Background
If you have a bank account with a large institution, their website probably has a section intended to help you track spending and design a plan to save for retirement. At the same time, the history of financial services is 100 years of breakthrough banking innovation that makes it much easier to borrow, and to spend, money. People have responded by…borrowing and spending more money. Previous posts looked at the increases in household spending which have been dramatic. This article looks at how 100 years of breakthrough banking innovation has made it easy to borrow and spend, and the impact on household debt.
Findings
- 100 years of encouraging borrowing: In 1916 GMAC finance created the auto loan. Since then we’ve seen federally guaranteed home and student loans, HELOCs, and credit cards being introduced. In tandem, we’ve seen incentives from government to buy homes. Think mortgage interest deduction, and Fannie Mae ensuring a market for home loans. Student loans, also federally guaranteed, have jumped to $1.5 trillion currently owed. Auto loans and credit cards have become the norm for many households.
- Products that encourage more spending: Does anyone remember paying for groceries with a check, or even cash? A series of innovations in purchasing have created great convenience for consumers. ATMs let you get cash 24/7. Contactless payment lets you wave your phone to pay. New credit card policies for many issuers and merchants omit the need for signatures. PayPal is introducing “Pay in 4”, the ability to buy now and pay over 4 months, essentially the modern digital version of buying on credit.
- More spending and higher debt: The aforementioned posts on this site look at the substantial increase in household spending, particularly on homes, cars, and education. The chart below shows that household debt has doubled since 2003.
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Implications
We live in a time of financial double-edged swords. The convenience of easy payment, and the ability to borrow in so many ways, enables people to do things they might have only dreamed of in the past. At the same time, this convenience leads to more spending and more borrowing. The Pandora’s box of cool innovations is open and likely will generate new products as Fintech creativity continues to disrupt the industry. How do we help the customer manage their finances?
- Serious help – Financial institutions need to be serious about their efforts to reach out and help their customers be intentional about their plan and actions. This means more than a tab on a website, it means talking to customers (live or virtually) and collaborating on how to reach long-term goals.
- Positive innovation – We’ve seen Fintech services that help consumers track how they’re spending and saving. Uptake and usage have been slow. There is an opening for something better – but we haven’t seen it yet.
- Finding the moral balance – Let’s face it, if you are a bank that makes money from fees, and from interest on home loans, credit cards, and other household debt, there are pressures to maximize near-term revenue. On top of this, more sophisticated banks focus on selling you the product you’re most likely to buy next. This isn’t customer focused. The long term approach means not pushing your customers to borrow or spend more, rather take a holistic view. Noble statements saying you want to help cusstomers succeed are great, but some financial institutions need a cultural reality check. If customer long term success is important, then approach them with holistic help, not product sales.
The small print
To be purer in the analysis of growing spending and debt, we should also look at rises in income. If you make a lot more money, maybe more debt isn’t so bad. If you don’t adjust for inflation, the average household income rose 59% from 2003 to 2019 during a period when debt doubled. Debt rose faster than income. This also doesn’t account for the increased income being concentrated in the most affluent households, while debt and spending have grown across most households.