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As the COVID-19 pandemic wreaked havoc across the world in 2020, families and individuals were left scrambling financially to stay afloat. Many employees were sent home indefinitely as businesses were unable to operate, some of them having to close their doors altogether.
The National Bureau of Economic Research (NBER) declared February 2020 as the start of the economic downturn, marking the end of the longest period of expansion in U.S. history since the Great Recession (December 2007 to June 2009) and the Great Depression (August 1929 to March 1933). The NBER announced that the last recession officially ended in April 2020. However, many Americans were still left feeling its effects. Many are still trying to recover today.
Unemployment Soars to All-Time High
In April 2020, one month after COVID-19 halted life as we knew it, the unemployment rate reached 14.8%—the highest rate since data collection began in 1948. The Congressional Research Service (CRS) reported the labor force participation rate declined to 60.2% the same month—a level not seen since the early 1970s. The rate increased to 61.7% in July 2021.
According to the CRS, between January and April 2020, nonfarm payrolls cut 22.1 million jobs, resulting in employment declining to 86% of its pre-recession level. By July 2021, aggregate employment remained 5.4 million jobs below its recession level.
Easing the Burden – CARES Act
To ease the financial burden in times of strife, the U.S. government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.2 trillion economic stimulus bill in March 2020.
The bill provided a one-time cash payment of $1,200 to individuals making less than $99,000 annually, $2,400 to couples making less than $198,000, and an additional $500 for each dependent who was under the age of 17 as of December 31, 2020.
A second round of stimulus checks totaling $600 were sent out to Americans in December 2020.
Despite the stimulus checks, as of October 2021, an estimated 12 million adults—16% of adult renters—were still not caught up on paying rent, and 63 million adults—29% of American adults–reported not being able to cover their household expenses.
While the stimulus funds may have helped, many saw themselves stuck in financial hardship, struggling to make ends meet and drowning in overdraft fees.
Overdrawn and Running Out of Options
More than 39 million Americans racked up at least one fee for overdrawing their account in 2018, according to PEW Research. The number grew substantially higher during the COVID-19 pandemic and shutdowns. While some recovered, others did not.
With their accounts overdrawn, account holders experienced their accounts closing due to the negative balance.
The uncertain economic conditions and the lasting effects of the financial crisis during the pandemic have left financial institution leaders scrambling to develop and implement consumer retention strategies to drive revenue. Today’s tech-savvy consumers expect convenience, personalized service, competitive fees, and rewards. Their receptiveness to Fintech to perform services that were historically trusted only to traditional financial institutions is another challenge financial services providers are currently facing. However, institutions that add value to the lives of their consumers through savvy decision-making and marketing, innovative product development, and success tracking are rewarded with loyalty.
Retaining Account Holders – Better than Not
To increase your retention rate, it’s important to evaluate every aspect of retaining consumers, and one that is overlooked is borrowers with negative share accounts. Often, a financial institution gives up on this opportunity and is forced to close the account, mostly because they don’t have the resources to facilitate a call-out campaign.
What if you could retain account holders you might otherwise lose? Managing overdrawn accounts is never a desirable task, but we all know delinquent loans and accounts—and the necessary collection efforts to resolve them—are an inevitable part of the financial institution’s processes. While most financial institutions don’t put retaining borrowers with overdrawn accounts at the top of their list of priorities, there are several reasons you should.
It’s Less Expensive Than Acquiring New Business
Salvaging relationships with borrowers who have negative balances is typically much less expensive than acquiring new business. In fact, acquiring new business costs about five times as much as retaining existing borrower relationships.
Avoid the Negative Impact of Losing a Borrower
If a borrower walks away from an overdrawn account, you could:
- Lose any future business and revenue opportunities with that borrower
- Experience a loss of reputation if the borrower feels he or she was not fully informed throughout the process or given a full opportunity to rectify the matter
- Damage your borrower’s ability to open another checking account for up to seven years—perhaps due to a simple misunderstanding
Much like loan delinquency, when it comes to overdrawn checking accounts, avoiding charge-offs is critical to keeping losses low. With all accounts, the goal is to create income rather than a financial loss. Resolving these accounts gives you the financial benefits of reengaging consumers for potential product sales in the future once they are more financially secure.
Preserving the relationships with all your consumers—even the ones who may have let their accounts slip into a negative balance—has many benefits, both monetary, and non-monetary.
SWBC offers account retention services to help you collect overdrawn funds and reengage your customers.
Steve Castner is an Account VP at SWBC. By leveraging the risk management products and solutions of SWBC’s Financial Institution Group, Steve helps his clients manage expenses, lower delinquency, and protect themselves and their members with cutting-edge technology and consultative-based solutions. Steve has 20 years of experience in sales and client service.