Why Some Savers Don’t Pay Down Debt

In an era of rising interest rates, it would make good financial sense for consumers to pay off costly credit card debt before stashing money in a low-interest savings account. But a new paper from the Federal Reserve Bank of Boston finds many consumers acting irrationally. These so-called “borrower-savers,” as Fed economists term them, carry revolving credit card debt while simultaneously holding liquid assets in their bank accounts. Understanding their motivations for doing so could help bankers identify new opportunities to connect with their customers. 

Based on 2019 survey data, Boston Fed economists identify 42% of respondents as borrower-savers, meaning they carry $100 or more in revolving credit card debt while also holding at least $100 in liquid assets, defined as cash, money in checking and savings accounts, or prepaid cards. 

Just 40% of these consumers have liquid assets that exceed their credit card debt. The average borrower-saver carries around $5,400 in liquid assets and nearly $6,400 in revolving credit card debt, according to the researchers. On the whole, borrower-savers are financially worse off than savers, who pay down revolving credit card debt every month. 

“On the surface it would seem like there is a paradox here. You get paid a fraction of a percent on your deposits in the bank … That’s nothing compared to the interest rate that credit cards charge,” says Joanna Stavins, a senior economist and policy advisor with the Boston Fed. “If you have money in the bank, why not pay down that credit card debt?” 

But scratch the surface, and that behavior actually starts to make a lot more sense: Researchers also find that over 80% of consumers’ monthly bills need to be paid out of a bank account and can’t be charged to a credit card. 

Still, that imbalance between savings and paying down pricier debt is one of those quirks of human behavior that has myriad implications for banks. For those banks not in the credit card business, it could mean an opportunity to sell their customers on cheaper consolidation loans. It could also represent an opportunity to build goodwill with customers by offering assistance with managing bills or automating savings. 

Ron Shevlin, managing director and chief research officer with Cornerstone Advisors, notes that younger generations could be likelier to use technology to get a handle on their finances. “I think that resonates especially with a lot of younger consumers who have had it drilled into them that they have to be better at managing their finances,” Shevlin says. “You get somebody who’s 25; those habits have not been ingrained yet. And so the technology, the tools, and I think more importantly, the philosophies and approaches to managing their finances have not been solidified yet.”  

For most banks, offering the right solutions will have them working with their digital banking provider or another third party. Fintechs such as Plinquit work with community banks to help their customers set savings goals and earn rewards for achieving them, according to Bank Director’s FinXTech Connect platform. 

The Boston Fed’s paper doesn’t delve into the effect of higher incomes on saving and borrowing behaviors. Or in other words, the researchers could not say that higher income enables consumers to start saving more and avoid carrying a credit card balance in the first place. Yet, savers tend to have higher incomes, averaging about $98,000 per year compared to less than $76,000 for borrower-savers. On average, savers hold about five times more liquid assets compared to borrower-savers, as well as higher credit limits and lower mortgages due to more equity in their homes. And just a third of borrower-savers could cover a $2,000 emergency expense using liquid assets, compared to two-thirds of savers.

The proportion of borrower-savers fell from 42% to 35% in 2020, note the Boston Fed researchers, likely due to pandemic-related federal assistance programs as well as increased saving by people who kept their jobs but cut back on spending. 

With the employment picture still relatively strong, borrower-savers are generally in decent shape at the moment. But Stavins notes that many of the borrower-savers studied in the paper also have other kinds of debt; she worries how the picture could change if economic conditions further deteriorate. 

The imbalance between savings and spending could worsen. “What I’m worried about,” she says, “is that people are going to start relying on credit card debt more as the economy gets potentially worse.”  

Three Steps to Building a Commercial Card Business In-House

As the economy recovers from the impact of the Covid-19 pandemic, community banks will need to evaluate how to best serve their small and medium business (SMB) customers.

These companies will be seeking to ramp up hiring, restart operations or return to pre-pandemic levels of service. Many SMBs will turn to credit cards to help fund necessary changes — but too many community banks may miss out on this spending because they do not have a strong in-house commercial card business.

According to call reports from the Federal Deposit Insurance Corp., community banks make up half of all term loans to small businesses, yet four out of five have no credit card loans. At the same time, Accenture reports that commercial payments made via credit card are expected to grow 12% each year from 2019 to 2024. This is a significant strategic opportunity for community bankers to capitalize on the increased growth of cards and payments. Community bankers can use commercial cards to quickly capitalize on this growth and strengthen the relationships with existing SMB customers while boosting their local communities. Commercial credit cards can also be a sticky product banks can use to retain new Paycheck Protection Program loan customers.

Comparing Credit Card Program
Many community banks offer a branded business credit card program through the increasingly-outdated agent bank model. The agent bank model divorces the bank from their customer relationship, as well as any ability to provide local decisioning and servicing to their customers. Additionally, the community banks carry the risk of the credit lines they have guaranteed. In comparison, banks can launch an in-house credit card program within 90 days with modern technology and a partnership with the right provider. These programs require little to no upfront investment and don’t need additional human resources on the bank’s payroll.

Community banks can leverage new technology platforms that are substantially cheaper than previous programs, enabling issuers to launch products faster. The technology allows bank leaders to effortlessly update and modify products that cater to their customer’s changing needs. Technology can also lower customer acquisition and service costs through digital channels, especially when it comes to onboarding and self-service resources.

More importantly in agent bank models, the community bank does not underwrite, fund or keep the credit card balances on its books. It has little or no say in the issuing bank’s decisions to cancel a card; if it guarantees the loan, it takes all the risk but receives no incremental reward or revenue. The bank earns a small referral fee, but that is a fraction of the total return on assets it can earn by owning the loans and capturing the lucrative issuer interchange.

Bringing credit card business in-house allows for an enhanced user experience and improved customer retention. Community banks can use their unique insight to their SMB customers to craft personalized and tailored products, such as fleet cards, physical cards, ghost cards for preferred vendors or virtual cards for AP invoices. An in-house corporate credit card program gives banks complete access to customer data and total control over the user experience. They can also set their own update and product development timelines to better serve the changing needs of their customers.

Three Steps to Start an In-House Program
The first step to starting an in-house credit card program to build out the program’s strategy, including goals and parameters for credit underwriting. The underwriting strategy will establish score cutoffs, debt-to-income ratios, relationship values and other criteria so automated decisions reflect the policies and priorities of the bank. It is important to consider the relationship value of a customer, as it provides an edge in decision making for improved risk, better engagement and higher return. If a bank selects a seasoned technology partner, that partner may be able to provide a champion strategy and best practices from their experience.

Next, community banks should establish a long-term financial plan designed to meet its strategic objectives while addressing risk management criteria, including credit, collection and fraud exposures. It is important that bank leaders evaluate potential partners to ensure proper fraud protections and security. Some card platform providers will even share in the responsibility for fraud-related financial losses to help mitigate the risk for the bank.

The third step is to understand and establish support needs. These days, a strong account issuer program limits the bank’s need for dedicated personnel to operate or manage the portfolio. Many providers also offer resources to handle accounting and settlement, risk management, technology infrastructure, product development, compliance and customer service functions. The bank can work with partners to build the right mix of in-house and provided support, and align its compensation systems to provide the best balance of profitability and support.

Building an in-house corporate credit card program is an important strategic priority for every community bank, increasing its franchise value and ensuring its business is ready for the future.