As the banking industry is well aware, the United States economy simply wouldn’t run without the American consumer—in fact, they are responsible for nearly three quarters of the country’s gross domestic product. An economy without consumer spending is an economy no longer, a fact that the COVID-19 response amplified in short order.
Stagnant bank accounts and oversaving are here to stay, as the pandemic created a situation in which people whose finances have been disrupted—as well as people who have not had their income significantly disrupted—state they are going to save more and pull back on discretionary spending.
An Escalent study found that more than a quarter of those optimistic about the economy (people who are expected to be drivers of consumer recovery) plan to save more in both the short- and long-term, indicating a slower-than-anticipated recovery.
Payments and banking industry professionals need to be ready.
The 2008 recession put the American economy in near-instant calamity. Consumers doubled their savings and spent significantly less. By 2012 the national savings rate was at 12%, slashing three points off the GDP and nearly stalling the economy. As a bandage solution, the Federal Reserve intervened and announced they were keeping interest rates lower for longer as a way to entice consumer spending. The plan worked, and the United States saw the longest economic recovery in history as a result.
But bandages can’t hold forever, and rates were kept too low for too long. As The Fed was running out of new ways to entice consumers to spend, the pandemic’s whirlwind effect forced them to slash interest rates even more than they already had in order to draw consumers out of their homes and into the market. But with consumer desire to save increasing, it’s more likely that after the initial “save more” impulse passes, the impulse becomes a repeated behavior and the economy won’t fully recover as quickly.
A Wider Lens
From an investment perspective, one of the reasons why the market has largely held up is due to massive, unprecedented amounts of liquidity being injected, both from monetary policy (The Fed) and fiscal policy (PPP, enhanced unemployment). What happens when that runs out? That’s one of the big questions our nation’s leaders face as they evaluate further actions to keep the economy afloat.
The industry needs to keep a close eye on the market and spending trends to understand when their customers are going to feel comfortable spending again, and perhaps introduce incentives to enable it even further. If consumer spending doesn’t rebound soon enough, the American market could tumble even further. From there, consumers will face harsher struggles and their impulse to save will persist and grow, no matter how deep The Fed slashes rates.
The Importance of Trust
Trust in institutions matters. People need to have confidence in their government, financial institutions, police, academia, etc. in order to properly function as a society. But since 2008, trust in these institutions has been on the decline. In the age of COVID-19, adding political division on top of low faith in institutions will result in nearly insurmountable partisan disagreements over the path to recovery.
More than half of consumers trust that their banking and payment providers are doing the right thing for their customers. These higher levels of trust (compared to other financial service providers) may be driven by more frequent contact and stronger customer relationships. Organizations who make investments in brand experience tend to be more trusted.
Finding a smart middle ground is necessary so we can begin the recovery process. Regaining levels of trust is important so state and federal governments can devise a plan that people will listen and adhere to, leading to fewer cases of the virus and businesses reopening on a fuller scale—with consumers wanting to spend.
What the Industry Can Do
If even the most optimistic consumers continue to save, rather than spend, a tangible and measurable recovery can only follow a significant medical event, such as a vaccine or proven therapeutic treatment. There will be twists and turns for at least the next year, so it’s important to stay safe, stay smart, follow health measures and keep customers and employees educated—only then can we get our economy back.