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The Long-term Appeal of Short-term Liquidity

Consumers have more access to short-term liquidity programs than ever before, but providers don’t always make it easy or efficient for them to tap these options. Furthermore, financial institutions often don’t take advantage of the treasure trove of data in these programs that can offer valuable insights about their customers.

There’s little doubt that short-term liquidity products are being created and overhauled at a rapid pace. From overdraft to “buy now, pay later” (BNPL) to an anticipated resurgence in home equity, financial institutions, fintechs and retailers are ready to offer alternatives for consumers who need cash quickly. (See Figure 1.)

Curinos believes that lenders can still catch up on missed opportunities that deepen customer relationships and provide fresh potential for non-interest income. Indeed, we see three (sometimes overlapping) strategies for lenders:

  • Provide a buffer to avoid incidental overdrafts and set a starting point for fees
  • Reduce overall basic fees
  • Develop new alternate credit products

Figure 1: If customers could see all short-term liquidity options, what would fit best?

Source: Curinos analysis

OVERHAUL YOUR OVERDRAFT

If you haven’t overhauled your overdraft program yet, there’s really no time to wait. The biggest names in financial services already have grabbed the headlines and even smaller banks and credit unions are being creative. First National Bank of Texas, which has less than $4 billion in assets, launched a feature that automatically refunds customer overdraft fees within 24 hours (if the account balance isn’t overdrawn by more than $12 at the end of the next day). And Chicago’s Alliant Credit Union eliminated overdraft fees completely.

Consumers now expect limited-to-no OD/NSF fees at all from their current banking provider and/or the banking institution they are considering. In fact, Curinos research has found that this expectation is even apparent among the mass affluent segment, with more than half of mass affluent consumers saying they believe it is important that their checking product doesn’t have overdraft fees.

Curinos research has also found that many consumers still think it is important to have overdraft abilities as an option. In many cases, that’s because overdraft provides immediate access to funds.

Banks and credit unions can pursue three actions to remain competitive in this fast-moving environment.

  • Modernize the Checking Suite: Restructure your checking suite and fee schedule to maintain competitiveness and to fend off attrition without upending the balance sheet.
  • Maximize Value with the Current Base: Given the major pressure on both sides of the traditional banking U-curve, the importance of driving higher value with current customers/members is greater than ever before.
  • Innovate: As the fee-friendly and overdraft space becomes crowded, the next act of differentiation is up for grabs. The level of differentiation is contracting across the industry (including for neobanks). This is a key opportunity to develop the next-generation products and experiences to build a competitive moat for acquisition, engagement and quality retention.

BNPL EVOLVES AT RAPID PACE

The breakneck speed of the overdraft revolution shouldn’t be overshadowed by the proliferation of BNPL programs that provide consumers with another option for short-term liquidity. And the line between types of providers is blurring as more financial institutions enter the fray.

Lenders can still catch up on missed opportunities.

Mastercard, for example, has announced a BNPL program in which financial institutions or fintechs can offer installment plan options that are separate from the merchant infrastructure. And a recent study by Visa, which is also partnering with banks and fintechs on BNPL, found that 42% of global consumers expressed interest in installment financing that is offered on a credit card.

But financial institutions can do more to make customers aware of this option. New interfaces enable customers to more immediately view the range of options, but this often still takes place only at the point of purchase. (See Figure 2.) For those considering post-purchase installment solutions, why not showcase the product on home screens and transaction feeds for customers whose transactions indicates they may be interested in the product? This can include leveraging transactional data to provide personalized messages to customers who have used a merchant-backed BNPL solution or offering installments following a large purchase.

Figure 2: New interfaces help customers to more immediately view the range of options.

Source: Curinos analysis

Lenders also need to keep close watch on potential regulations. The Consumer Financial Protection Bureau is already collecting information from five BNPL companies and has expressed concerns about debt accumulation, disclosure and data collection. And the U.K.’s Financial Conduct Authority (FCA) recently ordered BNPL providers to simplify and clarify language in BNPL agreements on issues like contract cancellations.

NEW OPPORTUNITIES FOR HOME EQUITY

Rising rates should create new opportunities for long-slumbering home equity offerings, but lenders need to update their processes to make the product viable and efficient in today’s fast-moving market. With homeowners sitting on enormous equity due to rising home prices, home equity can help to partly offset an anticipated slowdown in mortgage lending that will accompany higher rates.

Historically, it has been very challenging for consumers to access home equity loans or lines of credit. Although interest rates are usually competitive, the process to actually get the loan can take upwards of 60 days. It is also inefficient, often forcing customers to drive to a branch to complete the process.

Lenders also don’t typically track how their customers are spending the funds once they are transferred to a checking account. (See Figure 3.) Are they spending the money at Home Depot or using it to pay college tuition? Knowing a customer’s needs can help build a relationship and develop potential cross-sell opportunities down the road.

Figure 3: Home equity lenders have little insight about how their customers use the funds.

What type of funds access to do you provide your HELOC customers?

Do you track how HELOC customers use their funds once theyu2019ve drawn on their credit line?

Note: n=21 HELOC providers, CBA Home Equity Committee
Source: Curinos survey of 21 home equity lenders

Fintechs are already seizing on the gaps exposed by traditional lenders. Some have started using automated valuation models that can provide an appraisal in an hour. Although regulators are already sounding the alarm about potential algorithmic bias, the new entrants are clearly ahead of traditional players in this area.

There’s little doubt that consumers will continue to embrace new products that provide short-term liquidity. And lenders need these products to replace revenue that is being lost from traditional overdraft programs. But it is no longer viable for lenders to offer just one or two solutions as the lines between essential and optional spending continue to blur.

  • Authors
    • Suraya Randawa
    • Ken Flaherty

      Joining Curinos in October 2021 as a Home Equity expert and industry advocate, Ken works alongside his lending partners, leveraging Curinos’ Home Equity data assets to interpret benchmark performance and strategic planning through his expert analysis. Before joining Curinos, Ken gained his Home Equity expertise through multiple roles in Credit & Income Underwriting, Portfolio Management, and Product & Pricing Manager roles, in which he also served as a practitioner of leveraging Curinos’ Lenders Benchmark data assets, helping build strategies across the line of business to achieve profitability hurdles and growth targets. Ken works closely with Curinos' consortium lenders, leveraging the Home Equity data assets to help them assess market opportunity, efficiency improvements, risk management and margin optimization. He also leverages lenders’ data in his consultative advisory engagements, developing and implementing home-equity strategic initiatives.

      View all posts Manager, Home Equity
    • Olivia Lui
    • Hank Israel

      Hank helps clients address regulatory, market and operational opportunities related to overdraft and unsecured-lending product and service design — from marketing and acquisition to retention and collections. His work ties market research and empirical behavioral analysis to creative product and solution design. He previously held positions at the Federal Reserve Bank of Atlanta, Global Concepts (now McKinsey) and Fiserv.

      View all posts Managing Director
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