The looming consumer debt crisis
In Waiting for Godot, the playwright leaves the audience wondering why the characters continue to wait for someone, including answers or help that never comes. In the wake of the COVID-19 crisis, the last thing financial services companies can do is wait for a solution from the modern day Godot – the Federal Reserve.
As consumers feel the impact of employers closing shop, job loss or temporary furloughs, the trickle down impact will be swift. Consumers will evaluate which bills to pay and which to delay. For those with debt of any kind, stopping payment on loans, mortgage or credit card debt may be the only choice. For financial institutions holding debt, the avalanche of bad debt could be crushing. If we learned one thing from the 2008 financial crisis it’s that when financial institutions take on indebted properties, communities struggle because banks aren’t good property managers.
During this time, banks face significant challenges responding to the sheer volume of customer queries.
- Outsourced call centers located in other countries may face shutdown.
- Requests for help may be so broad that connecting with customers becomes a logistical problem.
- Consumers have read that there is a freeze on evictions, potentially giving them a false sense of security.
Now is not the time for lenders to simply outline a consumer’s rights in legalese and hope they comply. There is no magic source of funds that will allow debtors to continue their payments without work – especially with a consumer base that hasn’t saved aggressively. If banks take a hardline position of ‘pay or we’ll be forced to take steps,’ we all lose in the form of increased personal bankruptcies, empty homes, and deteriorating communities.
Banks and those holding the paper on loans need to address several critical questions:
- How do we connect with our customers, show empathy and support them at this time of need? Be the initiator of contact. Don’t sit and hope everything will work out for your customers. They are afraid. They need guidance.
- What do we know about our customers that can help us identify problem situations? Financial institutions have a lot of data available about their customers. Mine the data to flag potential problem accounts and intervene early with potential options.
- What steps can we take legally and from a cash flow perspective to allow consumers to delay payments, renegotiate debt or otherwise remain solvent while minimizing the organization’s exposure? Set up clearly defined pathways consumers can follow to allow for temporary COVID-19 relief, whether it’s delays in payment, restructuring or otherwise increasing the likelihood that debt doesn’t force a consumer’s hand to declare bankruptcy.
Several institutions are being proactive. A full page ad in a local paper by a large regional bank states “COVID-19 hardship assistance is available.” A visit to some bank websites show each is trying to provide consumers with help of some kind. The last thing financial institutions should do is wait for divine intervention from the Fed that will likely prove to be more complicated and problematic than helpful. Chart your own path now.
Not too big to fail
For small businesses, navigating the potential governmental support initiatives will bring some significant challenges. First comes the decision about whether to go after limited government funding in a rushed timeline. Next is understanding how any loan vs. grant requirements place reporting burdens on the owners. Finally, a business owner needs to decide if the funds being offered are enough to make a difference.
Now is the time for banking partners to step forward and provide the guidance needed.
- Become a resource center – Accountants, lawyers and bankers often vie over who owns the relationship with small and mid-sized businesses. Now is the time to differentiate yourself based on core competencies – business financing. Be the partner business owners turn to for information and thoughtful guidance.
- Profile your portfolio – Use your data to categorize organizations with a matrix-style rating system that includes factors like risk of default, business stability, category volatility, ownership payment history and other key factors. This data can serve as a guidepost, but not the entire story.
- Leverage Relationship Managers (RMs) – At a time like this, personal relationships should matter. RMs know their book-of-business. Involve them in the process of connecting with and supporting your business customers. Now is the time for RMs to prove their value.
The impact on product
If you asked a Registered Investment Advisor their opinion about buying an annuity on March 1, 2020 you would have been on the receiving end of a 10 minute lecture about how terrible annuities are and that they were only good for the salesperson and insurance companies pushing them. Just six weeks later with stock-heavy portfolios down 20%, advisors offering annuities and those promoting whole life products are poised to experience great success after the stock market’s precipitous drop and roller coaster ride of late.
As the market whipsaws based on employment data, the latest business bankruptcy report or a recent action by the Fed, where does this leave RIAs, BDs, CFPs and other advisors? How do they respond to their customers?
- Get your hands on data. Look at the market over an 80 year period. The story is easy to tell as long as you don’t overcomplicate it.
- Be proactive with your clients. They panic. It’s your job to be the voice of reason.
- Don’t be dismissive of alternatives. The negative view of products outside of your portfolio isn’t helpful. Provide information, an independent viewpoint and guidance where you can – even if some products are offered by competitors. Your customers will appreciate the honesty.
Banks and financial services organizations serve as a binding thread within the fabric of a capitalist society. Showing leadership, providing a guiding hand with some level of compassion will help instill consumer and business confidence on Main Street. That’s a critical first step in any recovery.