As an Economic Downturn Looms, Lenders Need to Start Now to Help Their Customers Weather the Storm

Excerpt from Forbes

In the personal loan market, which is now dominated by online lenders that haven’t been around long enough to have experienced a downturn, much of the lending has been in the name of credit-card consolidation. The dirty secret of the industry is that, by giving customers a lower interest rate to pay down existing card balances, the loans are often less likely to get someone out of debt permanently than to enable the next spending spree.

Given that 45% of Americans don’t have savings to cover three months of living expenses, all it would take is a small uptick in unemployment – not unlike the government shutdown earlier this year – to push paycheck-to-paycheck consumers over the edge.

With uncollateralized loans and asset-poor borrowers, lenders won’t have many levers to pull. Credit card regulations will make it difficult to reprice credit to account for greater risk, and much of the growing personal loan debt is in the form of installment loans. New debt collection rules, coming soon from the Consumer Financial Protection Bureau, will require different practices.

Companies that have been early to adopt broader financial health strategies are most likely to have built the kind of trust with customers that translates into positive engagement when times get tough.

U.S. Bank figured this out three years ago, when its mortgage delinquency call center partnered with SpringFour to provide referrals to tens of thousands of outside resources for struggling borrowers, such as utility assistance, food savings, prescription drug rebates and employment help. U.S Bank customers who received referrals were 10% more likely to remain current on their mortgage, and more than twice as likely to engage in foreclosure prevention activities. BMO Harris Bank, another SpringFour partner, provides free self-service access to those resources on its public website.

Oportun, which has made over $1 billion in installment loans mostly to lower-income borrowers in the Latinx community, has taken a higher-touch approach, providing customers with access to free telephone-based financial coaching through a partnership with UnidosUS. Since launching the partnership in late 2017, the national advocacy organization has helped about a thousand borrowers reduce their total debt by more than $157,000 and increase savings by nearly $30,000. Relatives of Oportun customers unexpectedly began asking UnidosUS for coaching too, and the pilot has now turned into a nationwide rollout.

Partnerships are flowing in the opposite direction as well, with credit counseling agencies experimenting with new fintech offerings to increase client engagement and improve the overall experience. GreenPath, one of the nation’s largest providers of financial counseling and debt management, partnered with EarnUp to integrate its automated installment debt repayment service into the GreenPath offering. The service breaks up a consumer’s single monthly loan payment into multiple smaller withdrawals, typically on paydays, across multiple loans.

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