Banking Providers Ill-Prepared for Marketplace Disruptions

The government shutdown will not be the last unexpected market event that could be an opportunity for financial institutions. Increasing interest rates, a stock market crash or a natural disaster all have unique financial consequences. Will banks and credit unions be in a position to assist consumers and benefit from increased business, loyalty and trust? If not, there definitely are many non-traditional financial institutions that could fill the void.

The impact of the government shutdown is thought to have had double the negative impact than was initially projected. While some banks and credit unions have responded to the hardships consumers are experiencing, many have not. Without a digital banking platform, the solutions provided may hurt the consumer more than help. The challenge is that legacy systems can’t respond well to digital banking opportunities.

Opportunities and challenges in a digital marketplace happen quickly. A new product is introduced, a new competitor enters the marketplace, a data breach impacts consumer trust, etc. Many of these market changes have an impact on financial institutions either directly or indirectly. Those organizations that can react the fastest (or are already prepared for change) become the winners.

The current government shutdown is such an instance. More than just impacting furloughed government employees, the shutdown has had a ripple effect on businesses and people who rely on government workers to make a living.

Stessa Cohen, Research Director for Banking and Investment Services at Gartner, wrote a great article about how the financial services industry has (or hasn’t) responded to the opportunities presented by the shutdown, and the challenges consumers are having based on the ability of their financial institution to provide support during the crisis. “The shutdown is an opportunity to practice empathic banking — to show concern for customers, and really respond to them — but so far, I’m not seeing much of that,” stated Cohen.

The government has asked banks and credit unions to help families impacted by the government closure. On January 11, in response to the crisis, federal and state banking regulators issued a short joint press release urging banks and credit unions to work with affected consumers. Until recently, most of the responding institutions were smaller organizations located around the beltway. Recently, some of the mega-banks have responded, although, most responses are far from adequate.

Traditional Banks Unprepared to Respond to Market Opportunities

As Stessa Cohen suggests, sending out an email asking the customer to call you may be sympathetic, but certainly is not empathetic. The customer is already trying to contact their utilities, credit card companies, retailers, mortgage company, etc. trying to make interim arrangements during the shutdown. The last thing they need is another call or visit to the local branch (assuming their bank is local).

The challenge is made more difficult by the reality that most consumers live paycheck to paycheck. According to the Federal Reserve Board, 40% of banking consumers in the U.S. can’t cover a $400 emergency expense. There is virtually no ‘rainy day fund’ available.

Beyond sending out letters to consumers, financial institutions are providing the following options:

  • Skip a payment: While the interest continues, a late fee is avoided for the missed payment. This usually requires the consumer to contact the bank.
  • Short-term personal loans: To ‘qualified’ consumers, financial institutions are offering short-term personal loans at non-discounted interest rates.
  • Waiver of overdraft payments: Reversal of overdraft fees caused by withdrawals made from accounts that are no longer receiving direct deposits.

Some government-focused credit unions are doing significantly more. According to CNBC, Launch Federal Credit Union is issuing a zero-percent interest rate for loans of up to $3,000 to federal government employees. Navy Federal Credit Union is doing the same, but up to $6,000. The U.S. Employees Credit Union is providing interest-free loans to impacted members for 60 days, regardless of their credit score and Justice Federal Credit Union is offering unsecured loans with low interest rates to any impacted workers at the Department of Justice or Department of Homeland Security. Some organizations are even allowing those impacted by the shutdown to break their CD contract to access funds.

Beware of the Government Shutdown Assistance Trojan Horse

What is interesting about the majority of responses by financial institutions is that these options have been in place for years for consumers that are experiencing financial difficulties. But, these options were set in place as exceptions and are not structured as long-term solutions where the consumer is NOT in charge of their own destiny. In fact, many of these solutions may not solve a problem, but simply delay, and in some cases hurt the consumer’s financial situation.

  • Skip a payment: Almost all institutions have systems in place to offer a single skip-a-payment per year or during the term of the loan. The problem is that the interest continues to compound and the length of the loan extends by the number of months missed. In other words, the overall cost of the loan could increase significantly. The longer the shutdown, the higher the interest costs. The question remains whether bank systems can process a second skip-a-payment in a row without negatively impacting the customer’s credit rating.
  • Short-term personal loans: While a short-term loan may look appealing, this assumes 1) the consumer has a strong credit rating to qualify in the first place, and 2) that the government worker will be in a position to repay the loan when the shutdown ends. With personal loans having higher than normal interest rates than car or home loans, the ‘offer’ may actually hurt the consumer in the long run.
  • Waiver of overdraft payments: The waiver of overdrafts is usually handled as a reversal of a fee charged as opposed to allowing the account to have overdrafts. This requires the consumer to notify all of their banks when an OD or NSF occurs. This is only half the problem. Is the bank going to help the consumer make the payment?

Benefits of Open Banking Digital Platforms

In a perfect Open Banking world, there would be a connection of a consumer’s complete financial portfolio under a single platform. Rather than a number of standalone products, the ecosystem would view the relationship as a whole, balancing the transactional deposits, time deposits, investments, consumer loans, transactional credit and mortgage credit for optimal results. When an unusual event like the government shutdown occurs, the entire relationship would respond in real time to provide the best possible outcome. If the open banking ecosystem goes beyond financial services to include products, services and relationships such as utilities, retailers, service providers, etc. the benefits multiply.

The result would be consumer-centric responses that would provide the benefits of a personal concierge. Again, in a perfect open banking world, this would all occur behind-the-scenes, seamlessly, with voice-first authentication and approval.

Most importantly, a digital banking back office structure would eliminate the challenges of needing to build solutions around outdated systems (only being able to support a single skip-a-payment, not charging interest on loans during a crisis, eliminating OD and NSF fees before they occur, etc.).

In the meantime, many banks and credit unions are not doing enough to help those impacted by the government shutdown … because they can’t. Most of those who have responded are scurrying around trying to rebuild back-office processes that were not built for financial hardships beyond 30 days.

Unfortunately, even in those cases where help is provided, the consumer will often get impacted negatively because the solutions were built to penalize those with a financial hardship, not help the consumer through tough times.

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