By Tom Church-Adams, SVP, Pay Products
The pandemic has impacted American financial consumers in painful and unexpected ways. As COVID-19 continues to spread across the country with no end in sight, workers are struggling to maintain their income in the face of layoffs and furloughs. Even among those that have maintained employment, many face pay cuts and a partial loss of income. It’s no wonder 47% of Americans are carrying more credit card debt during the crisis[i].
More worrisome, tens of millions of unemployed workers are facing a potential “income cliff” as the federal pandemic unemployment insurance program is scheduled to end in a matter of days. (At the time of this writing, Congress was negotiating the next pandemic relief package, which may include an extension of unemployment benefits.)
Yet, despite these perils confronting many American financial consumers, several major card issuers including, Discover, Wells Fargo, and Synchrony Bank have signaled they would slash credit lines to limit card losses and protect their institutions and shareholders.[ii]
Like adding salt to the wound, a credit line reduction hurts the cardholder in several ways:
- It immediately and abruptly reduces the cardholder’s access to credit when they need it most;
- It raises the cardholders’ credit utilization ratio, potentially hurting their credit score; and
- It fosters a vicious cycle that limits the ability of sub-prime borrowers or those facing even temporary financial hardship to obtain new credit, cover monthly expenses, and build cash reserves.
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Two Common Scenarios to Put Members First
At CO-OP, we’ve been tracking two common scenarios among members facing a financial crisis during the pandemic.
The first involves workers who lost their jobs or have been placed on temporary furloughs because of business shutdowns. Many in this group deferred major purchases as they tried to conserve cash to cover fixed and recurring bills. Now that their income is flowing again, some are beginning to spend on durable goods like household appliances and vehicles, as well as on everyday purchases like dining out and entertainment (to the extent that such activities are allowed in their jurisdiction).
The second group of financially stressed members includes those who lost employment early in the pandemic and have not yet recovered. They may be getting by on state and federal unemployment payments, which are scheduled to expire soon. Members of this group are facing severe, long-term financial hardship. These members are shifting their purchasing habits from credit to debit and depleting their savings to cover weekly expenses and monthly bills, such as rent, mortgage, and auto loan payments. They need your help.
The credit union movement was founded on the principle of “people helping people,” and credit unions always keep their members’ best interests at heart. At this year’s CO-OP THINK Virtual conference, we polled attendee credit unions on how they were helping their members during the crisis. The top answer (42% of responses) was “offering cardholder payment relief solutions to members.”[i]
The National Credit Union Administration is fully supportive of this approach, and “encourages credit unions to work with impacted borrowers. NCUA examiners will not criticize a credit union’s efforts to provide prudent relief for borrowers when such efforts are conducted in a reasonable manner with proper controls and management oversight.” We were pleased to see so many CO-OP Full-Service Credit clients take advantage of the three payment relief solutions we made available to them and their members in the early days of the pandemic.
Financial crises have always offered credit unions the opportunity to shine and to capture the next generation of members for life. So, what does this look like in practice?
Access to Credit is Critical Right now
One way you can help your financially stressed members is by selectively raising their credit card and HELOC lines, providing a liquidity lifeline during this (hopefully temporary) period of lower income.
Begin by analyzing your members’ transactional and direct deposit account activity to reveal those who recently lost a job, experienced a pay cut, or are otherwise experiencing financial hardship. In the case of a long-time, loyal member with a track record of on-time loan payments and few overdrafts, the relative risks of raising their limit are low, and the potential benefits are significant. They include:
- Increased member satisfaction and loyalty
- Higher interchange income
- Increased credit card portfolio revenue
There are other ways to assist impacted members, as well. Programs like skip-a-pay can help your members catch a breath on monthly bills. Waiving late-payment, over-limit, and overdraft fees on credit cards and checking accounts can also provide much-needed financial relief.
Now is also a great time to offer low-rate balance transfer credit campaigns. Such campaigns can not only help members save hundreds of dollars on high-interest credit card balances, but they also serve as a catalyst for growing your credit portfolio and interchange income. Most importantly, initiatives like these show members you care, strengthening their bonds to your credit union, and reminding them why you are their primary financial relationship (PFR).
During times of crisis, credit unions naturally double-down on their cooperative mission. The keys are to be agile and flexible and to maintain a laser-like focus on your members’ best interests during this unprecedented time. It’s also important to have the right partners in place who share the cooperative spirit of the credit union movement. Discover how CO-OP’s credit and debit processing solutions can fit these needs, and how the CO-OP SmartGrowth Team can help you analyze your portfolio and create customized offers and campaigns to meet your members’ needs
Download “The Payments Playbook: A Credit Union CEO’s Guide to Winning the Payments Game” and learn how to design a payments offering that meets your members’ needs now and in the future.