What Would High Unemployment in 2014 Mean For Payments?

by Ben Jackson 0

Unemployment will rise in 2014, Jim Clifton,the chief executive officer at survey company Gallup, says in ablog on Linkedin.com. Clifton offers to bet his house on it, andsays that the unemployment picture from the U.S. Bureau of LaborStatisitcs is not telling the full story.

Business leaders around the country tell methey’re not thinking about new hires right now. Rather, their solefocus is on how to win new customers. Too few people know this, butemployees follow customer growth, not the other way around. Mostimportantly, businesses want to survive. They’ve cut everything tothe bone and stored cash, and they won’t risk anything until theyexperience customer growth. New hires don’t solve theirproblems.
If Clifton is right, then financial services companies will need toprepare for further changes in their customers’ behaviors andchoices. Read his blog here.

Increasing unemployment may reignite the trend of shoppersavoiding their credit cards for other modes of payment. Even ifcardholders are employed, anxiety about their future may lead themto avoid incurring any more debt, even on a short term basis.Credit card issuers may also see people close accounts in a bid toreduce outstanding credit lines and keep their credit scores up.Cardholders who get in trouble may request longer payment times,lower minimums, and fee forgiveness. Credit companies will need tomanage their risks and delinquencies more closely and should startstress testing their portfolios.

A move away from credit may lead to increases in debit card use.While this could be a good thing for smaller financialinstitutions, those with more than $10 billion in assets and thussubject to lower interchange rates post-Durbin amendment would notsee as much benefit (we’ll see if this becomes a moot point thanksto a court’s recent decision that the Fed did not cut interchangerate enough) . In fact, the opportunity costs for those largerinstitutions could be quite high if those customers switch fromcredit cards that produce more interchange, fee income, andinterest income on revolving balances. At the same time, higherunemployment would lead to reduced spending across the board, sothe uptake in debit income may be rather minimal.

For those banks whose customers have opted into overdraftprotection plans, there may be a short term boost in fee income,but if those customers cannot pay the fees, they may just end upleaving the bank all together. Banks may also find that low balanceaccounts are even less profitable and so look for ways to pushthose customers out of the institution. Banks and credit unionsshould consider what monitoring they do on accounts to spot thosethat are suddenly no receiving regular deposits for example as asign of trouble. They should also consider what products andservices they have to offer customers who may be facing financialtrouble so that they do not lose customers through what is, withany luck, a temporary downturn. This kind of account monitoring andunderstanding of customer behavior could also help prevent creditdelinquencies so that financial institutions know not to extendadditional credit to riskier customer and take the opportunityadvise customer son how better to manage budgets to avoidproblems.or the prepaid industry, higher unemployment likely willresult in a growth of some prepaid segments.Loads onto state unemployment cards will no doubtgrow for as long as benefits hold out and the number of unemployedpeople increases. In addition, government benefit programs willalso see increased loads as people turn to the government forassistance through difficult times. As unemployment insurance runsout, programs like Supplemental Nutrition Assistance and TemporaryAssistance to Needy Families see their rolls increase.

Along with government cards, general purpose reloadable cards maybecome more popular as people abandon bank accounts and turn toalternative financial services. People earning cash in the grayeconomy of temporary, under-the-table work still need a way to makeelectronic transactions, so they will likely look to prepaid as oneway to do that.
Of course, other alternative financial services, such as walk-inbill payments and check cashing will also see an uptick withunemployment. This will become the best way for some liquiditystrapped people to manage their income. So, there will be more needfor retail outlets that can provide financial services.

Finally, emerging payment types may find their adoption slowed byhigher unemployment in 2014. If the goal of an increasing number ofAmericans is to simply keep a roof over their head and food ontheir table, they are less likely to adopt new technologies thatthey do not fully understand or cannot connect to through anaccount or credit card. Those that can provide ways for customersto meet their financial needs at a lower cost than thealternatives, help them manage their budgets, and increaseconvenience will survive, but they will need to be somewhatagnostic when it comes to devices and operating systems in order toreach the broadest possible audience.