Consumer banking has historically been riddled with “loyalty through default”— high switching costs that have kept customers tied to their banks despite many of the lowest net promoter scores across sectors. After peaking at 13.6% of consumers switching their primary banking relationship in the heart of the financial crisis (Q4 of 2008), the highest the switching percentage reached between the start of 2009 and the end of 2012 was 8.7%. Moving banks was hard. The dominance of physical retail as the core of the banking relationship kept consumers bound to locations close to home; the myriad of paper work involved in moving accounts was daunting enough for the most diligent to put it off.
Then, in Q4 of 2013, the switching rate spiked 40%. More importantly, these switchers were aggregated—while still only 10% of consumers overall switched banks, 37% of people 18-34 moved their relationship. And the percentage declined in tune with age—13% of people 35-44; 7% of people 45-54; only 2% of people 65%+. This number among millennials has continued to rise, pointing to a convergence of events forming an unprecedented moment in consumer financial services. Not only is there more innovation than ever in the sector creating a fresh option set—including the growing collection of emerging brand names we read about in credit, investing, and insurance–but we are also in a new era where millennials are riper to acquire and convert than any financial services consumer before. But, why and why now?
- An existing behavior. Recent times have seen a boom in alternate financial services (AFS) headlined by millennials. A study published by Pricewaterhouse Cooper and the Global Financial Literary Exchange at George Washington University reported that 42% of millennials have used AFS within the past 5 years. This trend even carries between income brackets with the report showing that millennials with lower incomes are using AFS at lower rates than those with higher incomes but still higher rates than older generations. This means that, unlike in the past when AFS typically meant pay day loans and products for those un or underserved by traditional banking, today even those who use traditional financial services products augment them with alternatives. Millennials, we’ve learned, aren’t anti-establishment—they’re just more willing to try the new, and even to mix it with the old to create a concoction right for them. As a result, new entrants face a lower hurdle in convincing these customers to try something outside the traditional option set.
- Convenience is key. The trend towards convenience is pervasive between sectors. It’s what’s been driving the rise of on-demand services, ecommerce, and telehealth. Just as millennials are rejecting the hassle of retail experiences in the rest of their lives, they are doing the same in their financial services products. But this doesn’t just mean reaching them through web and mobile—platforms that are now table-stakes for even the oldest school banks with the clunkiest products—but also streamlining how customers submit applications, locate and understand their data, and track their progress. This comes down to the details. To set up a bank account, apply for a loan, get an insurance policy, or create an investment management account from the traditional players requires at least a visit to a retail location, fax machine, or physical mail, if not a combination thereof. But less than 3% of US households now have fax machines (and just wait until Gen Z’ers become a main stream part of this conversation—they’ve never even used one.) Traditionally, securing a loan without a fax machine was keyword fodder for treacherous payday lenders, luring customers with easy processes but very high rates. Now, companies like consumer lending platform Earnest have simple processes and application flows entirely on web and mobile, and are setting the standard for new entrants serving the millennial demographic.
- Cost is always king—Across surveys and reports, the number one most important factor to millennials in financial services, just as generations before, is cost. While convenience and ease create loyalty and happy customers, low costs are what bring them in the door. Earnest’s lower rates; mobile-first trading platform Robinhood’s free trades; wealth management business Betterment’s rate cuts to 15bps—the leading entrants in this category have honed product and messaging around price as a leading tenant. But more than branding, these new players are at a significant benefit here. For one, lack of retail locations, hefty sales forces, or people-based models offers lower cost bases for the businesses, savings they can in part pass back to their customers. And, particularly in the lending vertical, a deeper core capability around harnessing data allows them to price more precisely and competitively by taking a larger set of consumer attributes into account than just the typical FICO score. The less you know about a customer, the bigger the buffer has to be to account for error; the more you know, the more you can take that buffer away.
- Hungry for new brands—For millennials, becoming adults and entering the work force went hand in hand with the financial crisis when banks tumbled not only in equity value but also in reputation. While once the hallmark of untouchable brands, the big banks showed their cracks and exposed their weaknesses with this demo as the core observers. Simultaneously, millennials emerged as a population with unprecedented brand awareness. A Barkley’s study found that millennials are more willing to trade up for brands that resonate with them and seem to “matter” and trade down on weak brand value than the generations before them. This combination of deteriorating brand value from the banks and a demo that cares intently created a window of opportunity for new players to not only innovate on products and services, but shape brands that could connect with millennials while using the lack of transparency and trust that they’d come to associate with this sector to their advantage.
These trends suggest that the rise we are seeing of new financial services players is indicative of the makings of a true financial services revolution—a uniquely primed and hungry demographic at the ready for a growing set of innovative entrants building advantaged brands to meet their needs.
Watch the Future of Fintech panel discussion about the Changing Face of Consumer Credit featuring Kaden, Sean Rowles (Paypal), Colin Luce (Klarna) and Portia Crowe (Business Insider):
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