barriers that discourage beneficial behaviors like saving? 

After years of average consumer savings
barely hitting 1% of annual income, the recession reinvigorated the level of personal savings to 4%. While the economy appears to be improving, according to recent data from the Federal Reserve the average American has yet to experience the economic recovery. In tough times old habits are hard to break, and consumers once again are unable to plan for the proverbial rainy day.

Consider some startling statistics from recent research:

• Roughly three-quarters of Americans are living paycheck-to-paycheck.
• 26% of households are “net worth asset poor,” meaning that the few assets they have — such as their home or car — are outstripped by their debts.
• 22% had less than $100 in savings to cover an emergency, while 46% had less than $800.
• 27% had no savings at all. 
• About a third of consumers admit they aren’t familiar with the basic savings options available to them.
• 35% confessed they don’t have any idea where they should put their savings if they had any.

This dire picture extends beyond the 42 million below the official poverty line. Others are walking a financial tightrope, too.  25% of middle income households earning $55,465-$90,000 have less than three months of savings. Given this lack of a safety net, it comes as no surprise that 7% believe they will never retire.  With today’s low interest rates, many people believe there is little gain by saving; yet, having a nest egg offers advantages well beyond peace of mind.

What happens when the unexpected happens and an infusion of cash is needed for an emergency?  Without savings, choices are limited. Many that previously relied on credit cards have watched as access to unsecured funds dried up: “Analysis by the investment bank Jefferies concluded that since 2009, approximately $122 billion in credit availability to Americans with scores of below 660 has been removed from the market,” according to a recent article in American Banker.

Many consumers with an urgent need will resort to a payday loan. Today, there are more payday lending storefronts in the U.S. than McDonalds and Starbucks locations combined. While some states are capping allowable interest rates, some of these lenders charge more than 400%.  And as online and mobile access become ubiquitous, so has internet-based payday lending. By 2016, Internet loans will make up roughly 60% of payday loans, many of which are not governed by U.S. regulations.  

While representatives of the payday lending industry state they are providing a needed service that their customers willingly purchase, a growing number of voices are challenging that position.  “They are stripping the wealth from our communities,” admonished Iowa State Senator Matt McCoy.  In an American Banker report, Kat Taylor, CEO of One PacificCoast Bank in Oakland, California said payday lending, “is a death trap that ruins individuals, households and whole communities and is the scourge of our time…We need to be in the business of creating bank customers, not destroying bank customers."

I think we can all agree that there are a number of social benefits derived from helping consumers avoid a cycle of debt, prepare for emergencies, and establish and cultivate solid credit habits.  

So what can an FI do?  Here’s a short list of ideas:

• Offer a savings account as an adjunct product for all checking accounts.
• Address barriers to opening and growing savings, such as high minimum balances and punitive maintenance fees. Establish reasonable entry requirements and monthly fees that won’t dis-incent saving by diminishing the account balance.
• Educate customers and prospective customers about savings options at your FI. 
• Offer financial literacy assistance.
• Get creative - consider innovative programs designed to make savings easy.
• FIs that offer cash back rewards for debit or credit card transactions might consider a program where the rewards earned are deposited into a savings account; it’s a painless way for customers to start building that safety net, and may incent participation in the rewards program. (Coincidentally, it may help position your card top of wallet.)
• Greater Texas FCU offers a Safety Net Savings Program, which provides incentives for members to prepare for the unexpected by reaching savings goals.
• Remember Bank of America’s Keep the Change® Savings Program, where transactions made with debit cards are “rounded up” for the next dollar and the difference is deposited into the accountholder’s savings account? This program encourages participation by matching the savings for the first three months.  Even though the amounts deposited may be modest, the program is an effortless way to start a savings habit.
• Some FIs are exploring small dollar, short term credit programs. (These are not to be confused with Direct Deposit Advance programs that have been recently targeted by regulators as bank sponsored payday loans.) For example, BankPlus in Belzoni, MS offers $500 and $1,000 loans for terms of one to two years, with a 5% interest rate.  Applicants are required to complete a financial literacy course to qualify. With more than 12,000 CreditPlus loans totaling $9.3 million, this $2.3 billion bank has found a profitable niche, gained customer loyalty and engendered community good will.

Doesn’t it make sense to design products that consider the overall customer experience, including products and services that support your members’ and customers’ fiscal fitness? What are other ways FIs can help address these issues? After all, isn’t it possible for FIs to do well by while doing good?

Resources

Center for Financial Services Innovation

FDIC’s Economic Inclusion Site

The National Federation of Community Development Credit Unions

Jump Start Coalition

National Financial Educators Council  

MyMoney.gov

Visa’s Practical Money Skills for Life