Published in Banking Insight, 2012. Original article here.
Banking and boomers, generation X, Y, Z and beyond
As the digital natives are growing up, banks are discovering the generation gap is bigger than usual. Soon the baby boomers will no longer be the biggest customer group, meaning banks are facing the pressing challenge of catering to the unique tastes of the millennial generation.
Rapid advancements in technology are changing the way we interact with each other. The more we can do over the internet and via mobile phones, the more we come to expect the same convenience when conducting business. For banks, this means heightened expectations for how people want to manage their money and interact with their financial advisors.
The banking industry has dealt with generational changes before, but the digital natives of Generation Y (Gen-Y) have brought about a unique set of challenges. In essence, the group of banking customers now aged between 18 and 30 are more different than usual, meaning banks have to step up their game.
“Gen-Y is so different from their predecessors that banks must understand their needs if they want them as their customers. Banks will need to use an approach distinctly different from anything they have been accustomed to in the past,” concluded technology group Oracle in its report on Gen-Y banking, developed in collaboration with the European Financial Marketing Association. “The imperative is that as the economic power of Gen-Y expands, its members will change how financial transactions are conducted, together with patterns of spending, saving and investments.”
Boomers, and their “silver generation” parents, currently make up the biggest segment of the banking population. Boomers are people born between 1945 and 1960, followed by Gen-X, born between 1960 and 1979. Gen-Y is the millennial generation, specifically those born between 1980 and 1992, and it is the gap between this group and its predecessors that has got banks worried; this is the first group of customers who were raised on the internet. And like it or not, Gen-Y will supplant the older generation as the largest customer segment by population by the end of this decade, according to research by technology group Cisco.
What millennials want
“We live differently now. Together, technology and customer demand are driving a complete transformation of how banking is done. There is a growing global tribe of consumers who want anytime access to services and banking is no exception,” said Steve Bertamini, chief executive officer of consumer banking at Standard Chartered. A personalised experience sits at the heart of these expectations: Gen-Y wants to be treated as individuals.
Technology is the backbone of this change. Gen-Y is comfortable using online forums to communicate and solve problems, they like talking to customer services representatives in company chat rooms, they like receiving information via video, and they like to be able to access all these things on their own time, either on their computer or their mobile phone.
“Banks have a tremendous opportunity to provide Gen-Y and Gen-X consumers with personalised advice and value propositions. In fact, retail banks that execute correctly will become financial services providers of choice for these consumer categories,” concluded Philip Farah at Cisco IBSG, in his report on the next growth opportunity for banks.
Farah has outlined three key elements for banks to meet the needs of Gen-Y customers: a mobile-enabled online interface for personal finance management emphasising a holistic view of the customers’ needs; a video-centric advisory model that allows customers to interact with bank staff; a bank-moderated community or social networking venue providing virtualised advice on demand.
While offering extensive online banking facilities will be a great start for banks to appeal to young customers, research from global professional services group PricewaterhouseCoopers (PwC) shows there are significant opportunities for those willing to take it a step further. The majority of respondents in an international survey were willing to pay up to £10 a month for digital banking services if they perceived them to offer both convenience and value. Features of particular appeal include social media notifications, and an electronic wallet for loyalty cards where accumulated points were converted into cash, according to PwC’s report, ‘The new digital tipping point’. The future’s digital features will, according to PwC, be focused on innovations in user experience; mobile devices and networks; social media and collaboration; customers analytics; and channel integration.
A partnered approach
“The growth of digital has removed key barriers to market entry, including the need for large branch networks, customer inertia and brand trust,” said Nicola Shield, partner in the Northern retail and commercial banking group at PwC. “Because of this, banks need to consider strategic acquisitions or partnerships with digital innovators to secure their long-term position and market share. Incumbents in developing markets, where there is a larger share of unbanked consumers, will experience the greatest threat from new players if they do not improve their digital offerings.”
While many banks have already woken up to the fact that the up-and-coming generation of customers want a different experience, this is a far cry from being able to provide this in the manner expertly suited to meet their needs. Part of this is because it is not necessarily the most experienced bank executives who can best get into the heads of young adults.
“Engaging younger employees more actively may help provide the necessary reinforcements to accomplish this,” said Steven Hatfield of global professional services group Deloitte. In his report on Gen-Y banking, Hatfield has recommended leveraging key qualities of Gen-Y employees such as innovation, tech savvy, enthusiasm and creativity, in order to connect with younger customers. This view is echoed by PwC’s report, which emphasised the importance of connecting with external experts in technology, telecoms and other non-traditional banking providers; “Identifying partners to acquire or help deliver the vision becomes of critical importance.”
Scratching the surface
Standard Chartered has done just this, by handing over the development of its mobile banking platform ‘Breeze’ to a small team of mobile- and social media enthusiasts: “The best ideas will not necessarily come from the top, or even from bankers,” explained Steve Bertamini. “It also means changing the approach to the consumer, offering financial services in ways that matter to people’s lives.” An example of this is how Standard Chartered’s ‘Wishlist’, a savings feature within ‘Breeze’, has been integrated with Facebook and bulk discount aggregators, meaning people can share savings goals with friends and receive discounts from companies. Furthermore, ‘Breeze Living’ is Standard Chartered’s augmented reality smartphone application where users can capture and share merchant discounts while on the move.
In Australia, UBank is using a Facebook-presence to launch new product ideas and source user opinions. Collaboration is encouraged via the ‘Click to Chat’ tool, with other features available on the social network include savings tips, discussions and links to instructional videos on YouTube. Japan’s Jibun Bank is taking it even further by using the mobile channel as its primary means of contact with the consumer, allowing customers to open accounts using just their phone and its camera. “The point is that innovation is now about adding value to customers’ lives, not about what products we can offer,” said Bertamini. “In many ways, we have only just scratched the surface on how banking is going to change.”
While their earning power is not as great as their parents yet, capturing the attention of Gen-Y, and the upcoming Gen-Z, is important as they are now at an age where they are forming banking relationship they may keep for the rest of their lives. But having said that, the younger generation is more likely than ever to change banks if they are not happy: 36% of Gen-Y customers are planning to change banks due to increased fees, while 33% will leave if another bank provides solutions that would improve the customer experience, according to a survey from business management solutions provider Intuit Financial Services.
Past generations have been reluctant to swap banks, but as this is changing with Gen-Y, financial groups will need to provide continually fresh offerings if they are to keep this demanding lot happy. Furthermore, Gen-Y’s prolific use of social media platforms makes them extremely well connected, meaning they will quickly spread the word of a negative (or positive) experience. The good news is that customer service is a major attraction also for Gen-Y, a penchant they very much share with the Boomer generation.
The power of Boomers
“The Boomer generation likes to have a relationship with their banks, to meet with a friendly face and to speak with people who use their names,” said Suzie Mitchell, founder of Mitchell PR, a US public relations agency specialising in understanding Boomers.
While preparing to meet the needs of Gen-Y, banks should not forget the influence the Boomers still have; they act as advisors both for their children as well as their ageing parents. And it is a mistake to think that Boomers are not technologically savvy, asserted Mitchell: “78% of Boomers are online, and out of these, 55% bank online. We have to remember that Boomers grew up with technology too; Apple computers was not even invented when they were in college, meaning they have been using this technology since the early days.”
And teenagers are not the only ones eager to own a handy smartphone; as mobile devices and tablet computers become increasingly intuitive, Boomers are happy to download apps and use them for shopping. Ease of use is key to make the internet accessible for Boomers, especially smooth site navigation, logical placement of key information, uncluttered presentation and an overall sense of trustworthiness.
The main problem, however, is a concern over safety and privacy. While concerns about ‘Big Brother’ watching your internet activities will be a deterrent for some, the fear of online fraud remains the key fear for most Boomers. But Mitchell believes most older generation banking customers would be happy to use modern features if they were properly reassured they were safe: “Boomers are very adaptable.”
Banks have become better at protecting people as online banking technology has matured, but equally important has been to teach people about safeguarding their details online. “Better public information about computer safety could save huge numbers of people the hassle of having their personal details stolen,” said MP Andrew Miller, chairman of the UK House of Commons Science and Technology Committee. While determined fraudsters will still find ways, the committee concluded the internet is a “reasonably safe place” as long as people take “sensible precautions”.
While Boomers still pack the biggest punch in terms of spending power, the global financial downturn has prompted changes in their spending patterns that mean banks have even more reasons to turn their attention to the upcoming generations.
“Although banks have invested heavily in meeting the financial needs of Boomers, this segment has seen its financial prospects dim with the recent collapse of asset values. Many Boomers are pushing out plans to retire, revisiting their portfolios and spending less,” observed Cisco IBSG’s Farah. “Although increasing restraint and financial anxiety on the part of Boomers do not necessarily denote trouble for banks, interest and fee income associated with older consumers is at greater risk than in the past due to a decreased appetite for new loans and the coming transfer of wealth to younger generations.”
Meeting the challenge
The question now is whether banks are adequately prepared to meet the expectations of Gen-Y. Not everyone is convinced that this is the case: “Industry leaders are generally misunderstanding the profundity of this generation gap,” said Jim Van Dyke, president of research group Javelin Strategy & Research. Gen-Y and Gen-X will be tied in terms of income by 2020, on Javelin’s estimates; “The mobile, payments and financial services generation gap will cause many banks, payments firms and technology vendors to play catch-up, or simply miss out altogether on crucial market opportunities.”
Banks are facing a choice between the old, proven ways and the untested future, meaning new entrants who ‘get it’ could find this is their moment to undermine the incumbent providers. Some banks may view the Gen-Y trends as a distraction, risking alienation from the future customer base: “The victors will be those who recognise the changing ecosystem and set out on a clear digital vision for securing customers’ relationship primacy,” concluded the PwC report.
There is however a gap between understanding that something needs to be done, and knowing what that something is. Choosing the right technology and the right partners will be a key challenge for banks, which are typically large, complex organisations not normally known for their innovation or speed-to-market.
“In the future, banks will have to become serial innovators, move with the urgency of start-ups and look for ideas everywhere. The task is not only to meet customers’ needs but to capture their imagination,” said Standard Chartered’s Bertamini. “As I see it, the changes underway in technology and consumer demand represent not so much a threat but a great opportunity for banks to move to an unprecedented level of closeness with the customer. If we embrace it now, more than ever, we have the chance to make banking a true enabler in people’s lives, helping to change the industry for good.”