Winning the Long Game: Reimagining Credit to Build Consumer Financial Health

Financially underserved consumers spend $173 billion annually to manage their day-to-day financial lives — including $97 billion on short-term credit products. How can lending solutions build brand loyalty that grows with borrowers’ financial health?

To learn more about credit and the underserved market opportunity, download CFSI’s 2017 Financially Underserved Market Size Study.

This fall, the Consumer Financial Protection Bureau finalized regulations concerning Payday, Vehicle Title, and Certain High-Cost Installment Loans. The rule, set to go into effect in 2019, aims to prevent borrowers from becoming mired in cycles of debt they are unable to repay. While these regulatory moves may mean the end of payday lending as we know it, the consumer need for credit is not going away anytime soon.

Credit card debt has reached an all-time high at over $1 trillion. The Federal Reserve reports that 44% of Americans lack savings to address an unexpected expense of $400 without resorting to borrowing, selling valuables, or otherwise coming up short. Households that handle shortfalls in liquidity by using small-dollar credit, such as payday or pawn shop loans, continue to struggle. CFSI’s Consumer Financial Health Study found that 92% of small-dollar credit borrowers are financially unhealthy. Seventy-five percent juggle bills and half are unable to save.

The opportunity to better serve struggling consumers is huge. CFSI’s 2017 Financially Underserved Market Size study found underserved U.S. consumers spent $173 billion to manage their financial lives in 2016, including $97 billion on single payment and short-term credit products. How can lenders and account providers address their needs at scale?

When it comes to financially underserved consumers, long-term engagement strategies are often overlooked — a missed opportunity to build loyalty and engagement among a customer base eager to find workable solutions for their financial needs.

For instance, frequent overdrafters provide a revenue stream to their banks — until they don’t. The top 20% of overdrafters are more than twice as likely to close their checking accounts as other customers. Meanwhile, CFSI estimates that underserved consumers paid $24 billion in overdraft fees in 2016 — more than they spent on payday, pawn, and title loans combined — to cover shortfalls amounting to only $521 for an average account over the course of the year.

Could banks and credit unions retain more of these account holders by offering new solutions to help them address small gaps in liquidity? Startup fintech Dave thinks so. Dave, a 2017 Financial Solutions Lab winner, becomes the expert on their users’ checking account balances to predict their fund levels seven days ahead, provide alerts before a shortfall occurs, and offer interest-free paycheck advances to smooth potential shortfalls without overdrafting.

Bank innovations are rethinking overdraft solutions too. Capital One now offers options to avoid overdraft fees through a grace period, a transaction decline, or by transforming checking account shortfalls into loans from a linked line of credit account which can be repaid over time.

The financially underserved market grew 6% in 2016 and is projected to grow another 8% by the end of this year. How can providers win the long game to meet credit needs sustainably? The answer can start with building brand loyalty and engagement strategies that grow customers’ financial health while meeting their short-term needs.

To learn more about credit and the underserved market opportunity, download CFSI’s 2017 Financially Underserved Market Size Study.