Hunting the Vanishing AffluentKevin Mellyn |
It makes sense to sell financial services to people with money just as it does to sell kennel services to people with dogs. The problem is that financial institutions are chasing the affluent at the same time their numbers are in decline. A smarter approach would be to figure out how to profitably serve all demographic groups.
The Saturday Essay in The Wall Street Journal on October 22 (subscription required) pointed out the flaw in thinking of the affluent, or the rich, as reasonably stable populations, given the current economic environment.
Today’s wealth is based on the holding of increasingly volatile financial assets, the prospect of bonuses, and the ability to borrow. This results in what the piece calls the “high beta” rich, whose fortunes and propensity to borrow and spend (the household debt of the top 1 percent surged over threefold between 1989 and 2007, faster than net worth) are directly tied to changeable financial markets. Their wealth has become “financialized.”
The WSJ article doesn’t focus on the so-called mass affluent, typically white collar professionals with incomes of $75,000 or more. The principle mass affluent asset remains the home. Fully $7 trillion in household real estate value disappeared since the crisis and most housing markets continue to decline. Mortgage debt reduction has not kept pace, leaving one household in five with negative equity.
The real vulnerability of the mass affluent segment is that its income comes from employment, not investments, and has been relatively stagnant for a generation while the top 0.10 percent has captured the lion’s share of financialized wealth. This wealth and resulting unpredictability of income is a product of liberalized capital markets and stock-based compensation, which have been prevalent since the 1980s.
Although the essay doesn’t go back that far, something very similar happened in the 1920s, when paper gains in the stock market brought about the rich and careless world chronicled by Scott Fitzgerald—to the horror of those with old money based on inheritance or position and income achieved in business or the professions.
During the Great Depression, these gains were wiped out to the tune of almost 90 percent, triggering massive defaults and bankruptcies among the well to do, while bringing down the banking system.
In the bubble economy that led up to the financial market meltdown of 2008, entrance into the “true” affluent realm, the top 0.10 percent, was remarkably easy for anyone with bonus compensation, stock options, or an inside track on an IPO. Since 2008, it has become remarkably easy to exit it. Between 2007 and 2009, the number of American households making over $1 million fell 40 percent while their combined incomes fell nearly 50 percent.
The obvious lesson in all this for credit card issuers and bankers in general is that business models and cost structures need to be viable and profitable across all income demographics—not just the ever elusive affluent.