Financial fragility doesn’t always present the way most consumers’ imaginations tells them that it will. The most common perception people have of the financially-fragile customer aligns most closely with either the “On the Edge” consumer profile or the “Shut Out” profile described in the PYMNTS/Unifund Financial Invisibles Report.
And there are some compelling reasons for those associations, as both of those groups share characteristics that are familiar to what the popular imagination associates with being financially fragile. Neither group makes much use of mainstream credit products – On the Edge consumers mostly by choice, Shut Outs because their previously spotty financial history tends to lock them out of offers. Both groups are associated with living paycheck-to-paycheck, and both report difficulties in making monthly ends meet.
But appearances can also be a bit deceiving. As Karen Webster pointed out earlier this week, when one digs a little deeper into the numbers, a curious trend starts to emerge. The On The Edge look, well, a bit less on the edge and a bit more like “solid financial citizens” with college degrees – low debt, only a minority (43 percent) living paycheck-to-paycheck and a majority saving money (57 percent). They rarely use credit cards, and only about 5 percent report having student loans.
They’ve taken that edge and seem to be building it into a nice secure porch to stand on.
The “Second Chances” group, on the other hand – consumers who’ve suffered a previous financial shock and have managed to climb back into mainstream credit markets, usually based on their profession, income and earnings potential – are not looking nearly so stable. And Webster wondered if perhaps Second Chances are “ticking time bombs” threatening to detonate on lenders, merchants and the economy as a whole if something doesn’t intervene.
It is a subject she took up when she sat down with Unifund VP Steve Ashbacher to talk over the results, and what it means for the future of the consumer economy. Ashbacher readily agreed with Webster that there is something a bit alarming in the numbers – particularly in an economy that is strong by so many counts.
“Many high-income earners are living paycheck-to-paycheck. We are proving that here,” Ashbacher told Webster. He also noted that these consumers in many ways closely resemble “No Worries”-classified consumers, who mostly pay their bills on time and seem to manage credit relationships with minimal difficulty or expense. They have similar amounts of education and they earn comparable amounts of money. But behind the scenes, one group is able to save and to avoid late payments and delinquencies, and the other is not.
“The obvious conclusion to draw is that they are living beyond their means, or at least that their income is not keeping up with their expenses,” he continued. “The problem is that just opens up a gigantic can of worms – how can that be? How do some high earners have expenses that are outpacing their incomes so rapidly that they are visiting pawn shops in some cases to get access to funds?”
But, as one would expect in opening a gigantic can of worms, the explanations and solutions are complicated and a bit wiggly.
Making Better Use of a Second Chance
The story, Ashbacher told Webster, really starts with education debt and the sums students end up owing at the end of their education as compared to the income they can earn in their post-graduation employment opportunities. For a lot of consumers between the ages of 25 and 40 – whose early experiences in the job market were clouded by the Great Recession – those early earnings were below expectations.
That meant, in a lot of cases, graduates five years out of school were still looking at massive debt mountains to climb and that missing a few loan payments here and there, and maybe even racking up some defaults, became a decided issue for many.
“And as they are getting older, they are trying to recover from student loan payments while thinking about starting a family, and paying a mortgage and a car payment. It snowballs out of control pretty quickly,” Ashbacher noted.
Some of that, he told Webster, can be written off to making less than stellar financial decisions, like the Second Chance customer he spoke to who reported taking out a personal loan to take their family on a trip to Disney World. Other consumers reported they don’t ever really believe they are going to be able to save in any conventional sense, so they really aren’t thinking about preparing for retirement. Plus, in a favorable economic environment, Webster noted, it is easy for consumers, even those who are getting in a little bit over their heads, to feel fairly confident (and the data shows they do) because they may start to take for granted that they can earn their way out of a jam.
But, of course, economic conditions change, and consumers can easily lose track of thinking about preparing for what comes tomorrow when they are keeping up with the Joneses today.
“And that doesn’t necessarily mean making irresponsible purchases. It is what comes from wanting to drive a nice, reliable car, to letting your kid play on the elite travel basketball team or wanting to be able to pay the two thousand dollars a year it costs for your daughter to be in dance classes with all of her friends,” Ashbacher pointed out.
What consumers often lack, he noted, is a framework to help manage those short-term priorities, so they can make better long-term decisions by balancing out their priorities.
Better Financial Education
When one strips out consumers who are acting questionably or those who have become fatalistic about living a life entirely defined by making debt payments, what emerges, according to Ashbacher, are a lot of consumers who genuinely want to be leading more financially responsible lives.
But the truth, he noted, is that we don’t offer most consumers a lot in the way of help when it comes to learning skills like setting a budget or putting money directly into savings, which makes the experience overwhelming enough that consumers just aren’t doing it at the rates they should. Second Chances, he pointed out, make up a third of the consumer base, and are in an age bracket that makes them the next generation of dominant American consumers.
“The problems always come back to a lack of understanding from the get-go about how certain kinds of choices to pay with credit are going to impact you down the road,” Ashbacher said. “A huge part of this comes down to education and helping consumers, particularly in the 18 to 35 range, understand the long-term impacts of this stuff.”
On that horizon, he noted, there is hope. There are services and apps which allow consumers earlier access to their pay funds – which can be helpful insofar as it keeps people away from the payday lenders and pawn shops. But better than that, Ashbacher told Webster, it gives consumers guidance on what actions to take, based on the budget they’ve set. When to save and when it’s okay to spend is often the critical piece of knowledge that consumers in all categories, but particularly Second Chances, often seem to lack.
“We know how to do this stuff. Budgeting is not rocket science,” Ashbacher said.
But it is tedious and can get overwhelming, and consumers can quickly decide that living for today is a lot better than saving for tomorrow. But as digitization and automation are becoming more powerful, he noted, digital tools can stop making money feel abstract to consumers and can give them a 360-degree view of their finances in real time, so they know exactly what and how they are spending.
Building More Trust
Once those tools are there, of course, consumers actually have to use them. And that in and of itself can be a challenge, because financial stability can’t be built with a single action or with any kind of magic trick. It just takes a lot of determination and discipline over time, though digital tools can lighten the load of the technical difficulty associated with keeping track.
And financial service providers – especially banks, Ashbacher noted – need to do a better job of presenting themselves to their customers as trusted financial advisors who can help them actually manage their money. The study shows that consumers both trust banks – and don’t.
In the trust column, there is the fact that most consumers – some 95 percent of the ones PYMNTS and Unifund spoke to – have bank accounts. On some level, they interact with the banking industry, which they more or less trust to hold onto and manage their money. That’s a very powerful starting point.
But, as Ashbacher told Webster, it’s not enough of an ending point because consumers have also been trained to be wary of banks and their services, as the headlines have frankly not inspired confidence in recent years.
“I think part of this is that banks and financial institutions and credit bureaus have got to stay out of the news,” he said. “There is a negative trend here and we have to hope that does not continue.”
Consumers should not be reflexively concerned about the fees hiding in the fine print, or vague concerns that somehow, in some way the bank is costing them money they don’t want to spend, Ashbacher said – and right now, that is the state of mind for most consumers. They trust the banks to hold their money, but when the conversation about services comes up, most consumers start immediately feeling around for the catch or hidden price tag.
In an environment of trust, on the other hand, financial institutions can do a better job of intervening, and helping their customers put their finances on the road to better, sounder management. It all starts with transparency and a real desire to build a trusting relationship with their customers. It won’t be easy work, he noted, but it is probably the best shot at making sure today’s Second Chance consumers don’t become tomorrow’s third-chance consumers.
“People don’t necessarily want to be put on a budget, and they definitely don’t want to do the work of creating it,” Ashbacher said. “But if you can give them a framework and the guidelines, people are willing to think about finances in a new context. And the earlier in their lives you can get to consumers, the better the process can breed good financial habits.”