The bank robber Willie Sutton wasn’t in the business of giving advice to bankers, but that doesn’t mean bankers can’t learn from him. The famous felon supposedly explained that the reason he robbed banks — obvious in its simplicity — was, “Because that’s where the money is.”
For bankers navigating a U.S. economy in which millions of American families will suddenly be receiving regular monthly payments from the federal government because of the recently implemented Advance Child Tax Credit, Sutton’s observation can serve as a guide to developing new and profitable customer relationships.
The ACTC will last at least until next year’s tax-filing season, but also has the possibility of extension beyond the pandemic. This potential longevity, as well as its size, breadth and targeting make it worth bankers’ attention. Americans — your customers — are excited to receive these payments for their families and are looking for help to better use these new funds.
In brief, the ACTC provides payments to virtually all American families with children under 18. Payments are $360 a month for each child under age 6 and $300 per month for each child aged 6 to 17. The first of this year’s six monthly payments, totaling $15 billion, went out in July and the payments will continue through December 2021. The second half of the payments will be provided in one lump sum in conjunction with tax filing.
The credits are refundable, meaning that they are available not only to offset tax liabilities, but also as a refund to people who don’t owe federal taxes. The ACTC begins to phase out at $150,000, $112,500 and $75,000 for married, head of household and single filers, respectively.
If the ACTC payments continue at their current rate, they will put at least $180 billion into families’ accounts. This is a material amount both in aggregate and at the family level. Prepandemic, federal income tax refunds were about $400 billion, so ACTC payments represent a 45% increase. The White House notes that for a “typical” family, this amounts to a $7,200 payment per year — a material sum given that the median family income in the United States is currently $79,900.
Bankers should focus attention on this new tax credit. J.D. Power has been fielding surveys of Americans during the past few months to gauge the importance and likely effect of ACTC. More than half (55%) of American families say it will have a large or very large effect on their family finances, and another 22% expect it to have a moderate effect.
In the surveys, families are divided into four categories based on their overall economic health — healthy; vulnerable (struggles with short finances and lacks appreciation for long-term needs); overextended (struggles with short-term finances but appreciates their long-term needs); and stressed (manages to cover short-term needs but lacks a long-term plan). Among each group, the fraction judging the payments to have a large or very large effect on their families is similar, ranging from 51 to 59%.
Recipients expect to use the funds for a variety of purposes, with the top four being purchases for kids, saving for their children, paying for groceries and paying bills. While these are broadly similar across the J.D. Power subsegments, there are some meaningful differences. For example, compared to vulnerable families, financially healthy families are twice as likely to use the funds for saving for children but only two-thirds as likely to use the funds to pay off bills.
Economists refer to payments like these as “helicopter drops,” but in the real world people need help finding the dropped money and/or assistance to help them realize their goals. On the former, it is estimated that 4 million children who were born last year, or are in families that didn’t file taxes last year, won’t automatically receive the funds. They will need help to get their ACTC payments. For banks that seek to expand their outreach to the unbanked and underbanked, this is an opportunity to help families who need it most.
But existing bank customers who are automatically getting the credits also need help. We asked households that were likely to receive the credits what assistance they might like from their bank. Only one-fourth said, “I don’t want any help, thank you!”
The remainder identified several ways that their banks could help them to make best use of ACTC. These include help with opening accounts to save for children’s education (32%), opening accounts to receive the CTC directly (28%), getting discounts on purchases for their children (26%), making it easier to pay off debts and bills (25%), and budgeting so they could use their money better (21%).
When we segment these preferences by the J.D. Power categories, there are meaningful differences. Healthy and overextended consumers are more than twice as likely to want help with opening accounts for their children (37% and 48%, respectively) than are vulnerable or stressed families (20% and 15%, respectively), and about 50% more interested in help with discounts on purchases for their kids (about 30% versus 20%). However, interest in help with budgeting is similar, varying between 17% and 23% across the segments. Going beyond our survey, some households, whose income has risen and are no longer eligible for the credit, may want to opt out of the program rather than repay the funds later.
American Banker has recently reported on the efforts that some banks are making to support households receiving the ACTC. Why should other banks care about the Advance Child Tax Credit — and possibly provide these services? As Willie Sutton might have said, because that’s where the money is, or in banking terms, where your customers are.
The ACTC will deliver a substantial amount of financial support for many American families, whether they are banked, underbanked or unbanked. Banks seeking to deepen their relationship with these existing and new customers, help them better take care of their families and attract new unbanked customers should pay heed.
