Another day, another customer trudging into the bank to discuss credit card debt and a lack of savings … over a venti Starbucks latté. It was an a-ha moment for financial guru David Bach, who started cranking out financial management guidebooks for the average consumer.
Despite his great respect for him, LendingClub President Steve Allocca couldn’t understand at first why Bach’s simple guidebooks were selling so well. The advice between the covers wasn’t rocket science. It was tips like, “Forego the venti Starbucks latté twice a week.” Shouldn’t that be self-evident?
After taking over Wells Fargo’s personal credit business, though, Allocca began to see the problem. Consumers were paralyzed, he said. They had entered an inertia cycle of spending fueled by credit cards, and it was easier to stay on the hamster wheel than to change their habits.
“There was, and is, a crisis of consumers not having savings and not being on a path to accumulate them,” Allocca told Karen Webster in a recent interview. “They don’t even think that it’s possible to even find a path to start saving.”
Allocca first observed the problem in the late 1990s, when he began to sense a disconnect between the bank’s stated vision and mission to help customers succeed financially — and the actual help and services that were being offered, from credit cards to overdraft fees.
For customers, he observed, finding ways to part with their money was much easier than finding ways to save it.
Which also, he thought, made it the perfect time to prove that inertia wasn’t good; that the credit card cycle for those who had gotten in over their heads could be broken; that setting aside funds, clearing away debt and starting to save — and even invest — were not only possible, but also easier than customers thought.
Particularly for those, Allocca said, who may feel they have no options.
An October 2017 study by PYMNTS and Unifund dubbed these consumers “financial invisibles,” having no (or little) access to further credit when they need it. These consumers live paycheck to paycheck, and the ends just aren’t meeting up. They feel like they could never set aside $300 a month to square away their credit card debt.
Allocca said they can — and they do — and if they get into the habit of setting aside those $300-a-month payments once the debt has been erased, the savings start to build up.
It was what drew him to LendingClub. The company takes a different approach to consumer credit and addresses the larger problem: Consumers whose disposable income is tied up in servicing credit cards don’t prioritize savings, since they can’t save. Loans that consolidate and reduce that debt give consumers a path to finding and then prioritizing savings, since they finally have access to funds which make that possible. Allocca said they then get into the habit of making an automatic payment that, instead of paying off a debt, can be put into a savings account.
Vanilla Consumer Credit
Try this instead of a vanilla latté.
Allocca said LendingClub is built on a “plain vanilla consumer credit product” that is of little interest to banks. That product is positioned as a debt paydown plan with the end goal of helping consumers find savings.
Savings can’t begin until debt goes away, he explained, so cutting a couple of fancy coffees out of the weekly budget isn’t the first step consumers need to take (although it does remain an important choice later in the journey).
The first move, he said, is getting credit card debt consolidated onto a product with a lower interest rate and obtaining an automated plan for paying it off. Having a plan or roadmap is a critical part of showing consumers that they can take control of their financial situation, said Allocca. It transforms their financial outlook from despair to hope, which is powerful for getting them motivated.
“They’re coming here because they feel like their money controls them, and they want to get more control over their money,” Allocca said. “For those customers, it is a windfall. It was inconceivable to them when they first started that they could put away a couple hundred dollars a month.”
Paying Themselves First
Allocca admits it’s not easy setting aside money to be saved or invested. If not for 401(k) plans, he said, the debt problem would be a whole lot worse than it already is.
Webster added that digital commerce makes spending abstract. Even those who live lives of relative financial stability have had months when the credit card statement arrived and punched them in the wallet — but saving is just as important in those higher-income segments, because disaster doesn’t discriminate, and bad borrowing habits can snowball for the rich just as easily as for the poor.
Still, there is something intuitive about paying oneself first, said Webster; it’s what her dad taught her growing up, and many parents like him taught their children the same money management lesson. Why, she wondered, is that such a foreign concept among consumers today?
Allocca’s explanation is simple: Everyone is in debt. And until the debt goes away, the savings can’t start. If it’s not credit cards, he said, it’s student loans: Millennials saw their parents get into trouble with credit and have proportionally avoided credit cards, but anyone with a college education is most likely up to their ears in debt anyway.
According to the Financial Invisibles Report, even 40 percent of the population that claims not to worry about money still lives paycheck to paycheck, and that’s true across demographics.
Why are even the well-off in debt? Allocca noted that credit is extended to people who are making good money. If something bad happens, those with access to credit are likely to use it to compensate. When they use it, though, they may find it difficult to exit the hamster wheel.
The Silver Bullet (or Lack Thereof)
Allocca said technology and mentorship are two keys to helping more consumers find their way out of debt and into savings. Just as the Fitbit and Apple Watch have helped people get more in touch with their physical health and habits, tech tools could help people become more familiar with their financial health and habits, he said.
However, such tools and networks are lacking.
It’s not hard to get a personal coach or buddy when it comes to wellness goals, noted Allocca — yet finance, possibly the most important area in which someone could need a coach, offers no such thing. The people who really need the advice aren’t getting it, he said, while those who’re doing well enough to get wealth management advice probably don’t really need it.
“I want it to be like P90X,” Allocca said, referencing the intensive workout regime available as a DVD set.
At the end of the program, he said, participants are recognized and receive a t-shirt. Then they’re asked if they’d like to become a coach; if they say yes, they’re paired with someone who’s just beginning the program to mentor through the inevitable ups and downs.
That’s exactly what people need in finance, Allocca said. Spending and income fluctuate. Life happens. Think of the impact it could have for an out-of-control borrower to receive financial coaching from someone who was once in their shoes but now has the means to save and even invest.
He said LendingClub is witnessing just that: People who signed on as borrowers have become investors, explaining that they feel it’s important to “pay it forward” to other businesses in their shoes. LendingClub didn’t have to tell them to do it, Allocca said. People just felt it was the right thing to do, so why couldn’t the same thing happen between individuals?
As far as technology goes, Allocca said there’s no silver bullet to ensure that consumers stay disciplined about chipping away at their debt or setting aside funds to save — but then, Fitbits don’t guarantee fitness either. The point of tech is simply to make it easier and to save consumers the task of creating and managing a budget.
That, he said, is precisely where he wants LendingClub to go in the future.
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