Across all industries, the hot question is this: How do businesses attract and retain millennials—the largest generation in American history by a landslide?
Nowhere does this question resonate so much as in financial services. In fact, The Millennial Disruption Index identified banking as the highest-risk sector for disruption. Thus it’s no surprise that community-based financial institutions (CFIs) are moving to get millennials’ attention and keep them engaged.
Yet the numbers behind millennial spending, purchasing power, debt and income reveal a raft of seeming contradictions: immense fiscal muscle as generational force, but alarming obstacles at the individual level. And that understandably leaves financial institutions puzzling as to what to make of it all.
For starters, millennials face serious financial hurdles unlike any generation before them. They have the highest student loan debt of any college-educated group—currently topping $1.3 trillion.
To put that in perspective, a millennial who earns $50,000 per year and pays a hefty 10 percent of their gross income to pay down a $35,000 student loan at 4 percent interest will carry that burden for more than eight years. Now imagine how those numbers pan out for millennials who borrowed far more, and earn much less.
But their colossal debt also means they’re more educated. This spring, an estimated 3.7 million graduates will enter the workforce with an associates, bachelors, masters or doctorate degree—the highest rate in history and one projected to keep growing, according to data from the National Center for Education Statistics.
So clearly, the numbers make for a mixed picture. What’s more, employment statistics tell two different stories. Even though the U.S. unemployment rate fell below five percent in February for the first time since 2008, there are still fewer adult Americans working. In fact, the current labor force ranks as the smallest since the late 1970s, according to CNN Money.
Additionally, wages remain stagnant. Typical take home pay totals roughly the same in 2017 as it did 20 years ago once adjusted for inflation, according to the same CNN Money article.
Here in particular, millennials suffer.
According to Luxembourg Income Study (LIS), millennials’ disposable income totals more than 20 percent below the national average.
As a result, this segment is struggling to establish itself and will reach milestones such as buying a home much later in life than previous generations (if at all). And yet … they will also take the economic baton—soon. According to an Accenture study, millennials’ purchase power is projected to increase 133 percent over the next five years, surging from $600 billion to $1.4 trillion. That’s massive spending power.
But banks shouldn’t assume that means future gains by default. Millennials remain untrusting of Wall Street since the financial crisis of the late 2000s. In fact, 73 percent prefer financial products from tech-driven companies over traditional banks, according to The Millennial Disruption Index.
At 80 million strong, millennials may spend less, but they’re certainly not unsophisticated. Born out of their current circumstances and observations from the last decade, millennials have very specific banking wants and needs—such as no or low fees on accounts, rewards and tools to help them reach their financial goals.
Getting to "no" you: Why millennials ignore credit unions, community banks
According to the 2015 Consumer Banking Insights (CBI) Study, slightly more than half of millennials bank with large, national financial institutions. Why? While nearly 40 percent indicate they prefer to bank with a credit union or community bank, they chose not to because they believe those institutions lack the products and financial tools they want, such as free checking accounts, reward options and personal financial management (PFM) tools.
Additionally, a 2016 Kasasa Explores survey reveals an uptick in general awareness, though only 56 percent of millennials are very or somewhat familiar with credit unions, and 51 percent with community banks: the lowest awareness of all age groups. Unfortunately for community-based financial service organizations, false perceptions regarding products, as well as a general lack of awareness result in lost opportunities.
So what exactly do want and how can CFIs get their attention? The 2015 CBI study found that consumers in general—including millennials—want rewards, not fees. In fact, 93 percent of consumers surveyed indicated that few or no fees were important when choosing a bank, and more than half said rewards were important. Moreover, monthly service charges and ATM fees ranked as the two most hated fees.
Millennials also expect superior and rewarding service for choosing a particular institution. Keep in mind that rewards don’t stop at cash back or returned interest on checking. Rewards can come in the form of helping millennials save money via savings products or an add-on product such as personal financial management, identity fraud protection or even cell phone insurance for doing business with the financial institution. These types of services can strengthen relationships with existing customers and attract new ones via word of mouth.
As for which additional services millennials want most, research points to more financial guidance, according to the 2015 Millennial Money Mindset Report. The vast majority also identify three priorities that pose the greatest challenges: to make enough money, stay on budget and manage debt. With this in mind, CFIs must offer the right products and services to meet these needs.
Millennials are not clueless in regard to their finances: in fact, quite the opposite. In a milieu of stagnant wages, soaring student loan debt and anemic job opportunities that match their degrees, they simply find themselves economically challenged.
That said, this generation has specific financial needs and expectations from their financial organizations. Studies show that they prefer community institutions—but their reluctance to switch from large banks stems from lack of awareness and false perception when it comes to the products CFIs offer.
Thus the assignment list boils down to these action items:
- Provide free, rewards-based accounts.
- Emphasize specific products and services that match millennial needs.
- Provide tools to help manage their debt and reach financial goals.
- And address their challenges personally, with empathy and can-do spirit, in a way big banks can’t.
For all the formidable obstacles—both educational and financial—many, many millennials graduated college with flying colors. They did their homework. They passed big tests. Now it’s time for community institutions to do the same.