Consumer debt; encompassing credit card debt, student debt and auto loans, but not mortgage debt, continues to rise sharply, as Americans struggle with increasing costs and decreasing savings, a sharp reverse from the higher use of debit products in the past several years. A recent article in SchiffGold by Michael Maharrey details the rising trends:
“In August, revolving credit increased by a staggering 18.1% as total consumer debt surged to a record $4.68 trillion, according to the latest consumer credit data from the Federal Reserve. Total consumer debt increased by $32.2 billion in August, an 8.3% increase on an annual basis. That was well above the $24 billion projection…
To put the 18.1% increase into perspective, the annual increase in 2019, prior to the pandemic, was 3.6%. It’s pretty clear that with stimulus money long gone, Americans have turned to plastic in order to make ends meet as prices continue to skyrocket.”
Bridge the Consumer Debt Gap
The current scenario amplifies coverage that Mercator has been providing that identifies both cause and potential solutions for financial institutions to bridge the gap with consumers, keep them in healthy financial situations, and benefit their business in the long term. As my colleague Brian Riley wrote in his research, this disposable income is at risk as personal expenses rise and consumers have no additional income alternatives to utilize when accounting for necessary spending. While credit will benefit, the added risk could become burdensome and also make credit less available to more at risk populations. In addition, as Maharrey reports, the tendencies in fiscal policy will be to make the cost of credit more expensive.
“And it appears that the Fed isn’t finished raising interest rates. This is bad news for Americans depending on credit to pay their bills. With interest rates rising, Americans are paying higher and higher interest charges every month with minimum payments rising. With every Federal Reserve interest rate increase, the cost of borrowing will go up more, putting a further squeeze on American consumers.”
Broaden the Toolbox with Prepaid Products
As an alternative FIs should look to broaden their toolbox to create better entry ramps for consumers who are not credit worthy or need to limit the additional stress of utilizing their remaining available balances. My latest research provides insight into the unique ability of prepaid products to provide such a gateway for FIs to create new opportunity that makes better budgeting sense for consumers, provides access to the credit/debit rails for customers and builds long term goodwill with budget conscious consumers.
The trends pointing to progressively larger increases in revolving credit also amplify the opportunity I wrote about last week. The fintech community to lean in the situation and be cognizant of credit and inflationary issues when developing products and business plan expectations. It’s clear that even as inflation moderates, the long-term effects of the past year will follow consumers and business looking to be financially stable.
Overview by Jordan Hirschfield, Director of the Prepaid Advisory Service at Mercator Advisory Group.