Credit card balances and delinquency rates are rising, and although delinquencies have not reached the dramatic levels seen during the 2007-2008 recession, community banks and credit unions should be paying attention.
Given that the credit card business is largely concentrated among a handful of large banks, the concern is not that these smaller financial institutions have exposure to potential losses. But excessive debt depletes consumers’ savings, erodes their credit scores and limits their ability to buy homes and cars and pay for college. So the opportunities for community banks and credit unions to serve their primary customers come under pressure.
But what if financial institutions could build stronger relationships with their customers in 2023 by helping them climb out of debt?
Joseph Gracia, founder and chief executive of behavioral science fintech Nickels, says many banks and credit unions have not effectively capitalized on the opportunity to cement loyal relationships by helping customers see ways to reduce their debt and put their money to better use.
“Research shows major banks have designed a system that allows them to optimize the interest and fees they charge, but not necessarily optimize credit card health,” Gracia tells The Financial Brand. He thinks the best use for credit cards is to serve as a plastic safety net, but instead they ensnare many customers in debt.
“There’s a lack of ability to get into consistent payment plans to pay off that debt,” Gracia says. “The default is to make minimum payments, which just exacerbates the problem and leaves people paying way too much.”
Nickels’ core product, “Credit Card Coach,” is a platform that centralizes card management for people, offering them a consolidated view of their debt load and their progress toward paying it off. For financial institutions that offer it, the platform can unlock loan growth by helping customers to improve their credit scores and financial fitness. It can also provide the institutions with valuable data that they would not otherwise have.
“More than half of Americans revolve on their credit card balances, deflating their credit scores and depleting their savings,” Corey Stone, senior advisor at the Financial Health Network, says in a November report from the Filene Research Institute and Nickels. Many cardholders also are making smaller monthly payments than they could, unnecessarily prolonging their indebtedness, Stone adds.
Unpaid federal student loans make the debt situation even worse. Gracia says these loans have helped set up unhealthy financial habits for many young people, given that the required minimum payments have been suspended repeatedly since the Covid-19 crisis began in 2020. Gracia started out his fintech career by trying to help banks ease customers’ student loan burdens before shifting his focus to credit cards.
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How Nickels Got Started
After college graduation, Gracia spent a semester teaching social studies to seniors in a Hawaiian high school, and he jokes that he wasn’t a “Dead Poet’s Society” type of teacher. It simply wasn’t his calling, even though he comes from a long line of educators.
Instead of following his family’s path, Gracia conceived Nickels as a fintech designed to help banks and credit unions tackle federal student debt. The idea was for Nickels to provide financial institutions with the tools to help their customers whittle down their student loans.
But Gracia hadn’t bargained on the series of setbacks that followed. Months after Nickels launched in 2019, Gracia’s chance for a critical seed funding round collapsed when a cancelled flight cost him a day of meetings. Then Covid hit, and student loan payments were paused by the Trump and Biden Administrations — again and again and again.
The result is that “45 million people haven’t accounted for monthly federal student loan payments in their budget for three years,” Gracia says.
So the fintech changed its focus to another area where borrowers often struggle — credit card debt management. “We needed to pivot because we decided we were just going to go bankrupt waiting for the government to make decisions.”
With the shift to helping financial institutions help their customers with credit card debt amid growing economic turbulence, Gracia hopes Nickels might finally benefit from some good timing. Insight into customers’ credit card history can help the primary bank or credit union better understand the overall debt load of an individual, provide some tailored financial coaching and assess the ability of that person to make payments on a loan to refinance the debt.
But BankRate senior industry analyst Ted Rossman says he’s skeptical of whether banks are going to be attracted to the value proposition.
“Not to sound too cynical, but I think it would take a special kind of financial institution to try to get their customers to pay lower credit card rates,” considering how profitable the card business is, he says. The average credit card rate — at 19.4% — is the highest it’s been since BankRate started tracking that data in 1985.
Credit Card Spending Trends
The Federal Reserve Bank of New York found credit card balances totaled $925 billion in the third quarter of 2022, a 15% year-over-year increase — the largest increase in credit card balances in over two decades.
Part of this rise in credit card debt is attributable to an increase in prices, a panel of New York Fed experts said in an article. As of November 2022, prices were roughly 8 percent higher than a year earlier.
But notably, credit card balances have grown at nearly double that rate since last year, the authors wrote.
They cited evidence that customers are “managing their finances through the period of increasing prices,” but said the real test will be whether borrowers are able to continue making their credit card payments.
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Taking on the Credit Card Goliaths
As the Filene report notes, credit cards are a David and Goliath story. Megabanks and high-volume credit card issuers control the lion’s share of the credit card market — and its profits. A separate Filene report says that in 2020, 89% of the $880 billion credit card market was controlled by 10 major banks. The remaining 11% was split among 10,000 credit unions and community banks.
That imbalance has implications for community banks and credit unions. Filene reports that, as of 2019, there were only five credit unions that even made it into the top 50 Visa and Mastercard issuers. Most lack the scale necessary to compete with the big issuers that dominate the market.
Nonetheless, an opportunity exists. Consumers often have a primary banking provider other than their credit card company and may be receptive to this provider offering help with managing their debt.
The potential market is large. The New York Fed experts said in their article that 191 million Americans have at least one credit card account, and many have multiple accounts. In fact, half of all Americans adults have at least two cards, and 13% have five or more cards.
Nickels doesn’t provide loan refinancing itself. The fintech’s embeddable software — in the form of an application programming interface, or API — is able to pull data from customers’ existing credit card accounts and consolidate it into a dashboard. The customers can view this information as part of the digital banking experience at their primary financial institution. The system also provides the customer with financial wellness insights based on their spending.
How Big Is the Refinancing Opportunity?
One of the benefits for financial institutions is that data from Nickels can be used to assist with loan risk assessment and underwriting — whether to refinance credit card debt or provide other types of loans.
But there are downsides to refinancing. For one, many lenders are hard-pressed to determine whether the customer will be able to keep up with payments on an unsecured loan.
As one credit union loan officer told Filene, “I would love to make loans to people who are over their heads in card debt if I could tell those who will succeed in avoiding more card debt from those who won’t.”
Refinancing isn’t the only way for people to address credit card debt, though. Financial education is a particularly appropriate service for banks and credit unions to promote.
Atlanticus’ banking division, Aspire, has a strong financial education component to its new credit card offering, which targets the unbanked and underbanked. The Atlanta-based company announced the launch of its Aspire Banking platform in early November. It provides users with a bank account, debit card, and a prescribed list of activities intended to help build positive financial habits.
The activities include meeting minimum criteria for making deposits, maintaining a balance, and making purchases, each for three consecutive months. Those who succeed in that receive an Aspire Credit Card offer. The banking services and the cards for Aspire users are provided by The Bank of Missouri in Perryville, Mo.
Bill Bostwick, head of Atlanticus’ card division, told TransUnion in a webinar that financial institutions everywhere ought to sharpen their financial education tools. “How do we educate the consumers in terms of budgeting best practices?” Bostwick asked.
Help Can Come in More Ways Than One:
Refinancing is one way banks can help customers address their credit card debt. So is a financial education and wellness program.
The Filene report — which analyzed one year’s worth of members’ transaction data provided by five credit unions — noted that, “a large portion of them are making sincere efforts to pay down their debt, making them attractive candidates for refinance loans.” The checking account activity at the credit unions indicated that roughly three out of five members were making payments to a credit card — which came out to approximately 29% of their monthly spending.
“Credit unions in the study could increase their overall loan interest revenue and net interest margin by as much as 25% and 17%, respectively, by making card refinance loans to these members,” says Stone, of the Financial Health Network.
Seeking Bank and Credit Union Partners
Though there are a bunch of fintechs focusing on consumer credit card health in some form or another, Debbie is an example of one similar to Nickels in that it partners with community banks and credit unions to help turn their customers into better candidates for credit card refinancing. Debbie, which is in beta, pulls together credit card data for the customers, then relies on behavioral psychology, positive reinforcement, and cash rewards to motivate borrowers to shrink their debt and improve their financial habits.
Nickels is already working with three credit unions and a bank and is looking to add more partners. Gracia says his experience suggests credit unions are generally farther ahead of the curve than their traditional bank counterparts when it comes to an emphasis on financial wellness.
Acknowledging that generalizations are flawed, Garcia says credit union executives also seem to be more familiar with and interested in the behavioral science behind how people manage their money. Part of the extra appeal of Nickels for them is that it offers relevant data for better understanding customer behavior.
“This is showing financial institutions what their customers are actually paying toward their card, and that’s information they don’t see on the credit report,” Gracia says. “Seeing the actual payment and purchase behaviors can allow them to make more informed decisions to refinance debt.”
Gracia’s observation about credit unions jibes with Rossman’s sense of how a pitch like Nickels’ would play out. The BankRate analyst says he would expect Nickels to resonate more with credit unions, “which tend to be a bit kinder and gentler” than banks. He also suggests Nickels might have “some commonality” with nonprofit credit counseling agencies.
“I’m a big fan of nonprofit credit counseling agencies such as Money Management International,” Rossman says. “They can negotiate lower rates for customers, perhaps a 6% rate over four or five years that can consolidate your credit card debt at much more favorable terms, and you don’t even need good credit as you would for the more desirable balance transfer cards and personal loans.”