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Great Expectations (when it comes to Millennials and their banks)

Being born between the early 1980s and 2000s, we were exposed early on to advancing technology and the vast, largely uncharted, capabilities of the internet. Back then, we were solely digital consumers…today, we are also its digital creators. This year, the Census Bureau projects the US millennial population will expand to 75.3 million; that will make us the largest demographic group as we inch ahead of the slowly shrinking baby boom cohort. 

Automation, trust and speed are critical to a tech-savvy generation and millennials’ demands are bumping up against the limitations of traditional financial frameworks, which can seem lethargic and unresponsive. New needs are spurring new entrants into the marketplace, changing the ways we purchase, finance and invest.

Financial institutions such as Fidor Bank, Movenbank and Simple are designed for the digital consumer. They focus on design-led user experience, transparency and simplicity. Simple, for instance, offers sophisticated mobile applications giving customers access to a full range of banking services on their iPhones, enabling them to easily track their expenses, disposable income and savings goals on a single screen. 

Fidor Bank provides banking services for the social generation—interest rates are dictated by its number of Facebook likes and a single interface shows all customer holdings—from precious metals to virtual currencies. Movenbank is the first bank designed to be used on a mobile phone with sophisticated analytics, allowing customers to track spending against their usual patterns as well enabling them to modify behavior based on instant feedback. 

Digitally native banks have extremely streamlined business models—with traditionally very low fixed costs, few to no legacy IT systems and talented nimble teams. Some firms like Movenbank and Simple do not even have risk capital; they use other institutions’ banking licenses, while offering a banking experience for what is becoming the only part of the consumer banking process that matters—customer interaction. 

More than 70% of millennials say mobile banking is important to them— the most among the generations surveyed and a far greater proportion than baby boomers. To the tech industry, this means opportunity. 

Apple saw more than 1 million users activate Apple Pay in the three days following its unveiling last fall, while PayPal logs more than 7,000 transactions per second. Total payment volume for Venmo reached nearly $2.5 billion in 2014, and Snapchat recently unveiled Snap cash in partnership with Square. The explosion in alternative payment systems and providers makes sense considering that US millennial spending will rise to $1.4 trillion in the year 2020. Investors are piling into this space with ~$4B invested in ~2000 payment startups. 

Millennials are also reaching outside the traditional lending network to build their businesses while getting comfortable with alternative financing tools. As financial institutions pull back from small business lending, a host of equity and debt platforms have emerged to fill the void. Through complex algorithms, millennials can obtain financing at the click of a mouse with minimal paperwork hassles and delays.

Millennial small-business owners are five times more likely to receive funding from peer-to-peer lenders than Gen-Xers, a Bank of America survey suggests, with fewer than half indicating that we would rely on banks for first-time financing needs. Millennials also use many alternative lenders such as OnDeck, Lending Club, Sofi, Funding Circle and Prosper far more than boomers. 

Along with entrepreneurship, millennials are changing how other generations invest and manage money. Why should the financial industry care? By the time they’re through, baby boomers will have passed down assets worth more than $30 trillion, and we are expected to have at least $7 trillion in liquid assets by 2020. While that may sound like an advantage to investors, millennials have shown themselves to be an independent bunch, skeptical of traditional financial institutions and conservative in their investment choices. 

Even before millennials take the top spot among the demographic ranks, we are challenging the ways financial services are delivered by avidly embracing financial technology. The industry’s rapid change is pushing governments worldwide to rethink their approaches to oversight, and forcing retailers, lenders and asset managers to invest in or adopt new platforms and services. Otherwise, the leading force in the future economy will go elsewhere, simply by touching a screen.  

In addition to their population size, Millennials have other positives for banks. First, Millennials are more educated than their predecessors. In general, higher levels of educational attainment are associated with lower unemployment, job stability and higher incomes—key variables in assessing credit worthiness and demand for financial services. 

As the economic recovery strengthens, the unemployment rate among Millennials will decline. Second, mobile technologies and connectivity are ingrained in their daily lives, allowing banks to generate economies of scales in reaching millions of hyper-connected individuals for which the branch has become irrelevant.

However, serving Millennial customers will not be easy. The common assumption that they will embrace traditional banking as they age may prove to be wrong. Contrary to previous generations, banks now have to navigate the complexity of a multiracial and multicultural customer base. 

From here on, marketing strategies aimed at young adults should account for cultural differences in saving and spending, as well as gaps in educational attainment and economic conditions among ethnic groups. Enduring education and income gaps tend to feed different—and sometimes conflicting—views on political and social issues. Banks need to be aware of these differences to avoid alienating young customers.

Millennials expect banks to provide them with options amongst standard products like a checking account or an auto loan. In addition, they want banks to guide them on how to maximize their financials wealth based on lifestyles and personal goals. 

Millennials not only want a mortgage but also understand how it works. They want their banks’ honest opinion about the best time to buy a house and when does renting make more sense than buying. 

Millennials demand a genuine and meaningful relationship with banks that transcends commoditization and transactions. This trend was worsened by the financial crisis and the slow recovery, which has yielded a high level of distrust in traditional industries and institutions. 

This explains why Millennials welcome disruption from non-banks.

New generations of young and technology-savvy adults are entering into a highly complex and uncertain economic environment with a degree of choice and consumer freedom never seen before. As a result, banks need to help Millennials not only access credit, but also navigate their financial lifecycles. 

To maximize the impact of technology, banks need to establish empathic relationships. If banks do not embrace these changes and confront these challenges, non-banks will. 

Payments Expert

ACI Worldwide powers electronic payments for financial institutions, retailers and processors around the world with its broad and integrated suite of electronic payment software.