Increasing loan volumes has been the main driver for bank-fintech partnerships over the last three years. This is a big change from pre-pandemic business plans when new product development was the main objective. In our endeavor to meet higher expectations of engagement we cannot forget the goal of making business work for people.
Americans are overbanked and underserved. During the early days of the pandemic, $2.5 trillion in extra savings was squirreled away. It only took only 15 months for that money to dwindle.
Pent-up savings was thought to be the workhorse of economic growth that will drive consumer spending for years to come. And yet, we're in the midst of a sobering predicament. Wages have fallen out of step with rising inflation. Families are increasingly taking on more debt. Credit card balances are the highest in over 20 years.
Global economists have shared their thesis that there is going to be a long recessionary period. When this happens, we should be encouraging consumers to stave off spending more than their means. Yet many in the lending and payments industry are using advances made in digital technology such as enhanced ease of use and increased access to credit products as a way to exploit borrowers into overextension.
Overconfidence only serves to make markets more volatile. Ignoring early signs of stress can exacerbate the issue of economic inequality. In earnings calls during the third quarter of 2022, strong credit metrics and spending behaviors were cited as means to entice investors to the credit industry. When business leaders take this approach, we risk fintech development becoming a force for greater division than a boon for open and competitive markets.
Although October's inflation report shows abating price pressures, Treasury Secretary Janet Yellen warns shelter costs — expenses such as mortgage or rent — are still expected to rise sharply. When housing advocates talk about an affordability crisis it often boils down to one important statistic: the share of "cost-burdened" households as defined by those spending 30% of their income on housing. In 2022, the average mortgage payment climbed to 31% of a typical household income — the highest share since 2007. For renters, the situation is much worse. Forty-six percent of renters spend 30% or more of their income on housing, including 23% whose rents exceed 50% of their take home pay.
Mortgage application volume for aspiring homeowners is now lower than the bottom of the 2008 crash. This is terrible for the health of a nation dependent on a strong, aspiring and growing middle class. For a great majority of the income strata, real estate tends to be the most valuable asset to build wealth that can be passed down from one generation to another.
Time is a huge component to building generational wealth. But digging out of debt is a big first step. Strategic use of debt like paying down a mortgage that results in equity can help consumers reach personal financial goals. Wealth can be created from a lending environment, but what this requires is for all parties to take an investment lens. In other words, banks and their digital partners should be doing everything possible to encourage consumers to think and act like portfolio owners.
It can't be stated firmly enough: At this moment homeowners should seriously consider the drawback of using cash-out refinances to extract equity out of their homes. There is this fairytale belief that shifting debt can save money. Instead, what often takes place is the consumer is reduced to being exposed financially. Issue should be taken with a buy now/pay later approach. Calling for a resurgence in home equity line of credit programs is not the answer. Pushing out payments has been long and rightly criticized by financial advisors and consumer advocates, alike.
For far too long servicing a loan — especially a mortgage — has been seen as just a process and not an opportunity. When delinquency and default are on the rise, the importance of compliant servicing also rises. However, the typical playbook for helping consumers who are taking on water becomes no longer relevant when interest rates climb. Greater flexibility with workout strategies will be required to maintain portfolio integrity and positive customer relations. Servicing innovation not origination innovation is what will prevent a 2008 repeat.
Financial institutions must shift their operations to the needs of the hour. To position for the recovery, financial institutions and their fintech partners need to look beyond their own walls. Financial technology is an essential part of our economic infrastructure. We must allow it to direct and align engagement with responsible business practices. A more stable, open ecosystem that is broadly inclusive of consumers holds great promise.
Consumer alignment is where real innovation and technology breakthrough is now needed most. There is no substitute for a great return to business fundamentals, a focus on sustainable growth and a collective operation showing greater pragmatism. Frankly, the need at every moment is to put a focus on consumer connection and allocate for the long run. When the market bounces back, the brands that focus on education, engagement and loyalty will capitalize.
