Why Some Savers Don’t Pay Down Debt

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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.”  

Community Banks and the Adoption of Real-Time Payments

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The Covid-19 pandemic dramatically reshaped how community banks approach digital transformation.

This is largely in response to the shift in fundamental consumer behaviors and new technology, as Americans adapted to the realities of the pandemic. According to a report from Mojo, 44% of consumers who wait to adopt new technology have shifted to an “early adopter” stance. Additionally, 41% of “later adopters” stated they were likely to adopt new technology at a faster pace, even after the pandemic subsides.

Digital innovation is no longer an option for banks. Financial institutions must evaluate their digital products against consumer expectations. Leading the list of customer demands is access to more convenient and immediate payments. The pandemic’s remoteness made receiving and making immediate payments a necessity, accelerating the movement to real-time payments (RTP).

RTP are not a new concept; many countries have transitioned from paper-based payments and directly to real time. The U.S. has successfully worked with electronic payments, but is now behind in the global shift to real time. The Clearing House launched RTP in 2017; it experienced slow but steady growth initially but has been propelled by the pandemic more recently.

Addressing the growing need for immediate payments, the Federal Reserve announced plans for FedNow to streamline the clearing and settlement process. FedNow will enable customers to move funds instantly between accounts, pay bills and transfer between family and friends. Though FedNow garnered strong support from banks, it is not expected to launch until 2023 at the earliest.

No Time to Wait
Financial institutions are finding it difficult to wait for FedNow. Although vaccinations have blunted most of the impacts from the pandemic, the changes in consumer habits engendered by the pandemic persist — including demand for innovation in real-time payments. Consumers looked to technology for shopping, entertainment, paying bills and banking in general. A recent PYMNTS survey found that 24% of consumers would switch to financial institutions that offered RTP capabilities. It’s critical that banks recognize and react to this paradigm shift in payment by prioritizing RTP solutions.

Popular P2P payments apps like Venmo, PayPal Holdings, and other solutions from big tech companies underline that consumers are willing to adopt new technologies to meet a need. Now, these firms are offering credit cards, loans and even demand deposit accounts. (I even received an invitation to open a checking account from my cell phone company!) This should be a wake-up call to banks. In the same PYMNTS survey, researchers found 35% of consumers consider access to real-time payments as “extremely” important. These survey results reflect a growing trend and reality that financial institutions must recognize and address.

The race is now on to compete with non-traditional providers and megabanks to attract and retain tech-interested customers. Real-time payments are where consumers and businesses are headed. Financial institutions need to be fully engaged to connect to RTP or FedNow.

This is not an easy path for financial institutions that are used to making project decisions based on calculating the return on investment of the project alone. Strategic technology initiatives should be evaluated broadly, including the cost of doing business in banking. Large financial institutions have already moved forward to deliver top-notch digital services and experiences. To level the playing field, smaller institutions should look to technology savvy leaders and fintech partners to help deliver innovative solutions. Unheralded sources for fintech solutions are the bankers’ banks, which play a vital role for technology and as funding agents in RTP/FedNow and are offering innovative solutions to help community banks connect to real-time payments.

Changes in customer behavior and heightened demand for immediate payments driven by Covid-19 are here to stay; adoption of RTP will only continue to grow. In just the last year, real-time payments in the United States grew 69% year-over-year, according to Deloitte.

To act now, financial institutions should consider fintech partnerships to remain relevant in a dynamic financial and regulatory landscape. Financial institutions that tap into technology companies’ speed to market and access to a broader audience can approach RTP as a competitive advantage that distinguishes them in their local markets and attract new customers. Those taking a “wait and see approach” are already behind.

How Digital Tools Can Create Consumer Confidence

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The coronavirus’ challenges offer banks an opportunity to reassure shaken consumers and help them reestablish a sense of control.  

Consumers are concerned about protecting the health of themselves and their families and, increasingly, the impact Covid-19 could have on their financial well-being. Unemployment is at its highest level since the Great Depression; approximately 50 million U.S. workers have filed for unemployment since March. One survey found that 38% of individuals report checking their account balances more frequently than before the pandemic — a clear sign of anxiety around finances.

Banks are uniquely situated, as already-trusted partners, to provide the peace of mind and assurances that consumers desperately seek during these anxious times. Consumers will build loyalty toward those institutions that help them feel aware and in control of what’s happening with their money, even in virtual spaces.

A few ways that banks can increase confidence as consumers increasingly rely on digital payments include transaction alerts, increasing contactless payment limits and giving spending insights, including recurring transactions.

Alerts and insights help consumers feel more in control of their financial situation. Consumers have shifted their spend toward debit cards and checking accounts as they seek to limit accidental overspending and avoid debt. Monthly insights can give them a quick view of their spending by merchant type and location. Making it easy to see where card data is stored online, and with which merchants, allows consumer to review their recurring transactions and easily remove cards from accounts and merchants they are no longer using. 

Increased credit limits help consumers feel like they have more options for safe and contactless payments. With rising infections, lockdown and social distancing causing a drop-off in travel, social events and eating out, online commerce and contactless transactions are increasingly replacing cash transactions.

While Covid-19 accelerated the uptick in the use of these digital payment methods, many Americans may continue these new habits post-pandemic. As many consumers remain reticent to venturing out of their homes for errands, visits to branches for service requests have migrated to bank contact centers. To manage this increase in the number of requests to call centers, banks should encourage consumers to handle everyday requests themselves through online and mobile self-service tools. Doing so will allow phone support to prioritize in-depth items that require personal support.

For example, providing precise and detailed transaction information to consumers on their mobile apps will reduce the numbers of queries and false disputes raised with contact center staff through misunderstandings or confusing transaction details. Other digital capabilities that banks can offer range from simple card controls — like turning a card on and off, or resetting a PIN — to more advanced features, such as disputing a transaction or applying for a new account.

Consumers now tend to expect similar easy-to-use experiences across all of their apps. With tech companies like Amazon.com and Google setting the bar high, it is essential that financial institutions also offer robust features and intuitive design. The past six months have brought with them a dramatic acceleration in digital payments, and financial institutions should grasp the opportunities to continue to be the trusted and reliable pillar on which their account holders lean.