The pandemic is moving into the rearview mirror. And a cursory read of the headlines may make it seem that we’re headed out from under unprecedented times of economic upheaval.
Credit scores are higher than they’ve been in decades. Americans have been paying down debt, in part with their stimulus checks. Businesses are opening back up and staffing operations, although the jobs recovery has been uneven. But the headlines can be a bit misleading.
LendingClub CEO Scott Sanborn told Karen Webster that, at least from the online lender’s point of view, “What we’ve got here is a tale of two recessions that are really having an impact on two distinct customer groups.”
Broadly speaking, household balance sheets were in better shape this time around than had been seen before the Great Recession. The fact that so many brick-and-mortar locations and borders were closed meant spending was reigned in a bit, stimulus checks helped pad savings, and lenders were willing to lend or help customers by extending forbearance programs.
The stimulus checks are still coming in waves. Mortgage and rent forbearance programs are still in effect. LendingClub’s own customer base has been marked by higher credit scores and lower delinquency rates.
But as Sanborn told Webster, “There’s a huge group of consumers who are suffering and who aren’t back on their feet yet.”
The traditional definitions of the financially healthy individuals — the basic definitions where someone’s spending less than they’re earning, paying bills on time, managing to pay down debt while building up savings — only applied to less than half of the population.
And that was before the pandemic.
Extrapolate that a bit and more than half of the population would be defined as financially unhealthy.
As Sanborn said: Incomes are up a paltry 1 percent in real terms, adjusted for inflation, over the past two decades. Household expenses have been rising, and so has the cost of healthcare.
The group of consumers who have been left behind includes people who earn their livelihoods from industries most significantly affected by the pandemic, including food services and travel.
The question is: What happens when the forbearance ends, when the stimulus checks stop coming?
“We’re not expecting some kind of wall, or some kind of cliff,” said Sanborn, who noted that for LendingClub, payment plans averaged a few months in length, with additional support extending out another six months.
The Great Normalization
Where it took years for the U.S. economy to stabilize, to normalize in the wake of the financial crisis and the Great Recession, the normalization will take six months this time around. The pandemic-spurred recession was breathtakingly steep and fast, and the recovery will be similarly accelerated, with a V-shape.
And, he noted, the psyche of the U.S. consumer will be altered, and some trends will stick — just like the great digital shift remains firmly woven into the fabric of economic life. There’s also a broader recognition that credit card debt can be tricky.
“They’re great as a convenience mechanism, but if you don’t pay the card off, you have a loan and it’s not a good one,” said Sanborn, who predicted that credit card balances will be low, at least for a while, before spending trends back up.
But looking ahead, he said, with the pivot toward online banking and an embrace of mobile financial services, Sanborn said it will be necessary for firms (LendingClub among them) to take a holistic view of customers. LendingClub bought Radius Bank earlier in the year to build that holistic view, to cement its place as a trusted advisor to consumers looking to make greater strides toward financial wellness.
With a nod toward some of those challenges, he said, “Step one may be recognizing you have a problem,” such as wrestling with debt that eats up too much income. He pointed to the ability to consolidate debt, pay it down and build savings across the platform — and even adjust bill payments so that they align more closely with paychecks and other deposits so that cash flow is smoother.
Sanborn called it advice rendered in a contextual manner, which helps consumers do the right thing as they improve financial wellness.
“What’s really powerful and may be under-appreciated is that when you’re coming at this in digitally native fashion and you’re building it from scratch, and you’re not working within a system that is built on legacy infrastructure … you can focus on: ‘What does this customer need?’” he said.