With a strong 2.3 billion population worldwide, millennials are the largest generations and yet, with 2.45 trillion dollars of combined annual buying power globally, they are as powerful as their counterparts’ boomers and Gen-X. With this amount of spending power, millennials are a force to reckon with, especially in the financial services market.
But when it comes to financial services, we also must note that this generation has also grown up against a backdrop of austerity and financial uncertainty, meaning that young people—and their cash—are pulled often in opposite directions between consumption and aspiration and wanting to play it safe. According to research by investment banks, millennials also tends to be more burdened with debt and asset-light than their parents' generation, making them more fiscally conservative. This generation is also extremely tech savvy and price conscious—a clear signal to companies looking to make money from this generation with tech-savvy retailers beating more traditional retailers, such as department stores. And when it comes to finances, there are several recent surveys that suggest millennials are pretty savvy when it comes to getting on top of their finances – they tend to save, they’re thoughtful about taking on debt, and they show a higher degree of engagement with their finances compared to other generations.
So, it is necessary for the current financial services market to cater to this booming generation in the way they prefer. This is important because they’re actively staying on top of their finances and accessing their financial institutions regularly – an average of 8.5 times a month. In this article, we will focus mainly on lending market and how it is changing, mainly, what lenders really need to do/innovate to cater to millennials. More importantly, how these megabanks can achieve this feat of staying ahead technologically and in effective manner.
Earlier this year, Wells Fargo announced their ‘multiproduct’ offer in lending space and touted it as their change in focus towards customer-centric from product-centric. This is an end-to-end digital product and would allow consumers to apply for and establish their overall credit limit, a singular total for all borrowing, and then allocate that credit across a range of different products, instead of making consumers apply for individual loans or credit cards separately. For example, someone eligible for $30,000 in unsecured credit who is planning on renovating their house might choose to allocate $15,000 to a credit card and $15,000 to a personal loan. This whole application process is designed to be completed in five minutes. This is just a small example about the massive shift that has been happening in this industry, in perspective, processes, and policies — requiring strategic alignment and coordination across multiple lines of business, something that usually stifles innovation at banking providers of all sizes but specifically megabanks.
A typical generalised lending product is now changing into hyper-personalised products with the amount of data that is available with each bank about their individual customers. This new alternative lending methods offer number of advantages. For the users, it improved customer journey by faster processing times and lesser paperwork, faster credit, and lower interest rates. For the banks, the quality is improved due to data driven decisions, low operating costs, and better customer engagements.
Some of these change in thinking by the large banks can be attributed to growing competition from innovative FinTech companies. Millennials were attracted by FinTech start-ups, such as LendingClub, SoFi, etc when the large banks were reluctant to borrow them money. Credit unions and smaller banks were also lagging at attracting this segment. But now, the large banks are catching up looking at the potential and began to attract millennial borrowers.
The biggest advantage the large banks holds is that they are more successful now at cross-selling products to aging millennials. With the competition from traditional banks open for millennials, it directly puts pressure on FinTech companies, lending platform margins. Still, some aggressive FinTech companies do tap into part of this segment by taking risks, for example, SoFi doesn’t look at your credit score for lending you, instead they look at your financial history, your spending, etc. to give you loans. This growing competition from FinTechs drive innovation for the large banks and open new avenues that they were ignoring for quite some time.
Though megabanks are successful at cross-selling other products to millennials, they are not so successful at doing so in the lending space. The real problem the large banks are facing are that, they are not much innovative at attracting their millennial consumers here. What was successful for generation x isn’t working for millennials. The traditional way of loan processing makes the millennials to go back to FinTech start-ups, even though they depend on large banks for other services. This lack of innovative products of what costs the large banks most. But the problem is innovation cannot happen suddenly. There are lots of questions to be answered to make innovation happen like What is possible with the technology today, will it be viable at the marketplace and most importantly, would that be desirable to users. The process of finding answers for the above are costly and time consuming.
If one has enough time and money, then they can start with establishing an internal innovation or R&D team to get a start. Alternatively, money can be used to invest in existing players in this space in the hope that they would grow and will become a part of us someday. And if you have abundant money, they can always build their own lending products or acquire a successful player from the market and integrate with their existing line-ups. But the scenario today is that all the major banks are constrained by both time and money.
But, there is an easier way out which is less time consuming and much affordable for the large banks to tackle the challenges of new, small, and successful players to attract millennials. This is where the large banks can make use of the experience of IT solutions providers like HCL. These providers offer end-to-end products using existing technologies and solutions from these providers are less time consuming and much affordable than other options available for these banks. The main advantage of the lending solutions provided by these vendors are that they have successful existing models that are affordable, reduce the cost and time, and more importantly highly adaptable. Risks are shared, and they offer enhanced future regulatory compliance as the market continues to evolve. Modernizing the age-old processes for the millennials world is the need of the hour and the way to do things economically and efficiently is to use the established solutions providers in this space.