How can traditional banks win the battle for Millennials?
According to a three-year study by Scratch/Viacom Media Networks covering 10,000 millennials (people born between 1982 and 2000), 71% of them would rather go to the dentist than listen to what banks say.
The same survey reported that all four of the top banks in the U.S. are among the 10 “least loved” brands, and a third of millennials believe they won’t need a bank at all in five years.
Should banks be worried?
The short answer is – Yes. Millennials already form 25% of the workforce in the US and account for over half of the population in India. By 2020 they will form 50% of the global workforce. In the U.S. they are already the largest living generation surpassing the baby boomers, and by 2025, they are expected to generate 46% of all U.S. income, according to a survey.
Based on these numbers, clearly millennials represent a massive opportunity for lenders, albeit with serious challenges. One of their defining characteristics is their use of technology and affinity with the digital world. They have grown up with broadband, smartphones and social media. They expect instant access to information and have very little patience. The ‘always-on’, automated and hyper-personalised world of the Internet and mobile devices has created a new set of expectations in their minds.
About 67% of millennials now use mobile banking according to a study released recently by the Federal Reserve. Digital offerings are a key reason why millennials choose a particular bank. A recent survey showed that 82% of millennials would make a banking choice based on the bank’s online services. In short, they are looking for financial services that are as tech-savvy as they are.
So where would these young, digital-natives go for loans and other banking services? With their digital orientation, it is logical that they will also shop for their loans online. It is no surprise that they are interested in newer, non-traditional financial services (Fintechs). In fact recent research suggests that millennials are ten times more likely to use P2P lenders than people who are 50 plus. Most alternative lenders are based online, which makes them easily accessible to millennials. Their application process is completely streamlined, with little or no paperwork, and the loans are disbursed fast – in days or hours. Platforms such as Prosper and Lending Club provide quick and easy access to finance, without the hassle of the traditional loan application, and customers don’t need to have built up a long credit history. The idea of waiting for days or weeks to hear from a bank whether it will approve their loan – or whether they’ve submitted all the correct paperwork – simply isn’t part of their worldview.
With Fintechs having made quick inroads, banks will to have to work hard to regain this segment of the market. So what do they need to do?
A recent study by Telstra on the mobile financial services application behaviour of 30,000 millennials across eight markets – Australia, Singapore, Indonesia, Malaysia, Hong Kong, China, Britain and the U.S. provided some good news for incumbents. When asked which types of organizations they trust with personal information, 76 per cent of millennials nominated banks and no other provider came close.
This ‘trust capital’ is a major competitive advantage for the traditional financial institutions to leverage but trust is perishable. Lenders need to evolve from a traditional approach to one that addresses the unique traits of this demographic. They need to make the most of this trust through the design of products and services that integrate seamlessly with millennials’ lives, which would enable millennials to make their decisions quickly and easily without leaving their digital eco-system.
Banks need to recognize that one of the biggest differentiators for P2P lenders is the online interface and the customer experience the platform enables. The lending process is simplified and streamlined – as all of the process is done online, borrowers can log on to get real-time updates throughout the approval and funding process. A customer experience tailored for today’s tech-savvy customers and omni-channel environment is therefore an essential ingredient in staying competitive.
To exceed the high standards set by Fintechs, banks need to focus on building a strong digital foundation. This means re-engineering and integrating back-end systems to enable next-generation online and mobile experiences. Lenders should therefore be investing in the latest technology to streamline customer interactions while taking advantage of real-time data to offer exceptional customer experiences. With speed and convenience at the top of millennials’ agenda, banks need to use capabilities such as workflow-based automated processing, comprehensive credit scorecards (integrating non-traditional data sources), analytics based decision making and self servicing.
Traditional banks that transition quickly to digital will be well positioned to capture this growing business segment. The others who are not nimble enough, who do not embrace digital technologies and are unable or unwilling to become more customer-centric, could lose about 35% market share to the new breed of lenders.