Financially Empowering Debt-Burdened Members

According to Experian, the average American consumer had more than $100,000 in debt at the end of 2022 and debt balances grew for most, regardless of their credit score. Helping consumers manage this debt – from mortgages, auto loans, credit cards and more – is increasingly important, especially in our current interest rate environment.

What will it take to financially empower debt-burdened Americans? While today’s economic climate presents challenges, it also presents an opportunity for credit unions and fintechs to make a difference in the financial well-being of members.

A Nation in Debt

Consumer debt levels have been steadily rising for years – last year in particular saw a sharp increase of 7% and this trend is continuing in 2023. Total household debt in the United States rose to a record-high of $17.05 trillion in the first quarter of 2023, according to the New York Fed’s latest Quarterly Report on Household Debt and Credit. The report revealed persistent credit card debt among Americans, as well as rising delinquency rates for most account types.

Typically, the first quarter of the year sees a decline in credit card balances as people pay off their holiday spending. Yet, for the first time since the New York Fed started tracking balances 20 years ago, that isn’t the case, according to Bankrate’s senior industry analyst Ted Rossman. Instead, balances held steady over Q1, suggesting that people are likely using credit cards to finance daily spending due to the rising cost of everyday necessities and are unable to pay down their balances each month.

Debt balances are rising for other types of liabilities too. The average monthly car payment has jumped to $729. Mortgage debt increased by $121 billion in the first quarter, despite originations being down, which means the increase is likely the result of the Fed’s string of interest rate hikes.

As debt levels climb higher, so do stress levels. Managing money has already been extremely difficult given the financial challenges of the last few years – a global pandemic and the highest inflation in decades – and consumers are feeling it. Most adults said that finances were a burden, with 36% reporting that it is a major source of stress, according to a study by The Associated Press-NORC. These problems are particularly amplified in households with incomes under $50,000, with 61% of these households considering their financial situation to be in poor shape.

Data Lends a Helping Hand

Despite ballooning debt and financial stress, there are reasons to be optimistic. Stakeholders across the financial services industry are using data and technology to solve complex problems and make credit more accessible to potential borrowers.

For instance, alternative data is being used to determine creditworthiness as fintech companies and lenders seek to expand and better serve their customer base. FICO has even created a digital testing lab to improve tools that could help millions of borrowers gain access to credit.

However, the financial services industry must also focus on helping borrowers manage their debts. Currently, consumers struggle to track their bills and loans through disparate platforms, which can negatively impact their financial health. To address this, consumers need a consolidated view of their credit data that includes outstanding balances, payoff dates and interest rates.

Open Banking Makes Data Actionable

Open banking data has the potential to help alleviate the debt that burdens a majority of Americans. Open banking provides third-party access to financial data through APIs, and can be inclusive of liability data, creating an opportunity where a credit union’s members can view, track and manage their debt in one place.

Open banking enables members to more easily take action to manage their debts and make informed decisions around balance transfers, debt payoffs, bill payments and more. Meanwhile, credit unions and fintechs can leverage real-time data to view all of a member’s liabilities, enabling them to make more personalized product offers that improve the member’s financial health. Open banking opens the door for increased competition among financial institutions in a way that directly benefits consumers while also helping drive conversions.

When members opt to share their liability data with their credit union, they can unlock better, more competitive product offers and affordable credit. For example, rather than paying three student loans at 5.5%, 5.16% and 4.9%, the credit union may be able to offer a 4.5% consolidation loan and help that member pay down their debt faster.

Clearly, applying open banking to liability management offers a multitude of benefits. For one, members are more likely to make on-time payments when the process is seamless and they’re able to view and initiate payments for all their debts, including new lines of credit, in one place. No more resetting passwords each month to make a payment.

Some may argue that data privacy should be a concern, but members should have the option to grant access to their financial data and many have already expressed interest in doing so. In fact, Accenture’s global Financial Services Consumer Study found that nearly six in 10 consumers would be willing to share personal information with their financial provider in exchange for more competitive pricing on products and services, as well as more personalized offers.

Empowering Financial Futures

You may have heard the phrase, “a rising tide lifts all boats.” Helping individuals easily manage their liabilities puts them one step closer to their financial goals. Not only does this create a better member experience, it also benefits the credit unions they engage with.

Eliminating the friction members face when managing, paying or refinancing their debt translates to more members with higher credit scores and an improved ability to meet their financial commitments for things like loans and mortgages in the future. In our current economic environment – and with household debt at an all-time high – it is more important than ever for the credit union industry to find ways to empower debt-burdened members.

Mit Shah Co-founder & COO Method Financial Austin, Texas