How Digital Platforms and Lower Debt Ratios Are Reshaping the Landscape of Banking

by Kale Donnelly

April 18, 2018

“I’ll be back.” Three words and one of the most quoted movie lines of all time (need I say this is from the Terminator movies?). Three words that, unfortunately, may not apply to the employment levels of the finance and insurance sector. Or more specifically, a subsector within finance and insurance – credit intermediation and related activities. This is where most banking and lending activity is categorized, and employment in this subsector has yet to recover to its pre-recession levels.

Is increased use of technology driving down the employment numbers, or is it possibly the decreased share of household debt to disposable income resulting in less foot traffic in your typical branch? Are tighter, post-recessionary lending standards a contributor to the lack of expansion in this subsector and keeping the growth from mirroring Oregon’s other industries? Let’s take a look.

The Overall Picture

Statewide employment in the finance and insurance sector peaked at 63,900 jobs in 2007. Currently standing at 57,900, the sector has grown to roughly 90 percent of its peak levels. Growth has averaged 0.9 percent year-over-year in the last three years, while Oregon’s total nonfarm employment has averaged a growth rate of 2.8 percent. Comparing these two rates may be a bit disingenuous given that health care and construction are adding large amounts of jobs within the state, but the reference between the overall total nonfarm and finance and insurance is a helpful anchor.

When we break out the finance and insurance sector into two of its largest subsectors, we can see how each one is performing on its own. The activities found within the subsector of insurance carriers and related activities are pretty straightforward – life, health, medical, and property insurance to name a few. Economic conditions certainly affect this subsector, but mostly because of external factors. During hard economic times people generally purchase fewer cars and homes, so purchases of auto and home insurance policies also slow. However, people still maintain various types of insurance regardless of the economic weather. Think auto insurance, a requirement to be on the roads. This could potentially explain why the subsector lost 15 percent of its jobs in Oregon compared with the 20 percent lost in credit intermediation and related activities.

Credit intermediation and related activities contains almost all of your banking activities – commercial banking, credit unions, credit card issuing, consumer and mortgage lending, etc. It is worth noting that investments, securities, and other financial investment activities are not included. As we can see, both subsectors took a hit during the recession and the numerous months that followed. But, there’s an eye-catching dip in credit intermediation that occurred in late 2013 extending through 2014 and 2015.
If we look at our Business News Around the State tool, we can observe that there were multiple branch closures in Oregon within that timeframe. There were also multiple mergers within that timeframe, but still a noticeable loss of employment. This doesn’t account for all of the jobs lost, and it really only gets at the “what” portion of the occurrence and not the “why.” Perhaps, the lack of foot traffic within banks was starting to have a significant impact on the business strategies of these banks. But, what could be driving that?

Technology Changes Banking Behavior

Could technology be to blame? What I’m referring to is the increasing use of online banking apps, online mortgage apps like Quicken Loans, as well as money-sharing apps like Venmo, all of which are becoming increasingly popular, but especially amongst the younger cohorts. In fact, an article by The Washington Post written in 2014 stated that 39 percent of Americans preferred online banking as their method of account management, more than twice the amount of respondents who preferred visiting their local branch.

Another survey discussed in the article discovered that nearly 20 percent of all respondents across various age cohorts hadn’t physically entered their branch in over a year. Roughly 30 percent had yet to visit their branch in the last six months. Inevitably, the focus will be on Millennials being at the root cause of this. However, seven out of 10 of Baby Boomers utilize online banking services at least once per week.

While this transition from human-based services to online banking services may spark concern among “techno-pessimists,” you should be far from worried. The landscape of the banking industry may change, but the need for the brick and mortar branches will still remain. For more intensive and complex transactions such as applying for a loan, dealing with a death in the family, or businesses requiring specific withdrawals for money orders, the need for face-to-face interaction will still be a necessity for many consumers. The introduction of the ATM sparked worry for the survival of the teller occupation. While their scope of tasks may have changed, we’re still greeted by their smiling faces once we enter our local branch.

Follow the Money!

The total outstanding debt for the State of Oregon is at record highs, but this single aggregate measure is likely to be taken out of context if only observed by itself. First, this is in dollar amounts alone, and it would be fairly intuitive to say Oregonians have more debt today than they did in the year 2000. Second, the share of our debts to our income would be a much more telling story. While debts are higher in Oregon than say, Wyoming, incomes are also higher in our neck of the woods. Additionally, home prices are substantially higher along the Northwestern Coast than the rest of the nation. Since mortgage debt is the largest component of household debt, the typical household in Oregon, Washington, or California will have to take on more debt in order to finance their homes. Josh Lehner, Economist with the Oregon Office of Economic Analysis, details the many facets of Oregon households’ debts. The key takeaways are:

Oregon’s household debt as a share of personal income has deleveraged following the recession. Some of this deleveraging is due to foreclosures amidst the financial crisis, resulting in a loss of debt amongst households.

Prices of homes are seemingly ever-increasing, but there is favorable growth in the number of higher-income households to help hold down that ratio.

Student loan debt continues to grow, both nominally and as a share of personal income. However, this is most likely due to the high number of college-educated individuals migrating to Oregon.

An interesting note: Average student loan balances and delinquency rates seem to have an inverse relationship amongst Oregon’s counties.

National data shows that the servicing, or mandatory minimum payment, of our total debts now eats away at a historically low share of our disposable income. Looking at the graph below, the share of household debt to disposable income follows a natural pattern. During and after a recessionary period the share of debt to income drops. As stated before, a portion of this can be contributed to foreclosures and loan defaults. This can also be perpetuated by a lack of borrowing activity during tough economic times. As the economy starts to ramp back up more people become employed, consumer confidence perks up, people are more willing to take on more debts, and the line trends upward. The interesting piece in this cycle is the recent lack of strong, upward movement in the ratio.
Are people borrowing at a lesser rate than before? Ever since the tightening of federal lending standards after the Great Recession, obtaining a mortgage is not nearly as easy as it was 15 years ago. Some newly implemented regulations are minimum employment timeframes, mandatory income verification, and maximum debt-to-income ratios, to name a few.

Is it the propensity, or lack thereof, to own a home or buy a car amongst the younger generations that’s behind this change? If so, this could very well lead to a lack of demand for some banking-related services amongst one of the largest generations in the nation. It’s also possible that our taste for borrowing more hasn’t quite materialized, and if it does, it could result in a bump of employment in the banking world.

Closing Time

While we may never concretely know exactly why the finance and insurance sector has yet to recover, or what drove the drop in employment in credit intermediation and related activities in late 2013 through 2015, it may very well be a combination of the factors laid out above. Higher rates of online use for banking services paired with less current demand for borrowing amongst each individual household may be the reason that employment in this sector has yet to reach its pre-recession peak.

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