As fintechs and digital-first banks have entered the industry, many financial institutions have searched for ways to reach new customers and build stronger relationships. Although many consumers have student loans and are concerned about their ability to repay, banks often neglect to address this critical aspect of their customers’ financial lives.
In Student-Loan Debt and Anxiety: How Fintechs are Beating Banks, analysts from Javelin Strategy & Research examined the current state of digital banking, the increasing role of fintechs in the market, and how financial institutions can leverage student loans to build stronger relationships, even when they don’t originate the loan.
More Than a Menu
The student loan opportunity has arisen from the new reality in digital banking. Digital banking was originally devised to reduce costs at bank branches and give customers a convenient way to execute transactions.
Now, this transaction-oriented model has become the central touchpoint for consumers, a shift that has brought digital banking to a turning point.
“The digital banking experience has to be more than the McDonald’s menu board saying, ‘We’ve got burgers, we got fries, tell us what you want and we’ll serve it up quick and easy and consistently,’” said Mark Schwanhausser, Director of Digital Banking at Javelin Strategy & Research.
“It has to be about trying to figure out how to become an advisor and developing a relationship that can last over time—and position the bank to be at the front of the line when a consumer says, ‘I think I need a new savings product or a new loan product,’ whatever the case may be.”
Many digital banking services amount to little more than a do-it-yourself collection of tools and services. This may be sufficient for savvy customers, but it doesn’t serve the needs of the many consumers who require more personalized financial guidance.
When these customers encounter a financial roadblock, they rarely turn to their bank’s digital banking platform. This is largely because many financial institutions are more preoccupied with selling a product than solving the issues their customers face.
More often than not, these concerns revolve around the prudent use of debt.
“If you’re looking for a conversation with Americans, virtually every American has debt,” Schwanhausser said. “It might be good debt; it might be bad debt; it might be overwhelming debt. But we’re all sitting around the kitchen table, and sooner or later we think about, ‘Are we managing it wisely?’
“There’s no conversation around that with the bank. Typically, when banks talk about debt, it’s something like, ‘Do you want a consolidation loan? Do you need help because you’re falling behind, and you’ve been furloughed? Do we need to set up a payment plan?’ It’s very transactional; it’s very tactical; it’s very do-it-yourself. But they’re not talking about the management of the debt, and ‘Which one should I pay down first? What are my priorities with managing this?’”
The Commoditized Comparison
This transactional mentality also means customers don’t typically engage with digital banking platforms for long periods. Once they check their balance or verify a transaction on the app or website, they move on.
As a result, a bank may have substantial digital banking activity, but it’s not the deeper engagement most banks seek. What’s more, this impersonal model doesn’t give financial institutions a way to differentiate themselves from their competitors.
“This model doesn’t help you with how to decide between this credit card and that credit card, other than typically to focus on rates and fees and minimum deposits, things that every bank competes on,” Schwanhausser said. “It’s commoditized, and if we continue to put ourselves in this position, it’s very hard to win. It’s, ‘My rates are better or worse—if it’s worse, I’m out of the game.’’’
These challenges have been exacerbated by the increased competition in the financial services market, from rival financial institutions and fintech companies that are equipped to take unique approaches to the market.
Many fintechs have identified the issues that debt usage poses for consumers and have stepped into help, with general debt management and with the particular challenges that arise from student loans.
“They’re helping people learn how to build their credit scores, which banks do in a nominal way by giving you a credit score and some education,” Schwanhausser said. “They’re engaging in some cases specifically with your employer to help you with your debt. They’re helping you figure out when it might be wise to accelerate payments.
“They’re coming up with other forms of loans that could perhaps be a better option than the student loan that you’re carrying now. They’re all coming at this and saying, ‘A lot of people out there are worried—is there something we can do?’ They’re not trying to be the be-all, end-all; they’re going to very specific markets.”
Influential and Fundamental
Conversely, many banks are seeking to serve a broader audience with an array of products and services. Although this presents difficulties, it also creates an advantage for financial institutions, because banks are typically the central hub where customers go to manage their finances.
This constant interaction creates an opportunity for financial institutions to have daily conversations with their customers and share insights and guidance.
“If financial institutions do things right—and most of them don’t take this course—they can provide this holistic view and show you not only what you’re saving and what you’re spending, but also what your debt obligations are,” Schwanhausser said. “They can help you develop a plan for how to pay yourself first and how to divert money into the loan payment system that you develop internally. They can be part of your life in a way that is more influential and fundamental.”
Random Acts of Insight
Applying this approach to student loan debt can pay substantial dividends for financial institutions because most banks are seeking to engage with younger consumers and identify ways to serve them profitably.
Many younger customers have student loan debt, and a significant number among this group are concerned about whether they will be able to repay these loans. This creates an opportunity for financial institutions to engage with their customers about an issue that is close to home.
Once banks begin these relationships, they will be able to leverage another advantage: time. Student loans are long-term products, and banks can be there every step of the way.
“These relationships aren’t transactional; they’re something you build over time with random acts of insight and advice and guidance and coaching,” Schwanhausser said. “This whole conversation about student loans is about building that kind of relationship. As a banker, you may not ever want to lend or do a consolidation loan or get into the product side of things—but you can get into the financial guidance side of things.
“Digital banking’s future is in the guidance and the coaching. It obviously has to sell—every bank has quarterly earnings. But the long game for digital banking is to win share of mind so that one day they will win share of wallet.”
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