This post by Nataliia Pelykh, CFA, was originally published on CFA Institute's Enterprising Investor.
Are you still figuring out millennials? Or do you plan to in the next few years? It might already be too late.
Investment professionals have been overwhelmed in recent years with tips and tricks on how to win the loyalty of the millennial generation. Yet time flies, and now the oldest members of this mercurial cohort are approaching middle age.
Today another generation is emerging that deserves our attention: Gen Z.
Born after 1996, Gen Zers grew up online and adore chatting, gaming, and social media. On average, their attention span is eight seconds, four seconds less than their millennial counterparts, so they don’t tend to stay put in any one application or platform for very long. Moreover, as digital natives, they don’t want to deal with cash: It’s not really tied to their daily reality. After all, you can’t spend it on Fortnite or anywhere online.
That’s why they represent such an opportunity for fintechs and are a critical part of the sector’s future consumer base.
The traditional banks vs. fintechs and neobanking distinction may be central to the industry, but it isn’t for Gen Z. Even its oldest members are younger than Amazon. Gen Zers were born into technology and have never lived without it. They see no clear distinction between banks, fintechs, and neobanks — these are all familiar institutions that they have grown up with.
So now that Gen Z is on their radar, how are fintechs targeting it?
Pixpay and Greenlight have given kids platforms to track their savings and their parents oversight of their budgets. Another company, Zelf, created some buzz by offering regular banking transactions through messaging services. Step, a US-based start-up, also appeals to teens by providing no-fee bank accounts and easy peer-to-peer transfers. And these are just a sampling of fintech’s Gen Z-focused offerings. There are a lot more out there.
Previously, young people comprised unprofitable business segments of larger financial institutions. No employment, no higher education, no business — no available source of income. So financial institutions sought to attract customers at later life stages: marriage, first job, university, etc. Now the trend seems to be changing. These days parents want to teach their kids to manage personal finances wisely as early as possible. The COVID-19 shock will likely amplify this inclination. And fintechs might come in handy to help boost young people’s financial literacy.
And it’s not just the parents’ outlook that is changing. After witnessing the economic hardships of the Great Recession and the pandemic — seeing their moms and dads lose their jobs or struggling in the job market themselves — Gen Zers are destined to become more cautious about their finances. They will likely treat savings as serious business and make sure to have an emergency fund so that they have a cushion if they lose their job. Their views on how to make money may shift as well. The recent crisis may teach them the benefits of self-sufficiency and not being dependent on government support.
All these developments should only further increase Gen Zers’ value for fintechs. Indeed, the COVID-19 pandemic may have created a generation-defining moment for the industry. How fintechs appeal to Gen Z now will have a lasting, maybe a defining impact.
Currently, the primary challenge of the fintech space centers around trust and reputation. Traditional banking institutions have the advantage with their physical branches and the brand images they have cultivated often over generations. And Gen Zers constantly check social media and user reviews and feedback, so they immediately spot reputation-damaging issues. Now when so much activity occurs online, users pay much more attention to service quality and support. So doing things the right way now could translate into great growth potential and help ensure a fintech’s future.
But while the opportunity is immense, many unanswered questions remain.
The primary risk for Gen Z-targeting fintechs? Long-term retention. Will a teen entering college keep the same account they used to track their allowance money back in grammar school? Probably not. But that teen will likely prefer a new banking player to a traditional financial institution. So cross-systems integration and shared economy concepts that support smooth transitions without high switching costs will be essential.
There is another challenge: Gen Z’s comparatively low purchasing power undermines the fundamental revenue model for fintechs. To mitigate this risk, fintechs should look to bring value to both parents and children, compensating for Gen Z’s low spending levels through the parents’ income. The monthly subscription fee charged by some market players is one good example of how businesses can monetize on this strategy.
As financial services digitize, their customers will grow younger and younger. These kids will be much more likely to place an extra dollar in an app on their phones than in a traditional piggy bank. So fintechs need to take steps now to make sure they have a chance to be that app.
