Are Digital-Natives an Opportunity for Alternative Lending?

What Does a Quiet Shift in Key Demographics Mean for Both Banks and Alternative Lending?  

As Canadian banks and financial institutions continue to press forward with ongoing digital strategies, including legacy modernization and cloud migration journeys, an important generational shift has quietly taken place over the past few years: Millennials have overtaken Baby Boomers to become the largest generational demographic in both the United States and Canada. It’s a shift that comes with important implications across many industries, but it’s an especially important consideration for banks, as well as fintechs in the evolving alternative lending space. That’s because when it comes to borrowing money—whether it’s a 25-year mortgage to purchase a new home, a line of credit to finance the purchase of a new vehicle, or a loan to kickstart a small business—millennials are now and will continue to be the key generational demographic for borrowing and net new loan demand for the better part of the next decade.

What does this mean for financial institutions that have provided a traditional approach to lending and financial services for the Gen X and an aging Baby Boomer generation? Most notably, it means that traditional financial institutions are under more pressure than ever to deliver lending experiences in a format that millennial consumers expect. Current industry modernization initiatives—including payment modernization, cloud banking implementations, and the proposed adoption of consumer directed finance—are clear evidence of an industry in flux and one that’s adapting to an entirely different consumer mindset. 

While millennials will remain the key generational demographic for net new loan demand over the next eight to ten years, another key demographic change will soon follow. Gen Z consumers will soon begin to age into their early-to-mid-20s. These two digital-native generational demographics combined will undoubtedly reshape the way consumers bank, pay, and access credit. In fact, according to research by Morgan Stanley, “50% to 80% of smartphone-carrying Gen Z members are already using mobile banking today.” 

Key changes in generational demographics are not sudden events—they happen gradually, in lengthy cycles that take multiple years, like the prolonged rise and fall of a decades-long tide. This slow progression has fortunately provided ongoing opportunities for financial institutions to incrementally adjust their strategies and technology to the changing environment—something they’ve continued to do over the years, learning from emerging consumer preferences and making incremental investments in online and mobile applications that make the banking experience more seamless and intuitive. But a combination of recent innovations in fintech, significant underinvestment in legacy core banking systems, and the emergence of a different consumer mindset anchored in changing key demographics have created some unique challenges—and those challenges may translate to important opportunities for fintechs and alternative lenders. 

Are Millennial Banking and Alternative Lending Consumers Expecting More? Or Are They Simply Expecting Something Different?

As key lending demographics change, lenders must focus on delivering financial services in a way that caters to an entirely different type of consumer—one with a vastly different mindset shaped by everything from their socioeconomic positions to their environmental concerns, and from their purchasing behaviours to their lifelong experiences with ubiquitous modern technology. The millennial consumer isn’t a new banking consumer by any means—they’ve carried debit cards, held retail chequing and savings accounts, and explored personal growth opportunities like home ownership—but that doesn’t make this shift in key lending demographics any less challenging or any less significant for banks or alternative lenders. 

Banks have been serving and providing financial services to millennial consumers for over the last two decades. Until now, Canada’s major financial institutions have unquestionably been the foundation of banking for the majority of Canadian millennials, providing everything from branch-based retail banking services to online and mobile applications that have evolved over time, enabling millennials to borrow, save, invest, and make payments throughout their lives. Traditional financial institutions have played an important role. They have provided access to financial services as well as a technological platform and the necessary requirements for millennials to bank. But things are changing. Access to financial services and the necessities of banking may have sufficed for previous generational demographics, but they’re no longer sufficient for the maturing millennial. 

In recent years, banks have quietly acknowledged that consumer expectations are changing, and that those changing expectations are primarily driven by an emerging digital-first, tech-proficient generational demographic. Recognizing that considerable infrastructure and business changes are required in order to deliver next-generation financial services to this consumer, banks and financial institutions have formed and implemented strategies focused on digital transformation—a practice of adopting new digital technologies across an organization to improve business processes, culture, and customer experiences in order to create new opportunities for innovation and meet the changing demands of this evolving market. 

While these digital strategies ultimately focus on reinventing a bank’s financial services for the digital age, they’re also a direct response to this impending generational demographic shift. Digital-native consumers aren’t simply demanding more than previous generations; they’re demanding something different. 

This is a different consumer altogether—one that has an entirely different set of preferences, social concerns, and expectations about what brand should be and how it should deliver its services. It’s a consumer that speaks a different language, a language largely facilitated by intuitive mobile technology and personalized user experiences. It’s a consumer that prefers self-service facilitated by digital experiences and instantaneous text communications to intrusive phone calls and scripted customer service. 

They’re not alone. 

Millennials and Gen Z borrowers and banking consumers combined are now expecting and will continue to expect the same kind of digital experiences that they’ve come to know from big tech brands, like Apple and Google, experiences that have ultimately shaped their relationships with technology. Banks and lenders are no longer expected to be the banks of the past that offered technology as a means of delivering banking services. Instead, they’re more and more expected to become tech companies that offer banking services.

It’s this focus on tech-first digital user experiences that suggests there are immense opportunities for alternative lenders that can offer simple, streamlined online lending experiences that millennials want. Not only are millennials now currently changing the mortgage and home buying market by purchasing homes in droves after waiting longer than the previous generation, but they’re more likely to search for a mortgage online—and they’re also more open to financial alternatives than previous generations. 

Understanding Past Economic Challenges Can Help Alternative Lenders Create Next-Gen Lending Experiences for Digital-Natives

It’s important to understand that, from the perspective of many millennial consumers, years of financial services offered by traditional financial institutions have been marked by considerable personal as well as historical financial challenges. That’s a broad generalization until we look at it in the context of the economic situation this generation experienced as it entered the workforce. Sure, banks have provided the foundation of financial services to this millennial generational demographic during this period, as well, but how have those collective banking experiences affected consumer sentiment for adult millennials? Understanding the historical customer sentiment and financial circumstances of millennials can provide valuable insight into defining an ideal banking and lending experience designed for digital-native consumers. 

Think about the key financial circumstances that have shaped this generational demographic. millennials accumulated a staggering amount of student loan debt in the 2000s, with the average price of Canadian government student loan debt from Bachelor’s degree programs sitting at $22,800 and $26,300 in 2005 and 2010 respectively, according to Statistics Canada. For many, those numbers are much higher. With over $22,000 in average student loan debt upon graduation, a considerable portion of this generation entered the workforce in the years of and following the Great Recession. At the time, this was the most significant economic downturn since the Great Depression where new graduates were met with cancelled internship opportunities and the country’s national unemployment rate peaking at 8.3 percent.  

Without question, repayment of student loans became significantly more challenging and ultimately defined the generation’s first real consumer experiences with lending and borrowing. 

If this economic context that defined the lending experience for many millennial consumers, what role does that experience play for Gen Z? 

Forbes Council Member Alison Netzer captures the effects of this economic context on Gen Z consumers:

“Many in Gen Z grew up during the Great Recession and witnessed its effects on their parents. They watch millennials struggle with student debt, and now some are entering the workforce amid the Covid-19 financial crisis. Their experiences could make them more risk-averse than their millennial predecessors and especially hungry for financial literacy.” (Netzer)

Digital Lending and Alternative Lending Experiences Should Simultaneously Contribute to Consumer Financial Literary 

In terms of technology and consumer expectations, this generational demographic is the first generation of lending consumers that grew up under the influence of the Internet, in an era defined by ubiquitous technology. Technology played an influential role in this generation’s coming-of-age, as both millennials and Gen Z were exposed to computers, videogames, mobile phones, and even social networks throughout their early years and into their teens.  

These consumers understand that financial technology has the potential to educate and inform while simultaneously providing valuable data-driven, highly personalized, consumer-focused services. It’s those expectations that will shape the banking and alternative lending industry. 

Alternative lenders and banks need to recognize that consumer expectations are no longer rooted in the delivery of financial services—they’re rooted in the delivery of financial experiences. Fortunately, when it comes to lending, meeting the expectations of digital natives would translate into significant opportunities for the industry—opportunities for consumers, banks, and alternative lenders.

Sources: 

https://www.forbes.com/sites/forbescommunicationscouncil/2021/02/03/how-millennials-and-gen-z-could-reinvent-the-banking-industry/  (Retrieved August 17, 2021)

https://www.morganstanley.com/ideas/millennial-gen-z-loan-growth (Retrieved August 24)

https://www.gartner.com/en/marketing/insights/daily-insights/gen-z-consumers-embrace-alternative-financial-solutions (Retrieved August 25) 

https://www.forbes.com/sites/forbesfinancecouncil/2021/02/10/digital-transformation-what-the-future-holds-for-traditional-and-alternative-lenders/?sh=240b100972c0 (Retrieved August 26, 2021)