Filling the Gaps in Cash Flow Needs

The PaymentsJournal Podcast

Access to emergency funds provides peace of mind, especially when many people find themselves scrambling to cover expenses. Given the needs of younger consumers, liquidity and cash flow issues are becoming increasingly important for financial institutions to address.

Changing regulations offer financial institutions an opportunity to rethink how they are meeting these customer needs through offerings like overdraft protection and small-dollar lending. In a recent PaymentsJournal podcast, Jeff Burton, Vice President and General Manager at Fiserv, spoke with Brian Riley, Co-Head of Payments at Javelin Strategy & Research, about liquidity products that can keep these customers in the fold.

Liquidity Affects Everyone

In the past two years, just over half of consumers have needed access to short-term emergency funds to pay their bills. While lower-income consumers are more likely to need funds, nearly half those earning between $100,000 and $149,000 have also needed short-term emergency funds. It’s not a question of wealth, but of available cash flow.

For customers who maintain deposit relationships with financial institutions, liquidity is a key driver of success. Half of all deposit customers will need liquidity assistance at some point.

“Loyalty can be earned by how organizations bring these liquidity products to market,” Burton said. “Alternatives are good, options are good, but the key is addressing the client need.”

Consumers can’t necessarily predict if or when they’ll have a liquidity crunch. When a crisis arises, they want certainty in resolving the issue, to address the problem immediately, and assurance it won’t hurt them long-term. Having a suite of easily accessible solutions can provide peace of mind to customers choosing among institutions with otherwise similar product offerings.

Remember, cash flow is not necessarily linked directly to a customer’s net worth. While products addressing short-term cash flow needs can particularly appeal to younger or less wealthy customers, they offer real value across all generations and customer segments.

“Being able to get them through that without a long-term commitment on a credit card debt or a personal loan forms a good bridge with the customer that will have a lasting relationship,” said Riley.

Overdraft Alternatives

More than a third of account holders had an overdraft in their primary checking account in the past year. Among Gen Z, that number rises to more than half. These customers are precisely the ones institutions need to engage to grow deposits over the long term. To capitalize on this segment, many banks are offering smart alternatives to overdraft protection, providing value beyond replacing revenue from overdraft fees.

“There’s a lot on the table right now relative to pending overdraft regulation, specifically for the large institutions,” said Burton. “They’ve cut back on the amount of items that they can charge for on a daily basis. Programs like fee forgiveness give clients a specific period of time where they can effectively cover the overdraft. Those types of changes were all positive for the industry, but what the additional regulation will do is unclear. If they move forward with the benchmark fees being proposed, organizations would likely constrict the amount of credit they make available through the overdraft program.”

With about 30% of customers leveraging overdraft service, demand is not going away. It’s important for alternatives to exist within the bank’s framework, not just outside it.

Some clients needing overdraft protection don’t repay by choice, while others don’t repay out of necessity. By offering alternatives, banks can address both segments. Clients trying to protect their income can manage fees accordingly. For those struggling with their budget, an extended repayment period provides additional time. This transparency allows consumers to opt in and choose when to use the product.

Small-Dollar Lending

Small-dollar lending programs began in the ‘90s with the belief that clients who didn’t qualify for traditional lines of credit could benefit from smaller lines. Most clients needing liquidity typically require under $1,000. Small-dollar lending programs serve these clients by offering flexible repayment options, a critical concern for consumers who frequently feel strapped for cash.

The lack of exposure to these products represents an opportunity for financial institutions to provide an effective solution that many customers are unaware exists. Those who have used these programs tend to use them frequently and enthusiastically. Nearly half of those who have used a small-dollar lending program say it was better than any other similar option they’ve tried.

Four in 10 consumers say they would use a small-dollar lending program at least yearly, including 30% of Gen Z consumers. These programs could also be an attractive tool for deposit growth, as 44% say a small-dollar lending program would lead them to consider switching financial institutions.

For lending thresholds of $500 to $1,000, most organizations will not want to spend much time underwriting these loans. So the process has to be highly automated.

“There’s an axiom in banking that says it cost as much to make a $5,000 loan as it does to make a $500 loan,” said Riley. “Engineering that efficiency is essential.”

The flip side is small dollar collections. Integrating a program like this into a traditional credit collection process can be overkill, so many organizations have chosen to simplify that process as well. If the client is delinquent or missing payments, they’ll issue a notification advising their intent to perfect their right to offset. This way, they can manage all of these small data losses through the traditional deposit collection process.

Engaging the Customer

A well-constructed suite of liquidity products can help customers of all types, improving the banking experience, driving engagement and loyalty, and supporting deposit growth. However, these products must be tailored to a specific institution’s customer needs. Third-party vendors with extensive knowledge of proven solutions can help ensure financial institutions implement the right set of products to build a better future alongside their customers.

In combination, small-dollar lending programs and solutions reduce the conditions that cause overdrafts and give financial institutions tools to fill a potential void in a new overdraft environment. They also give institutions a way to offer depositors more flexibility than the competition, keeping customers better engaged over the long term as they build their wealth.

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