As we enter a new year and a new decade, it is time to reflect on the condition of our members and think about ways we can shift our focus and behaviors to improve their financial condition. As an industry we are rightly proud of our record of providing credit to many households that traditional lenders have ignored and that predatory lenders have targeted. But let me suggest that providing credit to those with emergency needs treats a symptom but does not deal with the underlying problem. And that problem? Lack of savings. The federal reserve reports that over 50% of American households don’t have $500 in liquid funds for an emergency. Too much spending, not enough savings.
Behavioral Economics teaches us to make preferred behaviors as simple, as painless, as automatic as possible. Here are some ideas that have been implemented by some of our credit union friends to focus on the savings crisis.
- Provide solid processes to help members set aside that emergency fund. Create a saving account that pays high interest rates on the first $500 or $1,000 in balances and market the account to members. DCU restructured their primary savings account and currently pay 6% on the first $1,000 in the account. In addition, they help members monitor their balance and make it very easy for members to move money into basic savings to maximize their returns. They are focused on helping all members, not just those with large balances.
- Be more deliberate and nuanced about the way we qualify members for loans, especially car loans. The Common Cents Lab have created a robust loan qualification calculator that takes into account a wide range of considerations and expenses. This process provides a much better indicator of the true expense loads of a household and improves the transparency needed by member to fill comfortable about the debt that car purchase represents.
- Help members prepare for the total cost of owning that car. Some credit unions are now “rounding up” the monthly loan payment by $25 dollars (or more) and putting the round up amount into a savings account. When the car needs new tires, or an oil change, or your member needs to pay the deductible on their car insurance they will have the savings to handle it and not need an emergency loan. Consider doing this for other loan types, that house will eventually need a new roof, or the HVAC will need updating. Help your members set aside money for those inevitable expenses.
- Another way to use the “round-up feature” is to round up all debit card transactions to the next full dollar amount and put that extra amount into the members savings account. These small amounts are painless in real time and have the potential to add up over the long term.
- Some credit unions are making one or more of these suggestions the default option for new members. Defaults are powerful behavior changers. Our credit union partners who use this option detail the program clearly and simply and inform members that they have the option of opting out, but few do. Members are looking to you for guidance; a default sends a strong message about what you think is the preferred (or smart) behavior.
- Build a recognition and rewards program that incents your teams to help members grow their savings balances and get their spending under control. Most credit unions have programs that award loan production, so use that as a starting point. If you want your team to think seriously about savings levels start rewarding them for those efforts.
It is time to recognize that increasing members savings is a critical piece of putting members in better long-term financial health and that we need to put as much effort into savings levels as we do on loan production. Are you ready to make that commitment?