In 2013, 68% of millennials believed that the way we access our money would be totally different in five years. So how are the money habits of this disruption-ready generation changing the way we manage money?
While the media often portrays millennials as preoccupied with the rising prices of festival tickets and avocado toast, their real financial concerns are a bit more practical.
A 2018 survey by Bank of America shows that millennials’ top financial priorities were saving for emergency funds (64%), saving for retirement (49%), and saving to buy a house (33%) — not much different from the concerns their baby boomer parents had 30 years ago.
But millennials face significant headwinds in making those financial dreams a reality. Having come of age during the Great Recession and its climate of wage stagnation, and being burdened by unprecedented levels of student debt, millennials have been called “the brokest generation.”
However, millennials are proving to be a fiscally conscientious generation, saving more and earlier than previous generations did at their age.
As millennials head deeper into adulthood and make more money, the personal finance space is adapting to their unique money management attitudes in a few key ways:
- From in-person to online. Millennials are “the most likely generation to use both online (92%) and mobile channels (79%)” for banking — and finance companies are aligning their services to reflect that preference.
- From big banks to big tech. 73% of millennials say they would be more excited about a new financial offering from a tech company like Google, Amazon, or Apple than from their nationwide bank. This openness to banking alternatives presents opportunities for fintech startups looking to innovate in financial services from the outside.
- From “the way it is” to “the way it could be.” As of 2013, 70% of millennials believed that the way that people purchase things would be totally different in 5 years, and 33% believed that one day they won’t need a bank at all. Being comfortable with the idea of alternative financial systems has opened the door to a variety of innovations, from alternative investment vehicles like cryptocurrency to point-of-sale lending alternatives.
Incumbent financial institutions are feeling the effects of millennials’ disruptive attitudes. Digital-first bank Chime is adding more customers each month than legacy banks such as Wells Fargo or Citibank. One report predicts that the 10 largest banks could lose $344B in deposits to smaller competitors over the next year.
But legacy institutions are fighting back, cherry-picking the best financial innovations that their younger competitors develop — investment robo-advisors, AI-based budgeting, and expense monitoring — and incorporating them into their services.
There have been some high-profile failures, such as JPMorgan’s short-lived mobile bank app Finn. But incumbent banks are also at the forefront of the most promising innovations in personal finance today, such as virtual credit cards.
In this report, we’ll look at how millennial money sensibilities are shaping innovation in personal finance across 5 core areas and how startups & incumbents are responding.
How millennials think about money
To understand where these millennial money behaviors come from, it’s important to understand 2 socio-economic forces that shaped the generation: the Great Recession and the student loan crisis.
Millennials were almost four times as likely as other generations to find themselves unemployed during the recession, and households headed by millennials born in the 1980s actually lost net worth between 2010 and 2016.
Meanwhile, 41% of the millennial generation has student loan debt, compared with 26% for Generation X and 13% for baby boomers. The average millennial student debt load was $10,600 as of 2017 — about 2X more than what was owed by Gen X in 2004.
With their unique financial pressures and their digital-first backgrounds, millennials are looking for new ways to manage their incomes, debt, and future savings. Below, we analyze how millennials are approaching personal finance across:
- Banking: Brick-and-mortar is out; digital and mobile-first are in
- Budgeting & Saving: Millennials go mobile and embrace automation
- Investing: Robo-advisors and micro-investing lower barriers to entry
- Payments: Mobile is replacing cash
- Borrowing: Credit-shy millennials embrace PoS lending
1. Banking: Brick-and-mortar is out; digital and mobile-first are in
Traditional banks like Chase and Bank of America are increasingly battling for market share with a new class of competitor: neobanks. These digital-first banking alternatives are well-funded, adding customers rapidly, and ready to compete with the traditional banks for market share. And millennial preferences are leading the way.
On the whole, millennials are highly skeptical of banks. In one survey, 71% said they would rather go to the dentist than listen to what banks have to say. They are also significantly less loyal to their current financial institution than previous generations: millennials are 2.5x more likely than baby boomers and 1.5x more likely than Gen Xers to switch banks, according to one poll conducted by Gallup.
The generation’s disenchantment with traditional banking institutions is driven by a number of frustrations, including difficulty resolving problems (55%), standing in long lines (37%), and technology failure (33%).
Fees are another factor driving budget-conscious millennials away from traditional banks. 93% of millennials say that no-fee banking is important when choosing a financial institution.
Then there’s the mobility aspect. 64% of millennials have at least one full-service banking app on their phone, compared with 59% for Gen Xers and 41% for people aged 55+, according to Bankrate. Millennials are 3X more likely than baby boomers to take care of banking business on their phones — and 30% less likely to walk into a physical bank branch.
These factors have created an opportunity for neobanks to challenge incumbents for financial dominance. Digital-first challenger banks such as Simple and Chime have risen to prominence with a no-fee, digital-first experience targeted directly at millennials.
Their message appears to be resonating: Chime and Qapital are among the 7 global digital-first banks to cross the 1M accounts mark.
Spotting opportunity in the US market, several of the international banks that have reached 1M accounts are setting their sights on the US, including Europe-based challenger banks Monzo and Revolut.
The strength of the neobank value proposition rests on its digital-first focus. 72% of US consumers now manage their bank accounts on the computer or their mobile device most of the time, according to a survey by the American Bankers Association.
But the road to the digital-only future hasn’t always been smooth. Simple, an early contender founded in 2009, floundered following its 2011 launch before ultimately being bought by Spanish banking giant BBVA in 2014. Simple is still a contender, but its struggles underscore how challenging the landscape was for banking alternatives only 8 years ago, and how rapidly the ecosystem has evolved.
Incumbents have responded to neobanks’ challenge by introducing digital-first offerings of their own. Bank of America, Capital One, Chase, PNC, and Wells Fargo all offer digital and mobile banking options.
In 2016, Goldman Sachs introduced its own online bank offering, Marcus, with an aesthetic and brand promise very similar to challenger banks. JPMorgan introduced its digital-only banking product Finn in 2018, but shuttered the project after only one year.
The design and copy aesthetics of Marcus by Goldman Sachs are strongly reminiscent of challenger banks like Chime.
Wells Fargo, Capital One, and Bank of America are also looking to chatbots as a way to provide more responsive, real-time digital services for customers.
2. Budgeting & Saving: Millennials go mobile and embrace automation
Between retirement savings, house savings, emergency fund savings, and student loan debt — not to mention day-to-day expenses like housing, groceries, and healthcare — millennials have more demands on their financial attention than any previous generation.
But contrary to the stereotypes about their whimsical spending habits, millennials are just as budget-conscious as other generations — they just budget and save differently.
Specifically, millennials are embracing the automation and machine-learning capabilities of fintech companies to help them advance toward their savings goals without having to think about it.
The millennial age group has played a significant role in popularizing budgeting apps. 34% of people aged 18 — 34 say they have at least one budgeting app on their phone, compared to just 15% of those between ages 35 and 54.
Mint, one of the first personal budgeting tools to break through, launched in 2007. It acquired 1.5M users in under 2 years on its way to being acquired by Intuit in 2009 for $170M. Today, Mint has tools to help the millennial money manager tackle spending as well as credit cards and loans.
Budgeting app Mint has expanded its purview to cover credit scores and investing.
But Mint is far from the only player in the budgeting app space:
- You Need a Budget (YNAB), which claims its users save an average of more than $6,000 in their first year, sees more than 100,000 new downloads per month.
- Personal Capital offers free budgeting and net worth tracking as a customer acquisition strategy for its financial advising services. It had over 2M users as of July 2019.
- Goodbudget provides tools for couples who want to manage their budgets together.
- Mvelopes takes the popular “envelope” method of budgeting digital by letting users allocate money to different categories directly through the app.
Companies in this space aren’t just monitoring users’ bank accounts — they’re intervening when the user is in danger of overspending. Dave, for example, alerts users via text message if they’re at risk of overdrafting. If they do, Dave will advance up to $100 to cover the overdraft at zero interest.
Dave’s ambitions extend beyond helping its 3.5M users avoid unnecessary fees. In June 2019, the company announced that it had raised $110M to introduce complete banking services to its customers.
Another millennial-driven trend in the budgeting and saving space is AI-powered virtual spending services:
- Apps like Cleo and Olivia use AI to analyze users’ bank account balances and spending patterns, set budgets, and save money automatically.
- Digit syncs with users’ bank accounts, analyzes their spending patterns, and siphons unused cash into a separate Digit account. The app is also notable for its SMS-based user interface, which lets users manage their Digit account alongside the other conversations they’re having on their phones. Digit has raised $36M in venture capital to build out its service.
- Qapital lets users set rules for when to save money. Users can also set group savings goals — a useful feature for millennials working toward long-term financial goals with a partner, family, or friends. Originally launched in 2015, Qapital has raised $51M in funding to date and gained roughly 420,000 users, who have reportedly saved nearly $500M.
However, apps that focus primarily on automated savings may be at a disadvantage, as the feature is relatively easy to replicate. Robo-advisor Betterment, for example, recently rolled out a “Smart Saver” product that directly mimics Digit’s set-and-forget approach, and paired it with a 2% monthly interest rate (Digit offers 1% every 3 months).
Incumbents have taken note of consumers’ appetite for money management and saving solutions. Barclays has introduced budgeting features into its mobile apps, including the ability to control spending in major categories like groceries, restaurants, bars, gas, and phone.
But not all efforts to integrate these features have been successful. Chase’s digital-first app Finn mirrored Qapital’s automated rule-setting model, but after less than a year the big bank announced plans to shutter the service and move its customers to its main Chase Mobile app product.
3. Investing: Robo-advisors and micro-investing lower barriers to entry
The Great Recession’s impact on millennials’ financial lives is most pronounced in investing. After watching others’ savings take a hit in the downturn, 93% of millennials said they were wary of investing.
Millennials also have fewer assets to invest than previous generations, as more “immediate” financial pressures like housing, healthcare, and student loan repayment consume most of their resources.
Now tech firms are taking on the challenge of helping cash-strapped millennials invest in their financial futures across 4 key areas: retirement, active investing, passive investing, and alternative investing.
Millennials will likely need more retirement savings than previous generations, as they are expected to live longer and receive less from Social Security and other programs. The average millennial 401(k) account balance is $25,500, and 67% of millennials have no retirement savings.
Cost has been a significant barrier to accessing retirement services. Legacy financial advisors typically require balances of at least $100,000 to access their services, a bar that only 1 in 6 millennials can clear.
Enter the robo-advisor. Robo-advisors rose to prominence on the strength of 2 core promises: lower fees and low starting investments.
Betterment, one of the first robo-advisors on the scene, has a distinctly millennial story. Jon Stein, a millennial himself, founded the company in 2008. By 2018, the average Betterment user was 35, and about two-thirds of the company’s customers were millennials. Betterment has also introduced a socially conscious portfolio option, which seems custom-built to appeal to millennials’ values-driven sensibilities.
Betterment made its name on the promise of personalized, professional-grade financial advice without the professional-grade fees.
Other contenders in the robo-advising space include:
- Wealthfront offers a wider range of investing products than Betterment, including 529 savings accounts and alternative asset classes, such as natural resources and real estate. It also offers a digital financial planning tool called Path, which helps users adjust their long-term goals of saving money as their financial situation changes with things like new jobs, children, and home buying.
- Wealthsimple has higher management fees than either Betterment or Wealthfront at .40%-.50%, compared with the flat .25% per year charged by Wealthfront and Betterment. Like Betterment, Wealthsimple offers a range of socially responsible investment (SRI) options to appeal to values-driven millennial investors.
- Ellevest seeks to differentiate itself in the crowded robo-advisor market by targeting its services specifically at women. The company says that it designs its products to account for the unique financial needs that women have, such as longer lifespans and covering child and eldercare obligations; however, the range of accounts supported by Ellevest is limited, and the platform doesn’t include more sophisticated financial features, like tax-loss harvesting, which other robo-advisors provide.
As of March 2019, Betterment is the largest independent online financial advisor in the United States, with $16B under management from 400,000 accounts. Wealthfront, meanwhile, has 250,000 accounts and a reported $11B under management.
Incumbents aren’t surrendering the retirement space to the robo-advising startups without a fight. Goldman Sachs and BlackRock have both acquired robo-advising startups Honest Dollar and FutureAdvisor, respectively, and Charles Schwab launched its robo-advisor product in 2015.
But there’s still plenty of territory to be claimed: experts estimate that the digital advice market could surpass $1T by 2020.
While robo-advisors have focused primarily on making retirement and other long-term investing goals more accessible to millennials, another group of companies set its sights on opening up retail investing.
As with robo-advisors, the rise of micro-investing apps is closely tied to millennials’ financial coming-of-age. One of the most prominent examples, Acorns, launched in 2014 and specifically targeted college students, offering them a low-friction entry into investing by rounding up their credit card purchases and investing the difference in a dedicated Acorns account.
Acorns has grown with its original target audience and now offers 3 product packages. As of 2018, the app had 3.7M users and as much as $1B in assets under management.
Another micro-investing app, Stash, built its platform around the promise of empowering users to invest in portfolios that align with their values. This seems built to appeal to millennials, who are 2X more likely than other investors overall to make impact investments.
86% of millennials expressed interest in the idea of sustainable investing, 61% reported making at least one sustainable investing decision within the past year, and 75% expressed a belief that their investments could make an impact to reverse climate change, according to a Morgan Stanley survey. Launched in 2015, Stash had 1.7M clients as of 2018, with an average age of 29 — squarely in the center of the millennial generation.
While robo-advisors and micro-investing apps focus primarily on helping millennial investors grow their money passively, another group of young companies is developing services for those who want to be more hands-on with their money.
Robinhood, for example, is similarly intertwined with the millennial story. The app, which lets users invest in individual publicly-traded companies and funds without paying commission, launched in 2013 with the goal of making investing accessible to people with smaller bank accounts. By 2015, 80% of Robinhood’s user base was made up of millennials, with an average user age of 26. As of 2019, the app is valued at $7.6B, and the company is eyeing an IPO sometime this year.
M1 Finance launched a year after Robinhood with a similar commission-free stock trading model. Unlike Robinhood, M1 offers fractional shares, meaning users can invest all of the funds they transfer to the platform rather than leaving cash on the table. M1 also offers Roth IRA, Traditional IRA, and SEP IRA accounts in addition to its commission-free taxable investment accounts.
Another no-fee investment platform, Zecco, was acquired by Ally Bank in 2016 and became part of the company’s investment product, Ally Invest. The platform offers users the choice between managed portfolios and self-directed trading, charging $4.95 for stock and ETF trades and $0.65 per contract on options trades.
Despite the growing popularity of Robinhood and similar startup platforms, the well-established incumbent E*TRADE still surpasses its younger rivals, with an $11B market cap compared to Robinhood’s $7B.
Millennials are also shaking up alternative investment categories, such as real estate funds, and or other non-traditional investments. In one survey, 83% of millennials expressed openness to alternative investment strategies — a significant increase from 52% of older investors.
In the real estate sector, New York-based Cadre lets high net worth individuals and institutional investors buy and sell commercial & family real estate at lower fees than private equity funds. The company is currently valued at $800M on $133M in investments from Thrive Capital, Andreessen Horowitz, and others.
Fundrise also lets users invest in real estate portfolios, touting historical returns of between 8.7% and 12.4% on its website. The company manages $2.5B worth of real estate and has approximately $500M in equity assets under management.
Cryptocurrency is becoming a more popular investment category among millennials, particularly the upwardly mobile set. 25% of affluent millennials — those who have $100,000 or more in individual or joint income, or have $50,000 or more in investible assets — use or hold cryptocurrency, while another 31% are interested in it, according to the “Millennials with Money” report by Edelman.
Coinbase has expanded beyond its original core service as a bitcoin wallet and retail exchange to offer services including cryptocurrency custody and professional and institutional trading platforms. The company has raised nearly $540M in funding from investors, including Tiger Global Management, Andreessen Horowitz, and YC Continuity, and was most recently valued at $8B.
Circle bills itself as “a new kind of global financial services company,” allowing individuals, institutions, and entrepreneurs to use, trade, invest, and raise capital with open crypto technologies. The company’s Poloniex exchange lets users trade more than 60 cryptoassets, while Circle Pay promises to let users send money “like a text,” free of charge. The site has 8M users and processes $200B in volume.
4. Payments: Mobile is replacing cash
Millennials may prefer cash to investing when it comes to savings, but you won’t find many of them pulling up to an ATM to withdraw cash for spending. Instead, millennials are more frequently managing their payments on their smartphones — and cash is becoming increasingly irrelevant as a result. Fintechs are facilitating the shift, building out new mobile-first payment options that make giving and receiving money as simple as the swipe of a smartphone screen.
63% of millennials complete transactions on their smartphones, and 41% have used a mobile device to complete an in-store transaction. More than 1 in 10 millennials use their digital wallet for every purchase — especially for food, rent, and Uber rides.
One mobile payments company that’s closely connected to millennials is Venmo, an app that provides a convenient way to split bills and pay back cash borrowed from friends. In one quarter in 2018, it processed $14.2B in volume — a 78% bump year over year.
Banking incumbents aren’t ceding the payments space to the tech giants and startups without a fight. Venmo competitor Zelle is owned by Bank of America, BB&T, Capital One, JPMorgan Chase, PNC Bank, US Bank, Citibank, and Wells Fargo. According to company reports, Zelle processed $122B in peer-to-peer payments in 2018, almost double Venmo’s $62B. The app has had its difficulties, though: in 2018, a New York Times article reported that the platform was vulnerable to fraud.
The incumbents may not be overly worried. Banks are still the number one method for peer-to-peer transactions, with $172B transferred in 2018.
The shift to mobile impacts more than just peer-to-peer payments. Mobile point-of-sale payments are projected to hit $370B in 2022 — a 500% increase over the 2017 total of $70B. The number of people utilizing mobile PoS products is expected to almost double over the same time period, from 50M in 2017 to 90M in 2022.
Phone companies have played a significant role in the shift to mobile payments. Apple launched its mobile payments platform, Apple Pay, in the fall of 2014. Google followed Apple’s lead with Google Pay for Android users in 2015. Samsung Pay also came out in 2015 and, according to Business Insider, processes more payments per day than Apple or Google.
Another trend taking shape in the payments space is the rise of virtual credit and debit cards. With online data security becoming a growing concern, virtual cards provide an added layer of security by generating unique card numbers for each individual transaction, thereby limiting the chance of fraud.
Virtual cards are one area of financial innovation where incumbent banks are on the forward edge of innovation. Bank of America’s ShopSafe tool gives users the ability to generate a virtual credit card number for use at a single merchant and set spending limits and time limits for each card created. Citi’s virtual card tool has similar spending limit and expiration date functionality. Capital One offers virtual cards through its online assistant, Eno. Eno works as a browser plug-in and generates virtual card numbers at checkout when users click the button on their browser.
A final innovation in payments with a strong millennial tie is loyalty programs. While cashback programs have historically been associated primarily with credit cards (which millennials have been slower to adopt than previous generations), a handful of startups have emerged that bring this perk to debit users as well.
For example, Dosh is a loyalty shopping app that links with users’ credit or debit card and gives them’ up to 10% cash back on purchases made at thousands of stores and restaurants. Pei offers users cash back in Bitcoin or cash for purchases made at stores ranging from Starbucks and Panera to GameStop and Sephora.
5. Borrowing: Credit-shy millennials embrace PoS lending
Debt is one of the defining details of the millennial generation. The typical millennial carries $42,000 in debt. Fintech companies are turning that number into an opportunity, developing new tech-forward options for millennials to manage the debt they have — and to help them make better borrowing decisions for new big-ticket items, such as home buying.
Incumbent banks arguably have more to lose in the lending category than anywhere else, given how central profits from loan interest are to the traditional banking business model. Now, with a growing ecosystem of startups focused on disrupting lending, one study found that $11B in lending profits could be at risk over the next 5 years.
Realizing this, a growing number of traditional banks are getting into the peer-to-peer lending business, primarily as investors. BBVA, Credit Suisse, and JPMorgan have invested in Prosper, a personal loan platform that offers loans up to $40,000. Wells Fargo is an investor in a similar platform, LendingClub.
SoFi hit the scene in 2011 with the goal of providing a more affordable option for financing education. The company says it saves its members an average of nearly $19,000 when they refinance student loans.
SoFi has since expanded its portfolio to include other forms of lending, including mortgages and personal loans. The company makes money primarily via securitizations and whole loan sales. SoFi has reportedly extended over $30B in total loans.
Another fintech company taking aim at student loans is Credible, which claims to have helped 130K+ people save on average over $13,000 on their student debt.
Digital lending company Affirm is shaping its lending offerings around millennials’ skepticism about credit cards. The company offers personal micro-loans to consumers for small purchases that traditionally would have been made with a credit card. In April 2019, the company announced that it had closed a $300M funding round, bringing its valuation to a reported $2.9B.
The future of personal finance
From banking to budgeting to saving to investing, the money behaviors of millennials have had an indelible impact on the way personal finance has taken shape in the 21st century. But millennials will soon have competition for the attention of startups and financial incumbents — Generation Z.
Born roughly between 1997 and 2015, Gen Z has never known a time without the internet. While they were alive during the Great Recession, they are too young to remember it or have felt its impact directly. But they saw the effect of both the recession and student loan debt on their parents and their millennial peers, and they’re already working proactively to set themselves up for financial stability. 64% of Gen Z have already started researching financial planning, starting at an average age of 13. 77% earn side income through freelancing, a part-time job, or an earned allowance.
All of these factors and more will likely contribute to a very different financial landscape and a different set of financial priorities as Gen Z enters adulthood and takes the reins on their finances. Finance firms will need to watch carefully — and be ready to meet them where they are.
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