The U.S. consumer is barely making ends meet and is one emergency expense away from financial dire straits.
They’re also in need of financial education and some guidance before things get worse.
That’s according to Sezzle CEO Charlie Youakim, PSCU President and CEO Chuck Fagan and Self Financial CEO James Garvey, who spoke to Karen Webster about consumers who live paycheck to paycheck.
It has become commonplace to point to inflation’s slowing pace, but the damage has already been done. PYMNTS Intelligence found earlier this year that, cumulatively, prices have risen 20% to 25% since just before the pandemic.
And amid it all, we remain, as a society, highly leveraged. PYMNTS Intelligence data found that the average American has at least $250,000 in outstanding debt, including mortgages and auto loans. Thirty-three percent of consumers carry high levels of debt, even exceeding that $250,000 level. Generation X is grappling with debt averaging $248,000 or 397% of their disposable income.
Savings are no panacea.
“The consumer balance sheets have had their peak,” said Fagan, where pandemic-era savings have been hit hard by inflation and mounting debt.
For many, housing and car loans have become downright unaffordable. The Federal Reserve’s “rule of thumb” for savings — covering a $400 emergency expense — is hopelessly low, as the real emergency expenses (think of a set of tires) are many multiples of that level, he said.
And since the Fed has already pointed to higher-for-longer rates, “we haven’t seen the worst of this yet,” predicted Fagan.
Much debt — like credit cards — is tied to variable interest rates, and that debt is becoming ever more expensive. Ours is the age of the paycheck-to-paycheck economy, as triaging bills is a constant juggling act. Some bills get paid before others, and some get paid late — maybe weeks or months late.
“There’s a prioritization of how they live month to month,” said Fagan.
Garvey observed that his firm partnered with a nonprofit and has seen soaring demand for government assistance for food and utilities.
“You got your income, and you mine your expenses,” he said. “But still, you’re in the red every month.”
There will be more companies and nonprofits seeking innovative solutions to help low- to moderate-income consumers, he contended.
When asked about how they might grade the average consumer’s financial health, the panelists provided assessments that were far from stellar.
Youakim: B-.
Fagan: C-.
And, Garvey said: “C+ to B- is about right.”
The warning signs are there, but they are not dire. Not yet.
Delinquencies are rising, however, and that’s especially true given certain demographics and credit profiles.
As Youakim noted, with Sezzle’s core audience of subprime, younger buy now, pay later (BNPL) users, “we’re watching student loan debt because that does hit our customers. And we’re a little more worried about spend versus increasing loss rates.”
Fagan also remarked that delinquencies among credit union members are rising.
To help manage the pressures of everyday spending, credit has become a lifeline, but it has run taut. BNPL is gaining traction, said Youakim, “and this is an area where we’re going to see some drive” well beyond younger, subprime consumers. Higher-income households are poised to embrace BNPL, which Youakim said “brings higher quality customers into our domain.”
Along the way, as the pivots continue, Fagan said consumers are understandably looking for ways to extend their income without overextending themselves as they strive to debt burdens and financial obligations. (In some segments of society, he said, the most strapped consumers can be about 14 bills behind in any given month.)
Credit unions are focused on providing financial wellness roadmaps, tied to debt management, said Fagan. Companies such as Self, said Garvey, are dedicated to helping users build credit as individuals apply for loans held by bank partners and pay down those loans through customized plans and secured cards. Responsible saving and spending, he said, helps consumers build cushions that could conceivably serve as down payments on a house.
Sezzle, noted Youakim, also has a credit-building app, Sezzle Up, and will be launching rewards that incentivize users to keep their positive “payment streaks” going.
A proactive approach is critical, said panelists, with reminders and suggestions that come well before borrowers, savers and spenders reach a critical point where warning signs flash.
Candid communication, said Garvey, involves telling consumers when they’re on track, or not, and detailing the positive and negative consequences of certain actions on credit scores while reinforcing positive behavior. And in that way, Garvey, Fagan and Youakim said, the B- consumers will find themselves at an A, in terms of financial health and reaching their financial goals.
“Most people are not getting an education about these things in school anymore,” Youakim said. “They’re not getting [it] from their families, so if FIs and firms can educate customers on what could be helpful in their future, well, that’s a big deal.”