There are 7 million Americans that are at least 3 months behind on their car payments. In 2017, Americans accumulated $568.6 billion in auto loans.
That’s a lot of money.
That’s a lot of risk.
Auto Pay is a feature that helps bring stability to both borrowers and lenders alike. But for financial institutions, it isn’t always cheap.
Why is Auto Pay good for borrowers?
The harsh truth is that most of us are bad at managing our finances. It’s easy to get ourselves into situations where we have to pick which debts to prioritize, but we also know that a late or missed payment is the start of a slide further into debt. A late payment hurts your credit score and usually triggers a penalty fee. The result of which is that the amount owed and interest rates only get worse.
For borrowers, there is a peace of mind in automation. You can’t forget to make your payment.
Another advantage for borrowers is the security that auto pay provides. Consumers, especially younger consumers, don’t feel comfortable dropping a check in the mail. They prefer the encryption and guaranteed delivery of secure online payments.
Why is Auto Pay good for banks and credit unions?
Having borrowers enrolled in Auto Pay dramatically reduces the risk of delinquency within loan portfolios, so much so, that many lenders are willing to offer an average discount of .25bps to incentivize this behavior. This leads to a significant amount of unearned interest income.
But more security doesn’t have to come at a higher cost. Performance data for the Kasasa Loan® shows that 74% of borrowers enroll in Auto Pay without needing any discount.
Consider what consumers actually want from a financial product. It’s not only low rates, though they matter, it’s confidence. People want to feel confident knowing that they are moving toward better financial stability. When it comes to loans, borrowers have to choose between their liquidity and paying ahead. With 78% of Americans living paycheck to paycheck, the financially responsible choice sometimes seems out of reach.
Consumers are forced to take a "wait and see" approach to their debt. How much money will I have this month and then what can I pay vs. what can I hold off on.
Without giving you the full sales pitch, the Kasasa Loan removes the uncertainty around making this choice. Borrowers can pay ahead with the confidence of knowing they can withdraw funds over the scheduled balance without penalty.
It’s this flexibility that gives consumers the confidence to make financially smart choices without having to receive a bribe of discounted rates. Lenders can now get the benefits of auto pay without losing interest income.
But what about lost interest income on early pay off?
One of the benefits we mentioned about Kasasa Loans® is that borrowers can confidently pay more aggressively on their balance. Having a loan paid off early reduces the delinquency risk, but it also means you are missing out on interest income. This might sound like a disadvantage, but in reality, it allows you to redeploy those funds, often at a higher rate of return. The ability to reprice at a more appropriate rate maximizes the interest income of those funds.
That said, our initial results show that only 3% of Kasasa Loan balances have been paid ahead. The result of which has minimal impact on your overall balance sheet.
The benefit missing from the balance sheets
Every banker knows that our industry runs on relationships. Parents open accounts for their children at the institution they have done business with for years. That first account turns into a first car loan. Which turns into a mortgage. Which ultimately grows into a portfolio of products. All during this time, a happy customer will be recommending your institution because they know you have their best interest at heart.
Trust is a major competitive edge in an industry where there isn’t much.
Beyond seeing banks and financial services at the bottom of the list, consider who is at the top -- Technology. Apple (one of the most trusted brands in mobile phones per Reader’s Digest) just announced their credit card. Amazon already offers small business loans and cash back on purchases. Many technology firms are trusted by consumers, which makes their encroachment in financial services especially threatening.
Offering products that inherently build trust with the consumer while delivering a sleek digital experience can help community institutions remain competitive.