Digital small dollar lending key for handling life events in the new year

These first days of the new year offer an opportunity for many of us to get back in the groove and jump on those personal and financial targets that will get our 2023 off to a crisp and healthy start.

For many others, however, the first month of the year can be financially stressful in that residual holiday debt solidifies into a hardened reality with little to no financial awareness of how to pay it down and improve financial stability. Ironic in a certain way, considering January is Financial Wellness Month!

According to CNBC, more than a third, or 35 percent, of American shoppers took on new short-term debt this last holiday season to cover their extra costs. In fact, 37 percent of shoppers will take five months or more to pay off the debt. Getting through the holidays also took a toll on emotional health for many, provoking depression and compulsive overspending. No one deserves a Christmas with that amount of emotional weight on their shoulders.

“Going into debt due to holiday spending has major drawbacks for your mental health,” says Maryam Kia-Keating, Professor of Clinical Psychology at the University of California, Santa Barbara Department of Counseling, Clinical, and School Psychology. “When people spend more than they have, or go into debt, their stress multiplies. Financial stress often increases conflict in family relationships, because of the spending itself when partners don’t agree, or because the sacrifices involved in trying to pay back the debt.”

While most consumers will revert to their credit card to help them get through, one-third of those credit card users admitted they won’t be able to pay off that holiday bill and would have to carry a balance heading into 2023. Without even considering the possibility of a sound, financially-healthy small dollar lending solution from their own financial institution, statistics found that 13 percent of consumers will unfortunately use the unreliable “buy now, pay later” arrangement, a program already known for its array of downsides that affect consumers’ financial health and place them even further in debt.

Even worse, another eight percent of unwitting consumers plan to use predatory payday lenders, while three percent expect to skip an essential payment altogether in order to afford the holidays, hurting their credit score even further.

Consumers face multiple challenges to financial health in the new year

In 2022, consumers faced competing economic influences; Government stimulus versus high inflation eroded away at both gains and savings. Low unemployment went up against the tech hiring freeze and layoffs. High home values versus high interest rates. For every thing that could help and encourage consumer confidence, there was a competing force present to bring consumers crashing back to earth. And we didn’t even include the effects of the COVID pandemic!

As 2023 rolls around and we discover how consumer behavior will impact the larger economy, we have to take a look at where consumers left off at the end of last year. A number of those economic forces are still affecting the economy, and they will continue to influence both consumer confidence and spending habits. Inflation – a primary driver of how much disposable income consumers really have – is forecasted to have peaked in 2022, so the US is likely to experience lower inflation this year. If that comes to pass, chances are any easing of inflation is going to help consumers realize improved spending power, according to Forbes.

At the same time, while inflation may improve as 2023 unfolds, interest rates are likely to remain high, and perhaps even increase again. For consumers who went from spending their savings to increasing their debt to pay for the holidays, these continuing high interest rates will further impact their financial health negatively by eating into their disposable income.

To add to the economic uncertainty, personal savings fell to 2.4 percent in November, the lowest since mid-2005, according to the St. Louis Fed. While consumers certainly increased debt to pay for holiday spending – debt that is 24 percent higher than the amount they took on in 2021 – they expect it to take even longer to pay off the debt in 2023 than it did the year prior.

Fortunately, one Petersburg, VA, credit union’s example is proving that when members lean on their local cooperative for such annual expenses like holiday debt, the journey to financial inclusion, health, and wealth becomes so much more manageable!

Small dollar lending success punctuates the “advantage” in Peoples Advantage FCU

That philosophy of helping members in unpredictable states of financial uncertainty is where Peoples Advantage Federal Credit Union spread their wings in 2022 with their mobile Fast Cash program. Prior to Fast Cash, Peoples Advantage offered a standard manual small dollar loan package in what President and CEO Amanda Habansky classified in a recent CU Broadcast as the “old school way” – complete with various paper application forms and loan documents that consistently bogged down her team.

Understandable. Such tedious and inefficient application processes can hinder the modern day member experience to varying degrees – from the time it takes to fill out said forms to processing the loan request and getting the member their time-sensitive funds.

Habansky added a practical reality to the situation as well. “It was a service where members were going to get somewhere [to get their loan], [and] we wanted them to [go] with us,” she said. “The bandwidth of the team was really absorbed through those small dollar loans, so being able to offer it through a digital channel created bandwidth but also credibility with our brand because we were giving [a] similar experience they were getting from other places.”

By taking advantage of a contemporary digital banking platform, Habansky said the process became a “totally hands-off experience for our team and for the member; the quickness, the ability to [use the service] 24/7, 365, and the tight-knit integration to our provider made complete sense. She added the platform “could do everything without an employee being involved.”

To their credit, their approach to the issue was fundamental to the success of the platform. When a credit union is already working with the dedicated mentality of genuinely serving their members and making a fundamental difference in their lives, great things tend to happen.

Operationally, such digital lending platforms are able to automate the entire transaction from start to finish, requiring no interaction from loan origination personnel. This, in turn, allows staff time to work on higher value items. It offers a “snowball effect” of organizational value!

In fact, by automating the digital loan process, credit unions are likely to see a massive increase in loan volume because they have now created an easy, unique, and accessible member experience – extremely important for members today. Because digital small dollar lending funds almost instantly, members literally go from the link to real money in mere minutes, if not seconds.

Habansky further explained that prior to onboarding their digital lending platform, Peoples Advantage found itself struggling for loan growth. While partly due to COVID, the real challenge, again, was the bandwidth with which PA staff was managing.

By converting to a digital lending platform, Peoples Advantage experienced double-digit loan growth because Habansky’s team could focus on other products and services. Additionally, since the cooperative launched Fast Cash, 25 percent of the members have had a credit score increase of 50 points or more. It’s also a credit to the supplementary coaching services PA provides, giving the member an entry point to a deeper long-term relationship.

The member feedback on PA’s digital lending adoption has been nothing less than transformative. In the course of the 2022 holiday season, Peoples Advantage promoted their mobile “holiday loan” program out to the public. The first week of December alone saw Peoples Advantage fund over 200 loans through Fast Cash.

In previous years, it would take Peoples Advantage TWO MONTHS to fund 200 holiday loans.

Habansky shared another story about a member who had been doing frequent lending activity with Peoples Advantage through the years. Coming to the credit union sporting a credit score in the mid-400s, by embracing both the Fast Cash lending program and financial coaching, in time the member was able to purchase his first home.

Digital banking – and by extension mobile small dollar lending, specifically – contains in itself a ripple effect that can fundamentally help your members live less financially-stressed, and healthier, happier lives. Millions of American consumers will still be paying off their holiday debt months from now, many using financially unsound methods like credit card debt that will undoubtedly hurt their long-term financial profile.

Give your members a chance to create a deeper relationship with you by investing in the digital banking products that give them the best opportunity to succeed in this new year and beyond.