A few years ago, I attended a session at a community banking conference on how to build a successful balance-transfer credit card program. The speaker summarized the unofficial motto of his bank’s program as: “We want customers to pay off all their balances … except ours.” Everyone in the room laughed.
It was a small moment, but it has stuck with me ever since.
It’s the first thing I thought of when the Federal Reserve announced in June that the U.S. had hit a new all-time high in outstanding revolving debt ($1.021 trillion). It’s the first thing I thought of when the New York Fed announced a similar record for household debt in November ($12.96 trillion). It’s the first thing I thought of when I saw the results of FICO’s 2017 consumer banking survey that found 35% of millennials agreed with the statement, “I am concerned about the amount of debt I have” and 33% agreed with the statement, “I am interested in getting assistance to help manage my debt.” (These were highest percentages across all generations.) And it’s the first thing I think of when I see fintech companies and other nontraditional providers making progress on solving this problem by exploiting the gap between what credit card issuers are providing to their customers and what those customers actually need.
Consider Affirm, a startup that offers consumers installment loans for individual purchases and markets the loans as a simpler and more honest financing alternative — a message that is clearly targeted at consumers who are frustrated by a perceived lack of transparency in the costs associated with using credit cards. This message appears to be resonating in the market; Affirm is processing relationships with more than 1,000 internet retailers and is reportedly working with Walmart on a pilot project.
Other newer market entrants are using a combination of debt consolidation loans and personal financial management capabilities to help consumers more effectively manage their revolving debts. Goldman Sachs, for instance, has built a personal loan portfolio through its digital lending platform Marcus, which CEO Lloyd Blankfein expects to surpass $2 billion by the end of 2017. That portfolio is primarily made up of consumers looking to refinance their revolving debt with Marcus loans ranging between $3,000 and $35,000 and carrying an annual percentage rate between 6.99% and 23.99%.
Then consider San Francisco-based Douugh, a startup that is building a service that can plug into consumers’ financial accounts and then use an AI-based virtual assistant to make recommendations on how to improve their financial wellness, especially their debt. In an interview with American Banker, Douugh founder and CEO Andy Taylor said: “When we dug deeper, we realized the consumer debt levels are out of control. Big banks are running off legacy business models that are driven to keep customers within these debt cycles. They’re not properly incentivized to foster financial wellness.”
Affirm, Marcus and Douugh are all basing their strategic direction on a simple but powerful insight: There is a difference between the way many consumers use credit cards and the way that those consumers should use their credit cards in order to maximize their financial wellness. This may seem like an obvious or even paternalistic observation. However, in the financial services industry — where consumers want and expect a fiduciary relationship with their primary service providers — this distinction is crucially important.
Credit card issuers are beginning to adapt. Recently, American Express introduced a mobile banking app feature that allows cardholders to select individual purchases that are more than $100 and arrange installment-based repayment plans for those purchases that carry a fixed fee and no interest. Additionally, BBVA Compass has sent millions of pieces of direct mail that encourage their credit card customers to consolidate revolving debt into a lower-rate installment loan product also offered by BBVA Compass. As Onur Genc, president and CEO of BBVA, explained in an interview with American Banker: “We are doing whatever is good for the customer. If our credit card customers refinance at a lower rate, we are OK with that because they are still banking with us, so our relationship is being strengthened. … We are not in the business of providing a single product. We are in the business of providing a relationship, and we want to extend that relationship.”
That is precisely the attitude that all credit card issuers should adopt. In a relationship-based business, it’s not enough to sell your customers a sharp tool. You also have to help them avoid cutting themselves with it. If you don’t, someone else will.