In the space of a few weeks the world was turned upside down for most people as a result of the coronavirus pandemic. Even as the U.S. tentatively begins to emerge from the lockdown, many challenges lie ahead as the economic impact becomes more fully felt. Much is unknown. However, one thing is certain: community financial institutions must continue to be the banking alternative that consistently delivers the financial support that consumers and small businesses need now and in the face of an uncertain future.
The Wall Street Journal pointed out how the country’s smallest institutions were the ones that got the job done in the first round of Paycheck Protection Program, while the megabanks stumbled. Thousands of small business owners voiced their anger on social media after being denied or ignored by the big banks. In fact several of the biggest are being sued by businesses over how their PPP applications were handled.
Bank of America stated early on that it would only offer relief to customers that had an existing credit card or lending relationship with the bank. While it later reversed its decision, in our view the initial policy demonstrates the connection large institutions draw between payments and the lending side of their business —in other words, these decisions are transactional for them.
Community financial institutions on the other hand leverage payments to support consumers’ and businesses’ immediate financial needs while building long-term relationships with them. Community institutions’ payments portfolios are a powerful means of maintaining regular interaction with and support for members and customers. This gives the institutions an opportunity to demonstrate their strengths compared with the giants.
There are three pandemic-related trends that community institutions should prepare for, ensuring customers have continued access to the financial tools and products they need, while also helping to community institutions to differentiate themselves.
Trend One: Migration from Debit to Credit
While cash and debit cards are the two most preferred payment methods among U.S. consumers, we may see a significant shift to credit over the coming weeks.
“In the last recession, people were hesitant to use credit,” says BJ Brisbois, Senior Vice President, Sales Operations, at CO-OP Financial Services. “This time, everything has happened so fast that people had no time to prepare financially or emotionally. As unemployment numbers have sharply increased, consumers look to purchase more necessities via credit. Given the multiple layers of uncertainty most people now face, even those who have not lost their jobs may want to conserve their cash now.”
Best practices for debit to credit migration. In order to stay ahead of the debit-to-credit migration trend, community banks and credit unions should proactively reach out to their credit cardholders with special offers. Brisbois recommends offering some incentives to help drive credit card activation and usage, such as:
- Skipped payments
- Relief from interest and fees
- “Spend and get” on essential items with a statement credit
- Outreach to activate inactive cards
- Low-rate promotion with relief language — for example, 0% for six months
- Credit line increases, where strategically appropriate
This is a prime opportunity for community institutions to deliver financial support to their customers and remind current credit cardholders of the benefits of carrying their credit card, notes Deb Wieczorek, Vice President, Strategic Advisory and Portfolio Growth at CO-OP. “Now is the time to get creative,” she adds. “Consumers are looking at whoever can give them the best financial incentives.”
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Trend Two: Forward-Facing Risk Mitigation
At the same time, credit unions and community banks must be prepared for increased risk of payments delinquency and fraud, says Tom Church-Adams, Senior Vice President, Pay Products, for CO-OP.
“As community institutions prepare for an increase in credit card purchases over the coming weeks, the risk of payment losses will also rise, either through fraud or cardholders unable to make payments. Credit unions and community banks will need to balance the risk of mitigating fraud while avoiding a spike in unnecessary declines and ensuring cardholders have access to their funds.”
Best practices for risk mitigation. In addition to more closely monitoring fraud at the transaction level, financial institutions can leverage tools to help minimize payment fraud losses. Such tools, for instance, can allow an institution to identify cardholders who are most likely to have the next payment returned, which enables better management of the potential risk associated with that cardholder.
Trend Three: Digital Payment Adoption
Use of digital payments has already seen an sharp increase since the start of the pandemic lockdown period and is expected to continue to increase over the coming months. A survey of consumers by RTi Research during March found that 33% reported ordering groceries online for the first time, and of those, 54% planned to continue this behavior after COVID-19. For those still shopping in-store, 30% used a contactless payment method for the first time and 70% of those planned to continue using that technology.
Best practices for digital payment adoption. As COVID-19 accelerates digital payment adoption, community banks and credit unions should use this opportunity to bolster their digital payment options.
“Offering integration with the major mobile wallet providers — Apple, Samsung, and Google — is key,” says Church-Adams. “At the same time, contactless payments will help put consumers at ease as they conduct POS transactions without having to worry about pulling their cards out and risking physical interaction.”
Community financial institutions should also be thinking about strategies to achieve top-of-digital-wallet status. In general, the more sticky products an institution has within its mobile banking suite, the more likely consumers are to use them. Mobile card controls and alerts, for example, are a powerful way to keep people more engaged with their digital banking products and give them more incentive to load their credit and debit cards into the app.
P2P services like Zelle will become another essential channel, helping consumers quickly send and receive money digitally to people in their social networks while maintaining social distance.
Modifying their payments strategy to deliver continuity and financial relief will help community financial institutions maximize the benefit to members and customers and, in turn, increase loyalty.
“It’s not about increasing transactions,” says Wieczorek. “This is a time when the people-helping-people message really hits home.”