Millennials: Challenge to Banks
Around the world the banking industry faces a challenge: millennials (born between about 1982 and 2004). The problem? Millennials seem to hate banks.
According to a recent study, 71% of millennials would rather go to the dentist than listen to a sales pitch from a bank. They think that banks are inconvenient, intimidating places, with off-putting monumental architecture and security guards. Why go to the bank for cash? Why not simply download a peer-to-peer banking app like Venmo or Square and split the lunch bill with your friends?
Banking is ripe for disruption by millennials and other tech savvy early adopters who don’t care about banking regulators or investment funds.
Banking has been slow to adapt to the needs of young people by offering products they actually want and need. For instance, instead of focusing on checking accounts, mortgages and car loans (millennials ask: why not just use Uber?), banks should lead with a collaborative app that lets customers share their purchasing experiences. Or they should sponsor special events that highlight how the bank helps the environment. Banks have started down this path, for example by providing apps that help to manage investment portfolios. But there is tremendous, untapped opportunity for banks that can broaden their focus from aging baby boomers to include millennials.
Banks can do well with millennials if they provide the right kind of customer experience. This does not mean a personal relationship with a concierge banker who is wearing a suit. The starting point for millennials: everything has to be done via a mobile phone. They don’t want to talk to another human being while they’re banking. They don’t want to drive up to a kiosk. They expect money transfer to happen simply, and in seconds.
To appeal to millennials, banking products must be simple and not require a degree in finance to understand. They should be designed around, not in spite of, millennials’ desire to collaborate and socialize, Venmo’s popularity, for example, is based on its connectivity with Facebook and the built-in simplicity it offers to split the cost of meals and other social events. When someone makes a purchase with Venmo, their friends get to see what they are doing and express their opinion on whether to get a currywurst or a döner kebab.
Millennials also care very much about security, even if they don’t know the EU’s latest deposit guarantee scheme. A recent survey by VocaLink reveals that most millennials in Germany and Italy would prefer to use mobile payment technology from PayPal over all other options because they feel comfortable with a company that is familiar to them. They know all about hacking and phishing, so they expect bank-level security and encryption. Features like email and SMS notifications of password change attempts are an absolute must. Apps they like offer an extra level of security with a pin and Touch ID.
Given this concern for security, banks should want millennials to see them supporting a limit to a user’s loss liability related to P2P services. If a young person’s paycheck has vanished, even if it is due to user error or an easy-to-hack password, a live person better be available by phone — with the phone number easy to find on the banking service’s website.
Banks might choose to see an industry initiative like Payment Services Directives (PSD) 1 and 2 through a millennial lens. After all PSD lets an online retailer like Amazon execute a transaction directly with a consumer’s bank account, without having to first go through a debit or credit card. PSD will also let consumers choose (and millennials do like to choose) to use an app that aggregates all of their financial services in one place, even if they are from different banks. For example, a consumer could see an aggregation of their Barclays, Lloyds, and Santander accounts. But there is also a risk here: millennials are quick to switch brands if they are disappointed. This kind of aggregated view of their funds could actually lead them to switch back and forth between banks or financial data consolidation hubs.
Peer-to-peer (P2P) banking has experienced enormous growth, with P2P cash transfers and remittances topping $1 trillion annually. There is still room for even more stunning growth. Currently Venmo and Square require that their customers link their accounts to a credit card, debit card, or a checking account. But it is already possible to have a paycheck direct deposited into a P2P account. The time is not far off when old line firms like gas and electricity companies start to accept payments by P2P services and landlords get rent payments directly from a P2P service. When this time comes, banks will face a real challenge to retain their millennial customers.
The banking industry needs to adjust — quickly — to what millennials want. Banks need to act now to offer a wide range of P2P and other mobile-based services that fit millennials’ lifestyles and buying preferences. It won’t be long before this distinctive cohort comes to dominate the market for consumer banking services.
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