NCUA Chairman Hood recently said. “For nearly a century, credit unions have had a history of serving their members and stepping up in the most difficult times.”
It’s true. Credit unions are going to extraordinary lengths to support their members, employees, and communities in this time of massive social and financial disruption. Lots to be proud of, for sure.
But don’t celebrate too much. The problem is, we have not done all we could have done to prepare our members for that “most difficult” time in the first place. It doesn’t need to be a global pandemic – even a short-term job loss, car repair or illness can financially ruin our members.
In this way, we have failed our members – again. During the peak of the great recession there was a tremendous focus on the short-term need to deliver credit to those most impacted. There was also a lot of conversation and energy around the need to fundamentally restructure the financial health of US households, to reduce the financial vulnerability of families. Research at the time highlighted this ugly fact – despite the strong run of the investment markets and real estate, almost half of US households did not have access to $500 in liquid assets to deal with a financial emergency.
And, it is even worse now. Fast forward to 2020 and after an 11-year bull market and record employment numbers, 46% of US households have still not accumulated a $500 emergency fund. According to a Bankrate survey in July of 2019, just 18% of Americans say they could live off their savings for at least 6 months. That is the lowest percentage of people with an adequate savings cushion in the 9 years Bankrate has been conducting the poll. We are headed in the wrong direction.
We’ve been focused on solving the wrong problem. Let us be clear – the biggest financial resiliency problem most US households have is not access to affordable credit – it is a lack of savings that provides a cushion in times of economic need. For too long we have bought into these mis-informed opinions:
- Our members do not know they should be saving: Study after study shows exactly the opposite. Surveys show that households at all income levels know they should be saving and can identify the benefits of having robust savings.
- We need to improve our financial literacy efforts to educate members on how to save: Turns out that most financial training, especially for adults, has little or no long-term impact – it makes us “smarter” but does little to shift behaviors. This study looked at a significant amount of published research reports and found the correlation between financial literacy and positive financial behaviors was very small.
- Households are living paycheck to paycheck and do not have the ability to save: Once again, surveys show that while income can be an issue, most households have a spending problem. When surveyed by the Common Cents Lab at Duke, 88% of low- and moderate-income households were able to identify 3 ways they could alter spending to begin saving, but follow-ups found almost none of them made a lasting shift in behavior.
So, what do we do about this as an industry? Behavioral economics gives us some ideas. Knowledge does not usually drive behavior change, but we have some good insight about tools and techniques that do:
- Default members into a regular savings plan. Automatically enrolling new members into a plan that moves a set amount each payday from the transaction account into their savings account has shown great results in the credit unions that have implemented this intervention. Members can opt out, but few do, and balances are sticky.
- Add a savings component to new loans. Include in the loan payment an additional amount that goes to the member’s savings account every month. You escrow for insurance and taxes, you should “escrow” for those predictable expenses or eventual repairs on the home or car you are financing.
- Make savings the preferred behavior. Rather than encouraging your members to buy a new car when their current loan pays off (as my credit union did), suggest members allow the automated deduction to continue and post it to their savings account.
- Actively and aggressively work with members to establish short, medium- and long-term savings goals. Break big goals into smaller pieces to make them more obtainable. Do not tell the new parents they need to save $200K for college, tell them they need to save $50 this month. Track those goals and provide feedback and encouragement regularly.
- Provide financial education as close to the point of action as possible. For instance, mortgage training immediately before members begin the house search has the potential to be very impactful. Research shows training is most useful when delivered near the point in time when the member might actually apply it.
- Add some friction (make it harder) for members to do behaviors that are not in keeping with their savings goals. Or, said another way, recognize that we tend to do what is easiest. Make savings easy, easy, easy.
- Make sure your internal rewards and recognition system for your teammates celebrates success in member savings levels. You cannot tell your staff that savings levels are important and then only reward loan generators. Well, you can, but do not be surprised when nobody cares about savings.
And here is the big one:
Measure success based on increases in the level of member savings (instead of just loan growth and balances). How might your organization evolve if you focused on shifting members’ behavior toward financial resiliency and away from spending and consumption?
I am reminded of the CU CEO who was concerned members were not listening because the quarterly member financial literacy training was not showing an increase in members’ savings levels. A closer look showed that between those quarterly programs promoting saving, more than 90% of the messages delivered to the members were about mortgages, car loans, consolidation loans, and credit cards. Only about 4% of their communication focused on the broad topic of savings. The members were listening and responding in a totally predictable way.
The good news is that your members do listen to you. They count on you to guide them through times good and bad. And, in the short run, they are going to be very appreciative of the support they are getting from you in this crisis. You need to start thinking now about what you will do to ensure your members are in a better position to weather the next financial storm. Let us not fail them again, there will be another storm…