Deposit Strategies to Help Consumers Bridge the Financial Gap

Oct  27 
Jeff Burton  Director, Deposit Liquidity Solutions, Fiserv 

Consumers' need for liquidity solutions goes beyond crisis situations

Since the pandemic began, many people have needed help covering their regular living expenses. Where did they turn? Most looked somewhere other than their financial institutions.

To help a financial gap, only 8 percent of respondents applied for a loan from a financial lender in 2020, according to a recent Northwestern Mutual study. But an analysis by Fiserv of internal deposit account data from SmarterPayTM shows that overdraft occurrences dropped significantly – over 40 percent – for both consumer and small business accounts during the same time.

Who filled the gap? When unemployment hit record highs in the U.S. this year, the call for liquidity was loud. Financial institutions provided loan forbearance and waived late fees to help. The U.S. government responded with almost $5 trillion in stimulus funds for consumers, unemployment benefits and lending programs for small businesses. Those measures helped consumers meet their liquidity needs – for the short-term.

When stimulus funds run out, small businesses and consumers will need to turn elsewhere. But instead of asking their financial institutions for help, most Americans use personal savings, borrow from family or friends, or dip into retirement accounts to make ends meet, according to the Northwestern Mutual study.

Why don't people typically turn to their financial institution for short-term help? First, few financial institutions offer small-dollar loan products. Since the 2008 recession and pursuant regulation, financial institutions have struggled to develop liquidity solutions. With tighter standards, the number of accountholders who qualified for loans shrank.

Short-term, small-dollar lending encourages retention and strengthens relationships with accountholders.

Clearing Regulatory Hurdles

This spring, some limitations on small-dollar lending were lifted. Federal regulators announced new guidance – and rescinded other guidance – to make it easier for financial institutions to issue short-term, small-dollar loans to deposit accountholders who were experiencing economic hardship related to the pandemic.

Even though regulatory and compliance burdens remain high for financial institutions, they typically offer lower fees than payday lenders and other options. If digital tools are used, the application process can be simpler and more convenient for consumers. Plus, borrowers are spared sharing personally identifiable information with yet another organization.

It's an option consumers want. If it was quick and easy to obtain, 86 percent of consumers said they were somewhat or very likely to pursue a short-term loan from their financial institution, according to a 2020 Emergency Funds Survey conducted by SmartBrief and sponsored by Fiserv. Nearly 60 percent of consumers said they would start a new banking relationship if their current financial institution didn't offer the same lending service, and 27 percent said they'd consider switching banks completely.

Short-term, small-dollar lending encourages retention and strengthens relationships with accountholders.

Short-Term Loans Have Long-Term Potential

Consumers' short-term need for liquidity is not a unique event. Even when employment rates were favorable and stocks were climbing, demand for accelerated funding from check deposits was on the rise in the U.S.

About one-third of consumers need emergency funds at least once a year, according to the 2020 Emergency Funds Survey. The bulk of those consumers (70 percent) need $1,000 or less to make ends meet when there are unexpected expenses, such as car, home or appliance repairs. A quarter of consumers surveyed said they repaid the loan in one to two months.

Even when employment rates were favorable and stocks were climbing, demand for accelerated funding from check deposits was on the rise in the U.S.

Solutions to Match the Situation

Consumers are faced with different financial situations. Whether their balance shortfall is due to the pandemic or an emergency expense, financial institutions can help accountholders close their pay gaps.

Financial institutions have typically offered reactive solutions such as overdraft protection. But overdraft fees can feel punitive if accountholders don't remember the terms of their policy. And the reality is, most consumers are confused about coverage limits and fees, even though they have opted in to them. Financial institutions have an opportunity to educate accountholders on discretionary overdraft solutions and to position their services as valuable, credit-protecting instruments.

To limit risk and increase customer satisfaction, overdraft limits can be adjusted for individual accountholders based on transactional behaviors. In the current environment, many financial institutions are capping or waiving overdraft fees if the overage is under $5. A few are allowing grace periods to help accountholders catch up. Those measures improve the value exchange on overdraft services, which may encourage more accountholders to opt into overdraft services. 

Proactive services prevent a deficit from occurring. For example, low-balance alerts and transaction notices help accountholders stay on top of their balances in real time. When accountholders know there's a gap, they can take proactive actions to fill it.

Accelerated deposit availability enables depositors to instantly access money they deposit via check for a fee. Traditionally, banks have limited deposit availability until there was more certainty that deposited funds would be collected. With improved modeling capabilities, however, financial institutions can better predict collection probability at the moment of the deposit and give customers access to those funds in real time.

Small-dollar, deposit-based lending is another proactive solution to help bridge accountholders' cash flow needs quickly and conveniently. Against the backdrop of regulatory uniformity, financial institutions can offer short-term credit solutions, which gives accountholders instant access to funds with built-in consumer protections.

Positioning Consumers for Success

When structured correctly, financial institutions can help accountholders avoid the debt cycle associated with predatory lending by offering services that fit a variety of liquidity needs. Proactive solutions promote better account management behaviors, while reasonably priced reactive solutions ensure consumers are covered if circumstances suddenly change. Moreover, when offering a suite of liquidity solutions, aggregate risk can be monitored across a consumer's portfolio to help financial institutions position their consumers for successful repayment.

Regardless of the liquidity solution financial institutions choose, it should be kept simple. Accountholders are already overburdened by debt, stress and anxiety. They need an ally. This is an opportunity for financial institutions to fill a valuable need affordably, simply and transparently.