The digital decade has re-shaped industries as far afield as healthcare and retail. By contrast, the financial services industry has remained relatively unaffected, until now. With a generation of ‘digital natives’ now coming of age however, what does this mean for the future of banking? And how should the world’s banks respond to the shifting expectations of the millennial generation?
“The consumer revolution we grew up with is playing out. It’s being replaced by the
individual revolution where we define ourselves less by what we consume and more by the projects we take on in life, our values and beliefs… It’s transforming industry after industry. One of our partners believes that every personal finance product area will eventually move to a marketplace model…. you can imagine mortgages, car insurance, home insurance.”
That was Richard Duvall, founder of P2P lender Zopa talking to The Independent newspaper in 2006.
A decade later and in the heat of the latest tech bubble, talk once again surrounds the impact of always-on internet and mobile technologies on the comfortable, conservative world of banking.
So what’s changed this time around? For one thing, the population has moved on. In the intervening decade a generation that grew up with no concept of a world without the internet has joined the workforce and started to have their own families.
At the same time, faster internet speed, global data availability and a step-change in mobile devices has leveled a playing-field previously restricted to big business and put much of the hype of the first tech boom in 2001 within reach.
Today, quite plausibly, a programmer in Bangalore with an innovative idea and a deft touch with user interfaces could launch a new retail bank for customers in Birmingham and it probably wouldn’t even make the headlines.
More specifically however, serving a generation of mobile-centred, always-online customers: the millennials – classified as young adults under 24 – offers as many opportunities for the financial services industry as pitfalls. Some of the demographics are instructive here:
- At over 70 million, millennials represent the largest generation in US history
- Low wage growth and higher educational costs mean that US graduates in 2010 earned on average around 25% less than their counterparts in 1980
- In a global survey over half of those surveyed go to a bank branch once a month or don’t go at all, just under half used only their phone for banking services.
- 38% of US millennials are freelancing (compared to 32% of adults over 35
Millennial banking
Growing use of the mobile for banking in itself is not surprising. Indeed surveys across the adult population indicate the changing role that mobile is playing in delivering banking services.
Among millennials however, higher expectations of service delivery through the mobile, changing patterns of interaction with big companies, and the image of a consumer with lower residual income, often accustomed to freelance or contract working, has profound implications for the way that financial institutions communicate, deliver and service their products.
Communicate your difference
A globalised workforce and the technology revolution has stagnated wage growth since the turn of the millennium. In the years after the financial crisis the world has also seen a revolution in working practices with the growth of freelancing and contract or non-permanent employment, suggesting that young customers will need to be more astute at managing their personal finances.
Brett King, author of Bank 2.0 and founder of digital bank Moven remarked, “this is perhaps the most financially illiterate generation in history, it’s our job in the marketplace to find creative ways to get young customers saving.” Moven digital bank’s approach is to move away from the ‘envelope approach’ of traditional digital banking – one place for savings, another for daily funds and so on – and over to a traffic light system where red means that funds are low or negative and green means there’s a surplus.
In response, banks need to put careful thought into how they engage millennial customers – and the mobile should be at the heart of this. Financial planning apps such as Bank of America’s Budget and Track tool, Wells Fargo’s Money Map or fintech start-up Squirrel provide some examples here, but clear differentiation is also indispensable. While the mobile presents an opportunity for lower-cost delivery of banking services, the competition is now only a screen tap away.
Distribute and deliver digitally
Exponential growth in the use of the mobile for banking is radically redefining the role of the branch. While the opportunity for reducing the costliest element of retail banking is no doubt welcome, fewer customers in the branch means that banks can no longer depend on traditional ways of selling bundled products and packaged accounts.
It is here that the world’s banking heavyweights, traditionally protected by the cost of entering the banking industry, have the most to fear from their digital upstart competition (see table). Surveys of millennial customers reveal that trust in banking is as important for young customers as it is for the adult population in general and existing banks continue to score highly in surveys of institutional trust. So all is not lost. Nevertheless, new market entrants that secure suitable regulatory approval will have the opportunity to compete on a level playing field.
Digital design, social service
While the smartphone is now at the centre of Bank 2.0, design, functionality and ease of use of digital banking services are as essential for banks to retain and acquire customers, especially millennials.
As evidence of this Venmo’s US person-to-person payments service has been highly successful in attracting young customers to transfer money between themselves through their phones, with ‘just venmo me’ becoming as common as ‘what’s app me’ among young consumers.
And while surveys indicate that young customers value security and indeed would switch banks for better mobile banking security, King reflects “if asked they want security as a hygiene factor of course, but ease and availability of use is ultimately more important. In the case of Venmo, some millennials chose not to rent an apartment from a landlord because they couldn’t ‘venmo’ the funds for the rent.”
Millennial customers are also likely to be the main drivers of the growth of wearable devices. In the health-related wearable device market (currently the most established segment) half of all users are under 34 – a trend that is expected to continue as the market for wearable technology grows. A PWC survey of millennials also revealed that over half of millennials were excited about the future of wearable technology.
Patterns of customer service interaction have also shifted, with social media now an important channel for young customers to communicate with large companies. As examples, HSBC and Nationwide in the UK have had some success with Twitter for customer service, but digital customer service innovations among traditional banking providers remains timid.
Cuts – both ways
The opportunity for banks to deliver and engage customers at lower cost than previously thought imaginable is obvious. According to Tower Group, an industry consultancy, the average cost per transaction of the mobile banking channel in the United States is two percent of branch-based transaction costs.
The flipside is that a flatter playing field means more competition – and from companies that were born digital. It remains to be seen if the next decade will be dominated by the rise of start-up banks, and a more diverse banking landscape, or a brief proliferation of providers followed by a period of consolidation and investment by the industry old guard. BBVA’s acquisition of digital bank Simple last year may be a case in point here.
In either scenario the financial services industry as a whole will ultimately benefit – both from the innovation and the larger market that greater banking provision, at lower cost, will help create. In which case, a clear strategy to serve the millennial generation should be viewed more as an exciting opportunity than an existential threat, albeit one to which the world’s banking giants urgently need to design finds answers to.
MOVEN ON UP: BANKING THE MILLENNIAL WAY
The era of digital banking for the millennial generation is calling for a radically different approach to retail delivery. While young consumers and entrepreneurs in the Middle East are voting with their smartphone screens and re-shaping the traditional model of e-commerce through social media over multi-brand e-marketplace sites the market for a new kind of digital retail bank remains wide open.
One company that thinks it might have the answer Is Moven, founded by banking industry analyst Brett King. Launched in 2014 the bank is similar in principle to the all-in-one ‘offset’ accounts that launched in the UK in the early 2000s with little product separation between credit, savings or payments. “When we set out to design the bank account we came to the conclusion it has to be very low friction in terms of opening an account “ said King.
Using a traffic light system – where red indicates low funds, and green a surplus – the bank has been designed to improve financial literary among what King says is the “generation with the least financial literacy and the worst financial habits of any generation of the last 100 years.”
King says the best way to get people, especially Millennials, thinking about saving and being more controlled with their spending is to move away from the ‘envelope model’ of different products for different purposes and towards a model that feels more like a game. “We use a traffic light system so all the customer needs to do is keep their money in the green and at the end of the month they’ll have some money left over. Millennials don’t want to learn financial literacy they just want the right tools that will help them,” he says. The latest release of the Moven account was announced at the Finovate conference in the US earlier in May.
The post The millennials have arrived appeared first on Payments Cards & Mobile.
