As banks and credit unions start considering logistics, booking hotels, and pontificating chicken or beef menu options for their upcoming summer and fall strategic planning sessions, I’d like to offer what I think will shape up to be a key strategic issue that should be on the agenda. We have a banking model that frankly hasn’t changed all that much in the past 50 years. A key driver of that has been a fairly steadily rising economy with some modest ups and downs. Incomes have grown, the job market has expanded, and increased access to education has driven a growing middle class.
The Great Recession changed all that. Our economy has been riven in the past four years leaving no stone unturned – housing, the banking industry, unemployment, wild commodity swings, the auto and manufacturing industries, and the list goes on. The only silver lining has been relatively tame inflation. This tsunami of unintended consequences has had a profound impact on businesses and citizens across the country.
Based on research by stalwart Cornerstone Analyst Ryan Brogan, the impact of the sour economy on households and individuals has resulted in some sobering statistics.
Since the start of the financial debacle in 2008 through 2011, there have been approximately 11 million foreclosures in the United States (including default notices, scheduled auctions and bank repossessions). This figure doesn’t even account for the potentially millions of homes that have been delayed in the foreclosure pipeline as the five largest lenders waited to ink a settlement agreement with 49 state attorneys general in February. While the pandemic has been widespread, roughly 20 states have had moderate to high levels of foreclosures including the most newsworthy like Florida, Arizona, California and Nevada. While many of these “hot” markets have seen foreclosure activity decrease, in comparing Q1 2011 with Q1 2012, a number of the “cooler” states have actually seen a huge uptick in default notices and foreclosure actions in states like Maryland (up 100%), Illinois (up 141%), Pennsylvania (up 112%) and Indiana (up 141%). These numbers indicate that the end to the mortgage mess may still be a loooong way off. In the six-year period of 2008-2013, I think it is entirely plausible that we may be faced with 15 million foreclosures affecting the credit ratings of 25 million+ people.
Of course it wasn’t only homeowners that were caught in the twister. The Great Recession also forced millions of working Americans who lost their jobs and millions of seniors who watched their retirement nest egg shrink into oblivion with a falling stock market to fund their day-to-day needs with their good ol’ credit cards.
The chart below shows the spike in credit card charge-offs that occurred with the onset of the economic crisis – and yes, those numbers are “billions.”
| National Credit Card Delinquency and Charge-Off Rates | |
| Year | Dollar Amount |
| 2011 (est’d) | $52,000,000,000 |
| 2010 | $75,090,106,350 |
| 2009 | $83,179,901,000 |
| 2008 | $53,506,353,600 |
| 2007 | $38,149,440,000 |
| 2006 | $32,111,934,400 |
| Source: CardHub.com | |
While the credit card troubles seem to be easing, again it is safe to say that millions of Americans have had their credit ratings adversely impacted over the past five years because of credit card trouble.
The Great Recession isn’t only affecting retirees and the lower- and middle-income classes. Not to be left out of the party, student loan default rates have climbed considerably. While the data released by the U.S. Department of Education has an approximate two-year lag time, the trend is, as one would expect, disturbing. According to data released by the U.S. Department of Education, the student loan default rate nationally climbed to 8.8% for fiscal year 2009, the highest the national default rate has been since 1997, representing an increase of more than 50% from 2006. Default rates at “for profit” higher education institutions are particularly high.
Not to beat a dead horse, but suffice it to say that the data for defaults on auto loans, second mortgages and other consumer products has shown similar trends over the past five years. The result: millions more consumers with impaired credit.
Where there is a will there is a way, and in America we have that great innovation called bankruptcy to give our consumers and businesses a clean slate. As one would expect, the economic crisis has resulted in millions and millions of consumers filing for bankruptcy protection over the past five years.
| Business and Non-Business Filings – CY 2007-2011 | |||
| Year | Business | Non-Business | Total |
| 2011 | 47,806 | 1,362,847 | 1,410,653 |
| 2010 | 56,282 | 1,536,799 | 1,593,081 |
| 2009 | 60,837 | 1,412,838 | 1,473,675 |
| 2008 | 43,533 | 1,074,108 | 1,117,641 |
| 2007 | 28,322 | 822,590 | 850,912 |
| Source: uscourts.gov | |||
All of these financial maladies come to roost in that all-important data point financial institutions review every day when making decisions – the credit score. The chart below is a great one illustrating swings in FICO scores over the past four years.
During the worst of the recession from 2008 to 2009, the FICO Scores for approximately 50 million people declined by more than 20 points. Two-fifths of this group (nearly 21 million) saw their scores decline by more than 50 points. The partial good news is that during 2008-2011, nearly a third of consumers (approximately 65 million) maintained a FICO Score within 10 points from year to year showing promising fiscal discipline.
FIs in the next two years will be faced with a credit score demographic skew that will likely be worse than shown in the chart below as the Great Recession continues to sweep up citizens in its wake. This data indicates that nearly half of the population has a FICO score under 650.
These tens of millions of Americans adversely affected by the bad economy are what I call GR Bank Customers (the Great Recession Customers), and they present a striking challenge to the traditional banking model. Students, retirees and the vast middle class have had their credit ratings dinged in a way that will take years and years to repair. And we are not out of the weeds yet. I think it is safe to say that the shakeout will continue to occur at least through 2013 with millions more Americans being added to the ranks of the “Untouchables” from a traditional bank credit perspective.
The question I have for loyal Gonzo readers that manage the great financial institutions of our day is this: “What is your institution doing now to address this fundamental change in the profile of the GR Bank Customer that will be a significant part of our population for 2014-2024?”
You may say that your strategy is to focus on the wealthy, but with the way wealth has concentrated in the past 20 years, the number of households to target offers slim pickings. No matter your political leanings, and no matter your opinions on our tax code and the benefits or malignancies of “trickledown economics”; the facts are clear: over the past two decades a disproportionate share of income growth in the United States has gone to the top 10% of income earners and, more specifically, to the dreaded “1%ers”.
An article published in the New York Times this week displays some very interesting graphics based on painstaking research of IRS records going back to the Great Depression. Two quick highlights:
If you aren’t going to base your bank’s strategy on successfully targeting the few tens of thousands of households holding a huge share of wealth, you are going to need some alternatives. Take into account the fact that most studies put the percent of the unbanked and underbanked at 25% of our population, and now you have to start getting very specific about your target market strategies.
As you head into planning season and discuss growth and increased market share, I think an hour or two would be well spent discussing and answering key questions on “The GR Customer 2014 – 2024” like the following:
Enjoy your strategic discussions this planning season, GonzoBankers, and make sure this issue makes the agenda. We’re in for a sea change.
All for now.
-SAS
Scott, Our approach is to return to our roots. Credit unions offered second chances and helped consumers in the post-Depression era. It is our intent to find a way to continue that in the post-GR era.
The best way to focus on the wealthy, is to provide them value while they are pursuing their wealth. This is where loyalty is earned.
I am curious if your research quantified any other lasting implications from the Great Recession; beyond credit score deterioration.
Are you observing trends that suggest there are generational behavior changes similar to the depresssion generation?
Are you observing trends that suggests the long term implications on the American consumer in borrowing, debt, and purchasing has been permanently altered?
For a credit union that was used to 120% loan to share ratios, now living near 98% loan to share; is this shift likely to be a permanent shift?
If the appetite for borrowing returns; we will find a way to provide the second chance. If there is a permanent shift in appetite, then we need to make a business model adjustment.