Increasing debt and disappearing savings require fintech’s next wave

Increasing loan volumes have been the main driver of bank-fintech partnerships over the past three years. This is a big change from pre-pandemic business plans when new product development was the main goal. In our quest to meet higher expectations for engagement, we cannot lose sight of the goal of making business work for people.

Americans are overbanked and underserved. $2.5 trillion in additional savings was squandered in the first days of the pandemic. It only took 15 months for the money to sink.

Buoyed savings were thought to be the workhorse of economic growth that would drive consumer spending in the coming years. And yet we are in the midst of a sobering predicament. Wages have fallen out of step with rising inflation. Families are increasingly taking on more debt. Credit card balances are the highest in over 20 years.

Global economists have shared their thesis that there will be a long period of decline. When this happens, we should encourage consumers to avoid spending more than they can afford. Nevertheless, many in the lending and payment industry are using advances in digital technology, such as increased ease of use and increased access to credit products, as a way to exploit borrowers for overextension.

Overconfidence only serves to make markets more volatile. Ignoring early signs of stress can exacerbate the problem of economic inequality. In Q3 2022 earnings calls, strong credit scores and spending behavior have been cited as means of luring investors to the credit industry. When business leaders take this approach, we risk fintech developments becoming a force for greater division rather than a boon for open and competitive markets.

Although the inflation report from October shows easing price pressures, Treasury Secretary Yellen warns that the cost of housing – expenses such as mortgages or rent – is still expected to rise sharply. When housing advocates talk about an affordability crisis, it often boils down to one key statistic: the share of “affordable” households as defined by those spending 30% of their income on housing. By 2022, the average mortgage payment will rise to 31% of a typical household income – the highest share since 2007. For renters, the situation is much worse. Forty-six percent of renters spend 30% or more of their income on housing, including 23% whose rent exceeds 50% of their take-home pay.

Mortgage application volume for aspiring homeowners is now lower than the bottom of the crash in 2008. This is dire for the health of a nation that depends on a strong, hopeful and growing middle class. For a large majority of income strata, real estate tends to be the most valuable asset for building wealth that can be passed down from one generation to another.

Time is a huge component in building generational wealth. But digging out of debt is a big first step. Strategic use of debt such as paying off a mortgage that results in equity can help consumers reach personal financial goals. Wealth can be created from a lending environment, but this requires all parties to adopt an investment lens. In other words, banks and their digital partners should do everything possible to encourage consumers to think and act like portfolio owners.

It can’t be said with certainty enough: Currently, homeowners should seriously consider the downside of using cash-out refinances to pull equity from their homes. There is this fairy-tale belief that moving debt can save money. Instead, what often happens is that the consumer is reduced to being financially exposed. The problem should be approached with a “BNPL” approach (buy now, pay later). Urging a resurgence of home equity lines of credit (HELOC) programs is not the answer. Pushing out payments has long and rightly been criticized by financial advisers and consumer advocates alike.

For far too long servicing a loan – especially a mortgage – has been seen as just a process and not an opportunity. As delinquencies and delinquencies increase, so does the importance of compliant service. However, the typical playbook to help consumers take on water becomes less relevant when interest rates rise. Greater flexibility with training strategies will be necessary to maintain portfolio integrity and positive customer relationships. Serving innovation and not originating innovation is what will prevent a repeat of 2008.

Financial institutions must adapt their operations to the needs of the times. To position themselves for recovery, financial institutions and their fintech partners must look beyond their own walls. Financial technology is an important part of our financial infrastructure. We must let it guide us and adapt our commitment to responsible business practices. A more stable, open ecosystem that is broadly inclusive of consumers bodes well.

Consumer customization is where real innovation and technology breakthroughs are now most needed. There is no substitute for a good return to business fundamentals, a focus on sustainable growth and a collective enterprise that shows greater pragmatism. Frankly, the need at all times is to focus on consumer connection and allocate for the long term. When the market returns, the brands that focus on education, engagement and loyalty will capitalize.