Bringing Debt Management Into The Digital Age

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

The above quote is usually attributed to Albert Einstein, widely considered one of the greatest minds of the 20th century. As is the case with most widely cited Einstein quotes online, it is best to take this with a grain of salt, as there are almost no citations for when or where he might have actually said this.

But even if the sourcing is wrong, the concept isn’t – because in the life of the average consumer, compounding interest will become important in exactly two circumstances: when the consumer is investing money or when the consumer is paying off debt. Consumers who understand compounding interest tend to do a lot of the former, while consumers who don’t tend to have a lot of trouble doing the latter.

And while it is easy to shake our heads at the consumers who don’t understand that debts tend to rise exponentially (and quickly) if not properly managed, it shouldn’t be all that surprising. Most people don’t get a lot of financial education during their school career, and only a handful get such instruction at home. Before experiencing it in a real-world context, most people’s exposure to the concept of compounding interest consists of a week of high-school algebra class, with no context as to why it might be important.

Moreover, while the mobile financial era has created all kinds of tools to help consumers better understand and manage their finances, the area of debt management has critically lagged behind. When it comes to cash flow management in the form of mobile account access, bill payment tools, budgeting and income smoothing, FinTech has had a lot to offer – particularly when it comes to consolidating functions into centralized access points.

“Innovation has lagged behind when it comes to a critical piece of financial health: debt management,” Plaid Product Manager Kate Adamson noted.

The area of liabilities, or debt management, lacks that diversity of tools and centralization of services – largely due to a data gap. What FinTech providers have historically been missing is access to real-time, consumer-permissioned financial data related to debt, Adamson noted.

Without access to that kind of data, FinTech developers haven’t been able to keep pace when it comes to debt management compared to what is available in other segments. Which is why Plaid announced last week the launch of its new Liabilities endpoint, which aims to start filling in that information hole – and to hopefully help developers put more comprehensive and useful solutions into consumers’ hands.

The Big-Picture (and Small-Picture) Plan

The big-picture plan for the Liabilities endpoint is to give developers (permissioned) access to all kinds of consumer liability data: student loans, medical, mortgage, car, credit cards, etc.

The most useful version of the debt management API they hope to make available to developers is one that allows them to look comprehensively at consumers’ debt and tailor management solutions accordingly.

Ultimately, Adamson noted, Plaid envisions giving developers tools to create central debt management control hubs.

But the starting point for the program will be with student loans. The Liabilities endpoint API gives developers access to data from a number of large student loan debt managers, including Navient, Nelnet, FedLoan, Great Lakes and others, so they can leverage that data to build tools to help borrowers understand, engage with and manage their student loan debt. ‘

Student debt was chosen as a starting point for the program because when looking at the diversity of consumer debt categories, that is where the need is greatest – both from a borrower and societal perspective.

“Today, over 44 million people hold $1.6 trillion in outstanding loans,” Adamson wrote. “This burden, averaging nearly $30K per borrower, has long-term implications for consumers, who often put off saving for emergencies or retirement, getting married, buying a home or starting a family.”

And though the service is new, early beta testing has shown that app developers are tapping into that data to help consumers more aggressively attack their debt – through refinancing, though slightly altering their payment amount – which helps borrowers see a difference between managing their student loan and actually extinguishing the debt.

One early beta tester, Pillar, is focused on addressing the student debt crisis by consolidating loans and payments in one place.

“Pillar relies on Plaid’s Liabilities data to provide personalized student loan repayment recommendations and facilitate payments from users’ bank accounts to their loan providers without leaving the Pillar app,” noted Jon Levinson, director of product for Pillar. “Liabilities has provided more reliable and comprehensive student loan data than any other solution on the market – in a single, easy-to-use API.”

Better information about student loan information means developers can often surface options for a consumer’s unique financial situation. Today, most borrowers don’t know they have options at all, let alone where to start looking for things like forgiveness programs, consolidation or refinancing for lower interest rates.

Moreover, borrowers don’t realize how any one of those options – even things as small as lowering an interest rate a few basis points – can have a big effect on their overall financial situation.

Getting those options out there, and giving developers the API support necessary to build them, is a step toward helping to bring down student debt, as well as tackling consumer debt management in general. The good news, from Plaid’s perspective as a longtime financial services API builder, is that it is possible to do this: They’ve seen how much progress the market has made in other areas in the six years they’ve been in financial services.

The challenge is to bring debt management up to speed, after letting it languish behind for so long.