The new financial normal: Taking the pulse of the cautious American consumer

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Not long ago, during the post-recession hangover, many U.S. consumers proudly embraced frugality. Some were directly affected by the economic malaise – experiencing job losses, foreclosures, and steep retirement account declines. A much larger faction of consumers remained worried and waited for misfortune to hit them too. They responded to that uncertainty by tightening their belts and, while no one really enjoyed the austerity, many felt a sense of pride and virtue in their adaptation to the circumstances.

Today, Americans have exhaled and shaken off the worst of the recession’s worries, which peaked in 2011. With employment rebounding and housing shocks easing, consumers feel less vulnerable than they did several years ago.  Financial satisfaction has begun to rebound, too.  Some 21 percent of the population is feeling satisfied with their personal financial situation, versus just 17 in 2011.

Yet, while Americans are spending with greater frequency and confidence, most have not, and doubt they ever will, return to the spending and borrowing euphoria of years past. It’s not hard to see why: Only 18 percent of Americans say they can afford the healthcare they need, just 9 percent say they are on track to meet their long term financial goals, and 17 percent are comfortable with their debt levels – all figures that have not improved since 2009. It’s impossible to predict what’s in store far down the road, but in the near term, Americans have assumed a new normal that’s defined by moderate spending and borrowing more cautious than it was prior to 2008.

At the same time, these figures reveal a bifurcation of American consumers, in which a small subset of affluent Americans are prospering and resuming consumption as usual. Twenty-three percent of households say that they feel invulnerable to economic concerns. These consumers tend to be investors in stocks and bonds and other vehicles beyond simple tax-advantaged retirement accounts. They are the minority of households who do not worry about healthcare costs, are meeting their financial goals and are comfortable with debt. Another, similarly-sized category of well-off Americans are also accumulating wealth, but at the same time they are playing it safe, keeping a close eye on spending.

These are some of the macroeconomic findings from a rich, five-year set of data that tracks Americans’ attitudes toward and behaviors around spending and banking. Since March 2009, we have surveyed five thousand households per year via online and telephone surveys. The cumulative and ongoing data set provides a comprehensive, highly quantitative view of the financial picture of U.S. consumers, and the motivations underlying their related behaviors.

Taking a deeper dive into the survey data, we see several key trends emerging that financial institutions will need to pay attention to in order to grow their market share and gain a better understanding of their existing and potential customers.

1) Smaller banks and credit unions are benefiting from the aftershocks of financial crisis

Since the financial crisis, smaller financial institutions have taken five market share points from the largest banks. Forty-six percent of households now have checking accounts with smaller banks or credit unions, up from 41 percent in 2011. Yet the largest U.S. financial institutions still maintain a sizeable share of Americans’ banking business, with nearly one-third of the population choosing to bank primarily with the three biggest institutions, down from 36 percent in 2011.

Fueling the rise in market share for smaller banks is the fact that their customers tend to like their bank better than do customers of larger banks, although this loyalty gap has been closing since 2010. Forty-five percent of households who bank with smaller institutions believe their bank gives them superior value compared to others, versus 39 percent of those who bank at the three largest institutions.

Regardless of size, it’s clear that all financial institutions have considerable opportunity to boost their customer loyalty and brand appeal. People's attitudes toward their banks are often linked to their opinions of financial institutions in general, and the fact that nearly half of all accountholders regard their bank as no better than any other bank reveals that financial institutions need to do much more to differentiate themselves from their competitors, developing effective brand building strategies that foster a deeper connection with customers.

2) Digital is having an impact on how Americans bank, but it’s happening slowly

Perhaps one day the bank branch, with human tellers and bowls of lollipops, will be obsolete, but today we’re a long way away from that. Sixty percent of households still use a local branch at least once a month, only four percent fewer than in 2011. While most customers still use branches, the frequency of their visits has declined, particularly those involving human interactions.  Teller visits, either walk-in or drive thru, have declined 24 percent since 2010.  

Financial institutions striving to provide satisfying digital alternatives to physical branches should note that customers who embrace digital do so mainly for the convenience, not to avoid human contact. Only a few bank customers feel strongly averse to interacting with bank staff: 13 percent prefer to use an ATM, computer or telephone instead of facing a bank employee, a figure that has not grown in the past few years.

Similarly, the comfort level with doing online financial transactions remains low, with only 16 percent saying they genuinely like them, a much lower figure than seen in other retail markets. Yet many of the 84 percent who aren’t completely comfortable banking online do it anyway, opting for convenience over comfort. As a result, usage of online banking is increasing, albeit slowly. In 2013, 58 percent of Americans said they have used the service at least once, up from 50 percent in 2009. Among these online banking users, the transactional activities with the largest adoption are fund transfers between accounts at the same bank and the payment of bills, though only the account transfer use has seen any growth since 2009.

Most of the 17 percent of households who use mobile banking do so for informational, not transactional, purposes. These include checking balances or the status of a transaction. For the most part, these are additional interactions with the financial institution that do not reduce the use of other channels.

Interestingly, and despite the decline in teller visits, most account holders (63 percent) are still depositing their paper checks at a branch teller or drive thru. Just five percent sent a digital image to make their last check deposit. Some banks, however, are leading the way with this innovation. Bucking the trend is USAA – 68 percent of its customers deposited their last check via digital image.

Although consumers’ adoption of online and mobile banking has been gradual, it is a question of when, not if, the majority of consumer banking is done electronically. Banks must keep pace with that demand, as customers continue to expect enhanced digital offerings year over year.  The challenge for banks is that capital expenditures for these digital innovations are not bearing fruit in terms of reduced branch costs.  With the exception of remote check image deposit, online banking and other digital options tend to be additive features for customers, not a substitute for visiting a branch.

3) Cash is not as obsolete as you think

McKinsey has identified eight different profiles for how consumers pay for goods, the largest being those who use a mix of cash and debit cards for the majority of their point-of-sale (POS) purchases. Roughly one-quarter of the population is using old fashioned greenbacks to pay for the majority (81 percent) of their transactions. A similar percentage is using nothing but debit cards for most transactions. Both these methods dwarf that of credit cards; while 25 percent of households regularly use a credit card at POS, just 17 percent use it almost exclusively. A stubborn four percent of the population writes checks for the majority of their purchases, a figure that has barely declined since 2009.

Consumer adoption of general purpose reloadable (GPR) prepaid debit cards grew rapidly until 2011 and has since plateaued. In fact, most brands of prepaid debit cards failed to increase their user base last year, suggesting that consumers are getting past the trial stage of product adoption and winnowing the number of cards per household. The gulf between the number of people who have GPR prepaid debit cards and the number who use them is noteworthy. There are substantially fewer active users than possessors, suggesting that issuers have done a tremendous job of driving trial usage but have not been able to compel triers to become regular users. Twenty-three percent of households possess a GPR prepaid debit card, yet those cards get used for just 2 percent of POS transactions, a volume that has been uniform over the past five years. Some consumers, however, do consider these cards well-suited to their needs – for instance, as a means of dispensing funds to a dependent. One-third of GPR prepaid debit card users spend funds that were put on the card by someone else.  

Paper checks still comprise the biggest proportion of bill payments despite the steady growth of electronic alternatives. Nearly one-third of household bills are paid by mailing in a check, though this practice is on pace to lose its dominant status in 2018. Thirty-seven percent of Americans said they mail checks less often than they did one or two years ago. Instead, they are using their bank’s online bill pay, the biller’s website, or are authorizing the biller to take automatic payments. Within these electronic payments, we see consumers fluctuating between different methods, not committing to any one preferred channel. It’s interesting to note, though, that in 2013 consumers moved away from making payments via automatic account deductions in favor of each-time bill payments, perhaps giving them a sense of control over their finances. This decline in automatic bill payments reverses years of growth.

Our bill payment behavioral clusters offer a spotlight on the most common mixes of payment methods within individual households.  Most households pay the majority of their bills using one favorite payment method. Twenty-eight percent write paper checks almost exclusively, using them for 83 percent of their bills. Debit card users, the faction paying as much of their bills as possible via debit card, grew to 16 percent in 2013. Fourteen percent rely on cash to pay a majority of their bills. Those consumers who try out many different payment methods within a single month have driven up membership in the category of “channel surfers.”

4) Americans are no longer loan happy

While Americans are once again using their credit cards – the number of people who say they pay cash whenever they can is down from 39 percent in 2010 to 33 percent in 2013 – they are doing so moderately. More consumers have credit card debt than they did in 2009, yet the amount per credit card-possessing household has decreased by 21 percent, and fewer consumers are using credit cards for everyday consumables. Consumers are either being more attentive to their debt or are simply better able to honor their obligations after their debt was refinanced or reduced by banks. The portion of households that missed a credit card payment in past year was down from 22 percent in 2009 to 16 percent in 2013. Lending terms are becoming more favorable to consumers as well.  Fewer credit card holders report interest rate increases or reductions of their borrowing limits: seven percent in 2013 compared to 19 percent in 2010.

In contrast to their increased borrowing on credit cards, Americans have not regained the access to mortgages and home equity loans that peaked in 2008. Thirty-nine percent of Americans had a mortgage in 2009; only 33 percent did in 2013. The average balance is down as well, from $142,000 in 2009 to $126,000 in 2013. Consumer lending in general – including personal lines of credit, short-term payday loans, and other unsecured debt – remains suppressed. Two exceptions are student loans, which have risen at an average rate of 6 percent per year from 2008 to 2012 with an average debt of $29,400 for the class of 2012, and car loans, which began rebounding in 2011.

When consumers do take the plunge to get loans, they do so mostly from financial institutions where they don't have deposit accounts. But since many banks have started making inroads cross-selling credit cards to their account holders, that trend has begun to reverse. However, there remains much room for banks to increase lending to their retail deposit customers.

5) Investing will have to wait

Investor caution, immediate consumption needs, and constrained credit have all served to deplete Americans’ market investments and their retirement nest eggs in recent years, despite the overall recovery of stock values. Fewer households possess investments and retirement accounts today than in 2009. One reason is a lack of savings: About half of US households have less than $2,000 available to invest (excluding tax advantaged retirement accounts). Yet because the massive loss of wealth that peaked in 2010 has been gradually reversing, an increasing number of middle class Americans (27 percent) have between $2,000 and $40,000 to invest, representing an emerging opportunity for financial institutions. Yet it’s important to understand consumers’ still risk-averse mindset. Many Americans say they intend to allocate a greater share of their household wealth toward savings accounts and life insurance, reflecting their risk aversion and dearth of assets. To that end, we’ve seen the mean balance among the 59 percent of households that have savings accounts increase, from $14,500 in 2009 to $23,000 in 2013.

Those who do decide to put money into securities say they are now embracing simpler, less aggressive investing styles. Burned by trying to go it alone, more consumers want someone to help them make better investment decisions.

For many consumers, the 2008-2012 recession isn't over yet. Financial institutions need to recognize that this identification with frugality and austerity will persist even as aggregate levels of spending and borrowing rebound. It’s true that hardship and fear might be fading in the rearview mirror for some.  There are many more Americans, however, who have not returned to the same level of prosperity they enjoyed before the financial crisis. The echoes of financial hardship are not easy to silence; more than a few readers of this article might have parents who still live as if the Great Depression were only yesterday.