This Isn’t Your Dad’s Economy: Americans are Struggling and Community Financial Institutions Can Help
CEO, Velocity Solutions
According to leading economic indicators in June 2019, the US economy is doing well. It has steady growth, low unemployment, and little inflation¹. In fact, June marks the 10th straight year of a growing economy², and we’re on track to break the prior record of economic expansion set during the 1990s tech boom³. Yet, the statistics regarding the financial health of typical American households don’t paint as sunny a picture:
- The average American household has an average of only $8,863 in liquid savings in a deposit account4
- 60 percent of millennials don’t have enough money to cover a $1,000 emergency4
In the Federal Reserve’s most recent annual report on household well-being:
- Almost 39% of Americans said they wouldn’t be able to scrape together the cash to meet a $400 emergency expense5
- More than 6 in 10 said losing their job would mean they couldn’t cover three months of expenses5
- Only 36 percent said their retirement savings are on track5
- Almost a quarter of Americans skipped some form of medical care in the past year because they couldn’t afford it5
An Alarming Lack of Liquidity
Why are the statistics so dismal when the economic outlook is so bright? There are several reasons.
While the improving economy has reduced unemployment, wage growth still doesn’t cover the gaps experienced by underserved, low-income segments of society. The authors of the Federal Reserve’s annual report stated: “Another year of economic expansion and the low national unemployment rates did little to narrow the persistent economic disparities by race, education, and geography5.”
But there’s more going on. Millennials are struggling with crippling student loans, high rents or mortgages, low wages and numerous other financial obligations6. A MarketWatch article from 2018 suggesting that millennials should already have twice their salary saved for retirement resulted in an angry and defensive backlash from this group and quickly went viral6. It’s not surprising, however, since a significant percentage of this group entered the job force either on the heels of the Great Recession or right in the middle of it.
And as college degrees become increasingly necessary (even being the minimum requirement to succeed nowadays in many jobs), competition has increased considerably for the most desired schools, and tuition costs continue to rise accordingly along with the student loans to pay the tab. We’ve all heard the frequently-cited assertion that millennials are the first generation to be financially worse off than their parents, but the statistics above seem to support this as fact.
The Golden Years Not So Golden
The lack of liquidity many Americans experience extends to the post-employment years as well. Employer-sponsored retirement plans aren’t what they used to be. Few of us will get to benefit from the type of pension plan our parents enjoyed, since many employers have switched to defined-contribution plans like 401(k)s, placing the responsibility for retirement savings largely in our own hands6. And the uncertain future of Social Security benefits is frequently discussed in the press, with predictions that the Social Security reserve fund will be depleted by 2034-20357.
The Price of Being Broke
So, with Americans in such critical need of liquidity, how are they obtaining it? Historically, there haven’t been many desirable options for obtaining cash, particularly for those Americans with lower credit who are unable to obtain short-term liquidity from traditional sources. Many consumers have resorted to high-cost—even predatory—loans that come with interest rates as high as 1,000% or more. Other consumers are forced to skip bill payments and forgo essentials such as medical care and car maintenance. And the situation snowballs from there, creating bigger problems for the individual consumer. Missed bill payments lead to credit score reductions (which means higher costs of credit), late fees, and even eviction or foreclosure. Consumers who neglect their basic wellness can end up being treated and hospitalized for illnesses that could have been prevented, incurring even larger medical expenses than the initial cost of preventive care.
Consumers and the Government are Counting on Community Banks and Credit Unions
Research has demonstrated that consumers would prefer to obtain short-term credit from YOU – their local financial institution – and regulatory agencies such as the CFPB, FDIC, OCC and NCUA are encouraging community banks and credit unions to provide responsible small-dollar loans to their account holders. But historically, the obstacles and costs precluded them from providing these types of loans. In the past, the two biggest impediments for community-sized financial institutions to offer affordable short-term loans were complex regulatory requirements and operational obstacles: time, cost and underwriting. But the government is doing its part to ease up on the regulatory requirements, and the operational side of underwriting and processing these loans is made feasible with digital technology.
Digital is the Answer. FinTechs are the Way.
By leveraging digital, turnkey loan platforms, financial institutions can provide much-needed liquidity to their account holders—responsibly, affordably and compliantly. For community financial institutions, the most logical way to get there is to partner with a digital lending technology provider. Building a loan platform in-house is out of reach for most community banks and credit unions, due to the required expertise, resources and costs.
With the introduction of affordable and compliant loan automation software, financial institutions can enjoy efficiencies of automating the entire loan process and avoid the high cost of individually underwriting and documenting short-term, small dollar loans, while providing their consumers a much-needed valuable service.
Here are just a few benefits of implementing a digital lending platform:
- New source of revenue to your financial institution
- Lower cost and more efficient than manual solutions
- Fully automated – no loan officers needed
- Loans automatically booked to your core
- Many FinTech providers offer underwriting processes based on alternative data instead of traditional credit scores
- In most cases, your account holders can apply for a loan 24/7 on your white label website or app
- Offer a valuable service that will help acquire new account holders and keep existing account holders coming back.
We may not be dealing with your dad’s economy, but your dad’s local financial institution didn’t have access to today’s digital technology! Partner with a FinTech to provide much-needed liquidity to your account holders in a responsible, compliant and affordable way. Who knows – you might be saving the economy!
1 – https://www.thebalance.com/how-is-the-economy-doing-3306046
2 – https://www.forbes.com/sites/kenrapoza/2019/05/07/the-u-s-economy-is-not-stalling-its-expanding/#664bb4d23d8e
3 – https://www.washingtonpost.com/news/wonk/wp/2018/04/18/the-u-s-is-on-track-for-the-longest-expansion-ever-but-its-coming-at-a-cost/?utm_term=.e53ba9e664f2
5 – https://www.washingtonpost.com/us-policy/2019/05/23/americans-arent-ready-weather-sustained-downturn-new-report-shows/?noredirect=on&utm_term=.9781234eca06
6 – https://www.marketwatch.com/story/this-is-why-americans-dont-save-even-when-they-know-better-2019-02-25
7 – https://www.barrons.com/articles/social-security-deficit-reserves-check-benefits-payroll-tax-51555958282
8 – https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2017/04/payday-loan-customers-want-more-protections-access-to-lower-cost-credit-from-banks