Photo by Johannes EISELE / AFP
An economic downturn is coming soon. No one expects the next recession will be as “great” as the last one, but the outcome for consumers depends as much on how lenders treat them in the process as on the severity of the downturn. Have lenders learned anything from the last time?
While the exact timing of the next recession is anyone’s guess, shrinking business investment, an inverted yield curve and stock market volatility point to the waning of the longest expansion in U.S. history. In the meantime, the situation on Main Street suggests there’s plenty of shoring up to be done ahead of the storm.
In the current environment, managing through a downturn will require partnering with customers to help them work through financial challenges, as opposed to making the first and fastest claim on a consumer’s assets.
Households are slightly less leveraged overall than they were a decade ago. This time, though, instead of mortgages, consumers have been taking out auto loans and personal loans to supplement stagnant wages, service their student loans, and afford rising housing and health care costs. According to TransUnion, outstanding personal loans totalled $138 billion and the end of 2018, a 200% increase from seven years ago.
Lenders have been happy to oblige, in ways that are likely to come back to bite them in a downturn. For instance, nearly a third of new-car loans made in the first quarter of this year had terms of six or seven years, whereas a decade ago only 12% of loans had terms that long. Plus, those loans are now more likely to include a rollover of existing auto debt.
In the personal loan market, which is now dominated by online lenders that haven’t been around long enough to have experienced a downturn, much of the lending has been in the name of credit-card consolidation. The dirty secret of the industry is that, by giving customers a lower interest rate to pay down existing card balances, the loans are often less likely to get someone out of debt permanently than to enable the next spending spree.
Given that 45% of Americans don’t have savings to cover three months of living expenses, all it would take is a small uptick in unemployment - not unlike the government shutdown earlier this year - to push paycheck-to-paycheck consumers over the edge.
With uncollateralized loans and asset-poor borrowers, lenders won’t have many levers to pull. Credit card regulations will make it difficult to reprice credit to account for greater risk, and much of the growing personal loan debt is in the form of installment loans. New debt collection rules, coming soon from the Consumer Financial Protection Bureau, will require different practices.
Companies that have been early to adopt broader financial health strategies are most likely to have built the kind of trust with customers that translates into positive engagement when times get tough.
U.S. Bank figured this out three years ago, when its mortgage delinquency call center partnered with SpringFour to provide referrals to tens of thousands of outside resources for struggling borrowers, such as utility assistance, food savings, prescription drug rebates and employment help. U.S Bank customers who received referrals were 10% more likely to remain current on their mortgage, and more than twice as likely to engage in foreclosure prevention activities. BMO Harris Bank, another SpringFour partner, provides free self-service access to those resources on its public website.
Oportun, which has made over $1 billion in installment loans mostly to lower-income borrowers in the Latinx community, has taken a higher-touch approach, providing customers with access to free telephone-based financial coaching through a partnership with UnidosUS. Since launching the partnership in late 2017, the national advocacy organization has helped about a thousand borrowers reduce their total debt by more than $157,000 and increase savings by nearly $30,000. Relatives of Oportun customers unexpectedly began asking UnidosUS for coaching too, and the pilot has now turned into a nationwide rollout.
Partnerships are flowing in the opposite direction as well, with credit counseling agencies experimenting with new fintech offerings to increase client engagement and improve the overall experience. GreenPath, one of the nation's largest providers of financial counseling and debt management, partnered with EarnUp to integrate its automated installment debt repayment service into the GreenPath offering. The service breaks up a consumer’s single monthly loan payment into multiple smaller withdrawals, typically on paydays, across multiple loans.
Given all of the payments innovation of the last decade, one would think that providing flexible, automated loan payments would be standard. Not so in the world of loan servicing and collections, which is still largely a backwater of outdated technology and poor customer experience. The reach of fintech into this dusty corner of the industry is still nascent, less because of the challenges of complex technology integrations than because of misaligned incentives. Intervening early with struggling borrowers doesn’t make economic sense when a lender or servicer makes more money from late fees than interest payments.
Incentives that are designed by companies to win when their customers fail derive from corporate cultures that value shareholders above all else. The recent pronouncement from The Business Roundtable - which includes some of the biggest lenders in the country - abandons shareholder primacy by renewing capitalism’s commitment to all stakeholders.
As the lending industry prepares for the coming downturn, let’s hope that the seeds of this new cultural mandate take root quickly - for the benefit of both borrowers and the economy as a whole.
