Remember the Age of Inertia in the banking industry? When even the most unhappy consumers would stick with their financial institution simply because it was too painful to move? Well, that’s coming to an end.
Increasingly consumers have greater ability to better track what’s going on in their financial lives. They expect more flexibility with less difficulty in managing their money, and have alternatives that didn’t exist a decade ago. And they don’t mind “fractured” wallets. This combination of forces creates new pressures on banking providers to demonstrate that consumers can find all the “best in show” offerings under their roof.
“Consumers have information and choice at their fingertips, and will find companies who meet their needs and expectations,” says TransUnion in a report. In their assessment, many traditional financial institutions now face “a generational countdown.”
By 2019, Millennials and Gen Z consumers will represent almost two-thirds of global population. TransUnion says their loyalty will have to be earned, and their research points to an unusual source to achieve this.
Giving Consumers the Feeling of Control
“Gen Z and Millennial consumers are more likely to select a financial institution based on whether it offers access to credit monitoring tools.”
The shifts forecast by TransUnion reflect more than just a greater ability to find a new banking provider and make the switch easier.
“Gen Z and Millennial consumers are more likely than the rest of the population to select a financial institution based on whether or not it offers access to credit monitoring tools to help them better understand their credit scores,” says TransUnion. “This type of interactive customer experience has only taken place for the past few years, but approximately one in five consumers surveyed said this was a reason why they selected a financial institution for a loan or credit card.”
Indeed, while studies have indicated growing use of credit by older Millennials as they have matured and formed households, they are wired for credit caution. Same thing applies to Gen Z consumers.
This sentiment is echoed in a report from Mintel Comperemedia, which indicates younger consumers are growing more comfortable with credit card debt but aren’t warming to it the same way prior generations have.
According to Mintel Comperemedia, many Millennials and members of what they call the “iGen” (synonymous with Gen Z, those born between 1995 and 2015) believe that credit cards can be a useful tool, but they are wary of actually using them.
“College loans are one main reason, as these loan payments eat into their monthly budgets, often for years” states Mintel Comperemedia’s report. “Young consumers also prefer to use debit over credit cards, often relying on debit cards to help keep them out of debt.”
This helps explain why their loyalty increases for financial brands that help them manage debt.
“It’s important to help consumers understand their credit scores,” says TransUnion. “In fact, consumers rank this as one of the top factors driving loyalty.” Indeed, three out of five consumers the firm surveyed said that they felt greater loyalty to such lenders.
Years ago, credit scores and credit reports were largely an enigma for many consumers. Even in 2003 when it first became possible to request a free credit report from each bureau storing one’s information, the process could be cumbersome and confusing.
Now, through websites and apps, updates can be nearly as easy as checking tomorrow’s weather. Wikipedia lists 19 different sources, including credit bureaus, financial aggregators, educational websites (e.g., Money Lion, Credit Karma, NerdWallet, and Bankrate.com), credit card issuers and other lenders. Apps — you can dozens from large banks, fintechs, and others — make it easy to check credit ratings regularly and set alerts. There are even a few Alexa “skills” related to credit reports.
Beyond Just Information: Prodding People to Improve Proactively
Some services offer personalized tips and suggestions on how consumers can improve their credit record. A few even help in rectifying errors found in a credit report. It may or may not be necessary to have a relationship with a lender to have access to its ratings service. (Consumers can pay for their own credit monitoring services directly from all three bureaus — TransUnion, Equifax, and Experian. These can become pricey, leading some advice sits, such as NerdWallet, to suggest putting together a DIY approach.)
Paul Siegfried, SVP and Credit Card Business Leader at TransUnion, says that consumers’ increasing fluency with credit reports and ratings is a far cry from where it was 20 years ago. Today, many consumers have a better understanding of their credit information, and they often want to be able to take measures to actually improve it, Siegfried explains.
Some services, such as American Express’ MyCredit, allow consumers to perform “what if” simulations to see how given actions would impact their credit rating. Others give indications of why a score comes out where it does — what factors hurt, which ones helped. Siegfried says such principles of gamification can make an otherwise dull subject — credit scores — interactive, engaging and (gasp!) possibly even fun. For younger generations that generally want “instant everything,” access to such information and tools can have much more meaning than sitting through seminars about budgeting.
In Siegfried’s opinion, consumers’ heightened concern over credit scores is a positive trend, indicating that people are taking a less passive, more participatory role in their financial lives and are actively seeking ways to improve their creditworthiness.
Early signs suggest Gen Z could be a generation that will do its homework when it comes to money. The Center for Generational Kinetics notes in The State of Gen Z 2018 that when it comes to purchasing an item for the first time, 27% of Gen Z consumers will consult at least three reviews, 21% five to six, and 16% will look at nine or more. So the growing desire to be up on credit shouldn’t be surprising. Gen Z females especially delve into money matters before committing.
What Value Does ‘PFI Status’ Have Today?
Financial services executives may continue to hope for higher cross-sell ratios, but the TransUnion report underscores how the modern consumer’s wallet has become increasingly “fractured.” Share of wallet is an increasingly fragile asset.
Geographical proximity, local branches, and the concept of “one-stop-shopping” are less relevant to consumers today, who are free to choose among the best options with a few taps and swipes on their handheld device.
TransUnion reports that consumers under the age of 25 are increasingly opening credit accounts with nontraditional lenders. TransUnion’s 2017 figures reveal that fintech lenders accounted for 36% of personal loan balances across all demographics.
“Consumers feel empowered to find and work with companies that meet their needs and understand their goals,” the report states. “In prior eras, lenders maintained control and focused on profitability. Now, the balance of power has shifted to the consumer.”
Fintechs understand this. They are constantly innovating new tools and features that empower consumers with greater insight into their financial lives.
“Technology enables the consumer to be in control,” observes TransUnion’s Siegfried.
On the bright side for traditional banking providers, TransUnion’s research indicates that two out of five consumers are more likely to open a new credit product with a lender with whom they already have a relationship. However, among Gen Z consumers, the report indicates that this trend begins to break down. Already, having a relationship with a lender is much less likely to lead Gen Z consumers to choose them as a source of credit.
“By 2019, Gen Z will comprise 32% of the global population and will be entering the credit market in droves,” TransUnion’s report states. “If lenders don’t adapt to Gen Z’s preferences, they risk missing significant opportunities to grow their revenue and customer base.”
Those preferences include strong mobile experiences, fast credit approval decisions, and, somewhat counterintuitively, strong fraud prevention. The study indicates that Gen Z consumers expect banks to find ways to pass “good” applicants quickly.
TransUnion’s Siegfried says financial institutions have to rise up and meet Gen Z’s expectations quickly. As he explains, his own 19-year-old son expressed frustration that he had to keep identifying himself as he worked with a financial institution’s app and navigated around its digital offerings.
“Why doesn’t it know me already?” Siegfried’s son griped.
Yeah, we’ve all been there…
Institutions need to eliminate silliness like this. In a world where the vast majority of consumers are Amazon Prime members, Siegfried says core systems that don’t make such handoffs seamlessly fall way short.
Increasingly, loyalty will be on the consumer’s terms. That means having digital systems that deliver the CX they expect.