The immense economic impact of the response to the coronavirus pandemic is driving a change in attitude towards money in America. The national stay-at-home shutdown slammed the brakes on a booming economy in a way never before seen and suddenly many people who had perhaps never even thought about coming up with a budget have had to learn very quickly how to do so.
Federal stimulus payments, expanded unemployment aid and lenders’ debt relief measures are only going to go so far for the millions out of work or furloughed. Only the highly optimistic think the economy is going to come back up to speed any time soon.
A study by MX details some of the financial fallout:
- At least half of stimulus recipients plan to save their payments, even though the government’s plan calls for spending them to increase demand for goods and services.
- Six out of ten people say they are spending less since the pandemic hit and two-thirds have changed their view on saving money.
- 34% say they are putting more money into savings than they used to, though people in some income brackets — even those making over $150,000 — say they are having trouble saving because they are spending almost all of their money of food, groceries and medical expenses.
- More than any other group, consumers making between $100,000 and $150,000 have been applying for fresh credit to get them through coronavirus-related financial challenges.
The MX study noted that many Americans have been checking their balances more frequently. But they’ve no doubt discovered that no matter how often one checks, the balance doesn’t get larger by wishing.
Study after study performed in recent years before COVID-19 demonstrated that many consumers effectively have no reserves, in the form of savings deposits. They might have credit cards and they might have friends and family, but the former is expensive and in the wake of the pandemic, the latter may not be in any better shape given the widespread harm caused by the shutdowns.
Even people who have a decent amount of emergency savings may be finding themselves in a fix, according to the Financial Health Network.
“Many people with emergency savings don’t use the money to optimum effect.”
In a blog on how to spend emergency savings, Heidi Johnson, FHN’s Director of Behavioral Economics, notes that many people with emergency savings don’t use the money to optimum effect. Many will borrow on cards and other higher-interest options with the thought that they are husbanding savings.
That’s a costly way to protect savings, Johnson points out. Equally, they may pay down some debts completely to clear them away, even ahead of schedule, instead of maintaining savings solely for debts requiring immediate settlement. The federal government’s interest-free suspension of its student loan payments until Sept. 30 should free up resources for settling other debts, she points out.
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Now is the Time for Talk about Counseling to Turn into Action
All of this reflects lessons that many Americans will have to learn on the fly, absent assistance with some financial basics.
“Now’s a critical moment for financial institutions. They have a chance to move well beyond simply providing a good CX experience, to providing insights that improve the financial well-being of customers, ultimately, positioning them as true financial partners and customer advocates,” writes MX in a company blog. The blog notes that 54% of consumers surveyed have complete trust in their banking providers, in terms of obtaining advice during the coronavirus crisis.
During the shutdown period, not much in the way of financial counseling could be done — not when branch lobbies have been closed and staffs have been scrambling to handle more immediate inquiries, when call centers have been overwhelmed, and when many employees have been drafted to help with Paycheck Protection Program loan processing. But as the reopening process begins, there may be time for banks and credit unions to consider how to reach out to consumers with more than “financial bandages” for the mid-term and long-term. The time for conciliatory emails is past. Consumers need solid advice.
“It’s critical that financial institutions step in and lead their customers to financial stability,” writes MX. “Right now, most people are paying very close attention to their finances, but that doesn’t necessarily mean they know where to start or what to do.”
MX suggests that in the current atmosphere, people have become focused on their finances and may have made the mental decision to take charge in ways they haven’t before.
“Financial institutions that provide customer-centric literacy programs and tools can help their customers come out of this economic downturn with better financial habits that will lead to stronger financial health overall,” MX suggests.
Just what this will look like will likely vary from one institution to another. Googling for budget-oriented software and apps will bring you to comparison sites like NerdWallet that offer rankings of “the best” offerings. While financial institution products offering some element of money management sometimes show up — such as BBVA’s Simple — it’s more common to find the offerings of neobanks like Chime and fintechs like Intuit on such lists.
Financial Well-Being is an Attitude, Not Just an App
Technology by itself may not be enough, either.
“Banks think they’ve ticked the financial well-being box by offering digital money management tools,” states a report by Forrester. “But those narrow, one-size-fits-all tools have disappointed users and firms that offer them. Financial services firms need a more holistic, personal, and proactive approach to customers’ well-being.” Younger consumers are already making it clear, according to the firm, that they have a strong affinity for the digital financial tools offered by fintechs.
Aurelie L’Hostis, Senior Analyst at Forrester, launched the research stream that the report is part of in September 2019 in a blog. While this was far ahead of COVID-19, it was already becoming clear to her that American consumers were going into massive debt even amid all the longstanding prosperity.
Currently, according to figures from TransUnion, in the first quarter of 2020 Americans held 457.6 million credit cards with balances of $814 trillion. Just to put that in some perspective, the total committed by the federal government in the four signed coronavirus relief packages comes to “just” $2.4 trillion. The fifth package, passed by the House thus far, would add $3 trillion to the total.
In her blog L’Hostis wrote that: “Financial services providers need to focus on customer-outcome-driven solutions and shift the dial from the cost of remediation programs to investment in prevention — particularly focusing on financial capability and well-being.”
L’Hostis defines “well-being” this way: “A state of being in which a person can fully meet current and ongoing financial obligations, feel secure in their financial future, and is able to make choices that allow enjoyment of life.” (This was adapted from the definition used by the Consumer Financial Protection Bureau.)
For all but the most affluent customers, many financial institutions tend to view consumers from the product end of the telescope, rather than thinking of all their products as solutions that can be used to solve financial needs and challenges.
“Everybody wants to ‘own’ the customer, but customers don’t want to be owned,” wrote L’Hostis.
Both institutions and consumers must acknowledge the current state of affairs. The speed at which the country has gone from aggressive prosperity to the edge of a financial cliff has been breathtaking.
Making Connections with People as Employees of Other Firms
Frequently financial well-being has been spoken of in terms of employer efforts, perhaps assisted by banks, credit unions, insurance companies and others.
“One out of three employees are bringing home 29% less than they had before the shutdowns — guaranteed to cause financial stress.”
MetLife, in a report on employee benefit trends, describes this approach as a blend of health protection and financial well-being assistance. Often stress factors that can have severe impacts on employees’ physical health begin with financial health concerns.
There is a somewhat circular relationship here. For example, employers who offer health savings accounts and flexible spending accounts may relieve some financial stresses and thus save employees some of the pressures brought on by health costs. The company’s report notes that working at home, while spoken of favorably by many on certain levels, is coming to be recognized as creating its own extra pressures on employees, impacting both financial and physical health.
And the study found that one out of three employees are bringing home 29% less than they had before the shutdowns — guaranteed to cause financial stress.
Working through employers may not be so easy right now. Firms struggling for their lives, or already finding themselves in bankruptcy proceedings may not have the fuel to launch such effort. So financial institutions that want to push forward on financial well-being may be going it alone.
How Do You Measure a Financial Pulse?
L’Hostis suggests that being able to measure the results of financial well-being efforts is essential to having a program in place. One institution she speaks highly of in her report is Commonwealth Bank of Australia, which has been working with the Melbourne Institute of Applied Economic and Social Research.
Between them, they developed a dual-track measurement system, the “CBA-MI Financial Well-Being Scales.” The first part is based on people’s replies to ten questions about financial concerns. The second is derived from the consumer’s financial records. This approach assesses financial wellbeing from both subjective and objective viewpoints.
The scheme looks at financial well-being from three perspectives:
- Everyday Financial Situations: Management of daily financial needs like rent or mortgage payments and transportation.
- Rainy Day Financial Situations: Building and using an emergency fund.
- One Day: Saving and managing expenses towards broad, long-term goals like a comfortable retirement.
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Several findings of the research could be helpful to institutions in the U.S. that decide to try to get a program off the ground in the wake of coronavirus:
- Budgeting is as much about attitude as expertise. Bring up the word “budget” to the average person and their eyes glaze over. The research found that even an informal budget makes a difference. “It doesn’t matter if the budget is a ‘mental’ one or a ‘formal’ one.”
- You don’t have to know everything for financial literacy to help. In fact, the research found that “a firm grasp of the basics rather than highly specialized knowledge is enough to make a significant positive difference.”
- Behavior means more than what you make or what you own. “Unsurprisingly, financial wellbeing increases with income,” the report states. “But how people behave with their finances has an even stronger effect on their financial wellbeing than how much they earn.” That would indicate that to the degree a bank or credit union can instill fresh attitudes towards spending, budgeting and savings, the more can be made of what a consumer owns or makes.
Ultimately, if banks and credit unions can help consumers rebuild their finances on a more solid footing than they had prior to the coronavirus recession, that could cement their relationship more firmly than any one product, app or branch innovation.
As a report by Filene Research Institute notes: “Creating and maintaining financial wellbeing touches every aspect of our lives; it affects our physical and behavioral health, our working relationships, our families, and our communities.”
The Filene report makes a point to ponder: Financial institution staffs can’t help people if their own affairs aren’t in order. Helping staffers can put them in a better mental position to help those they serve.