Shifting corporate responsibility to consumer resilience

Nobel-prize winning economist Joseph Stiglitz made the point recently in reference to Covid-19 that the US has created an economy without resilience. It would be fair to say the US is not the only one, but it is the most striking because it is famed as the world’s richest country. 

The many factors that make up a resilient economy will be debated in the months and years ahead. And as governments put together packages for those who have lost their jobs or who need support as a result of this crisis, the question of how we create financially resilient individuals also needs to be examined.

In the US, the Federal stimulus package includes a one-off $1,200 cheque to individuals who earn less than $75,000. 

Even with other short-term changes such as frozen student loan repayments, mortgages holidays and lowered credit card interest rates, these efforts are unlikely to create enough financial resilience to survive the longer-term economic impact of coronavirus: they are no more than sticking plasters to cover some deep wounds to the economy. 

These are not big enough solutions for a future that, according to climate scientists, may well see global economies face much more dramatic shocks. 

Not rocket science

What makes for resilient consumers, other than higher wages, is lower debt and higher savings. It’s not rocket science, yet consumer debt in many countries is growing while savings remain stagnant. 

Federal Reserve data in 2019 showed that 40% of the US population has less than $400 in savings, while a survey by GoBankingRates (also last year) estimated that 58% have saved less than $1,000. That’s worrying: a majority of the population don’t have enough back-up to withstand even one month of unemployment. 

In some European countries emergency savings seem to be just as weak. One in three people in the UK have less than £1,500 to hand. 

The situation is, perhaps unsurprisingly, even worse in developing economies: Global Findex Survey’s last report for 2017 showed that, while 55% of those in high-income economies had some savings, only 21% did in developing economies. 

The anomaly is Germany where consumer debt, while rising, is well below 2008 peaks. That’s a stark contrast with the US, where household debt hit record highs at the end of last year. 

German households last year put away around 11% of their disposable income, compared with less than 7% in the US, according to the IMF. Why? 

In Germany, savings have been increasing over the last decade in spite of negative interest rates. German households last year put away around 11% of theirdisposable income, compared with less than 7% in the US, according to the IMF. 

Why? 

It is at least partly cultural: Germany is influenced by the mix of its financial sector – savings banks, Landesbanken (state-owned regional banks) and credit co-operatives account for more than 75% of financial institutions by number and about 35% of assets. 

Compare that with the US where community banks account for 15% of assets and commercial banks continue to hoover up market share. 

The German savings banks are also socially highly influential and run education programmes – there’s even a university, the University of the Savings Banks Finance Group. 

Germany is one of the few developed countries to celebrate World Savings Day, established in 1924 and celebrated in 29 countries (most of which today are developing countries), when many German children take their piggy banks to the bank. 

It signals a culture of preparing for the worst – which could also be called building resilience – and could partly explain the German minister for economic affairs’ belief that his country will be out of the woods fiscally in several months. 

How can we develop this culture elsewhere? 

Community-oriented banking

Capital One gave it a try in the US by starting the first informal national savings day in 2017. And for sure, credit unions, community banks and community development financial institutions are all in the business of helping their clients make financially sound decisions. 

But can the same be said of the country’s largest banks? 

As a customer of two of them, if I were asked: do the largest banks market savings or credit products harder? My answer would be: the latter. 

While Bank of America, Citi and JPMorgan Chase have impressive inclusive finance efforts, they continue to charge for savings accounts for reasons that remain unconvincing. We need more community-oriented banking. 

Over recent weeks it has been interesting to see the foundations of large banks make generous donations to non-profits, the Covid-19 Solidarity Response Fund and community programmes. 

Citi and JPMorgan Chase have donated $15 million each, for example; far more than any community bank could give. 

But as welcome as that is, there are parallels here to be drawn with the $1,200 cheques being written by the Fed. If the largest banks in the world really want to build resilience in communities and offer financial protection from these events, then, when we emerge from this crisis, they should put their efforts into increasing savings and weaning their customers off credit. 

It just might also help build a resilient economy.