Today’s customer service models are being challenged by new generations and require urgent review. The demands of digital natives differ significantly from previous generations and will fundamentally change financial services.
i.AM Innovation Lab August 2019
This essay contains our insights about millennials, the generation of mid-twenties to mid-thirties, who also became known as the Digital Natives. We engaged in in-depth discussions with millennials that described themselves as financially literate and such that saw themselves as financial illiterates. Moreover, all interviewed millennials held a university degree and expected themselves to have a high future income. This group is particularly interesting because although it will make up a rather small part of the population, their share of wealth will likely be relatively large by comparison.
In short, the most important findings of this essay are that a paradigm shift is taking place. A change from striving for more money to fulfil a purpose towards searching for a purpose within the usage of money. At the same time, it is secondary to the millennials how much their investment grows. They want more than just bringing their money to the bank and hoping that it will increase.
Another crucial finding is that the millennials we talked to don’t seem to have an actual financial goal. They either don’t want to deal with money in the future or picture themselves not having to deal with money. The financing of present and future consumption is what counts instead. Moreover, the usage of things is more important to them than to whom the things they’re using belong to.
This lays the foundation for capturing the current situation and sketching how products, business models, and distribution channels could change. This essay is both meant to provide an overview of this new customer group as well as to spark ideas for actions to optimally serve them.
How Millennials think
The generation born between 1983 and 1993 has many names. Digital Natives, Millennials or Generation Y are some. It is a generation that grew up in a world of fast and radical societal and technological change. This, among other things, entailed the formation of the European Union, the usage of a common new currency and being able to work visa-free within Europe. The same generation also witnessed the commercialization of the internet, the emergence of smartphones and the spread of massive digital social networks. All this change has left its mark.
While prior generations wanted to increase production and thereby welfare at any cost or maybe didn’t know the whole extent of these costs, the millennials have a different approach. Now that the true costs are known, it feels growingly difficult to look away. Many millennials are strong advocates of socially and ecologically sustainable products, which is reflected in how the offering in the food and clothing sector changed. And now it seems that the same change is underway in financial matters.
We had exciting conversations with representatives of this generation. In those interviews, we found that they are likely to fundamentally change not only the products, but as well the business models, and distribution channels of the financial industry.
The ‘No’-Goal Goal
The hedonism of the millennial exponents we talked to, showed itself in their consumption behaviour. Although many of them just entered the job market and their high ridge is not overflowing with money many reported to have travelled the world (and wanting to see more) and to live a lifestyle in which they can’t think of anything they want, but can’t currently afford. At the same time many were repaying some kind of debt or faced large initial expenses such as furniture for their own flat.
The needed money for these expenses that exceeded their income was often taken from a saving account their parents set up when they were still kids. This means that instead of limiting their consumption, millennials ‘borrowed’ money from themselves to be able to facilitate their lifestyle. This behavior is commonly known under the economic concept of ‘consumption smoothing’ that many millennials adhered to either knowingly or unknowingly. This concept states that there is an optimal quantity of consumption which translates into a maximized utility: too little or too much results in suboptimally low utility, hence, it should be optimal to strive for the same amount of consumption all the time.
Interestingly, the interviewed millennials reported that while they don’t expect their personal and future family consumption to grow significantly, they expect their household income to grow considerably. When asked whether they pursued any financial goal, the response of both financially literate and illiterate millennials was essentially the same: not having to deal with money. However, the motivation was different. While the literate group wanted to have enough not to think about it anymore, the illiterate counterpart showed such an aversion towards financial topics that they didn’t want to be bothered with it.
In the case where their income exceeds their consumption needs, most millennials except for some reported to put it on the savings account because they didn’t know what else to do with it. Investments were scarce. The financially literate among the interviewed either conservatively invested their money because of the prevailing exceptionally low interest rates, which can easily result in a negative return due to inflation. The illiterates, in turn, often felt like investing equates to gambling, which they didn’t approve. However, a common factor was that both felt that they weren’t presented with the ‘right thing to invest in’ yet.
This finding stands in contrast with the current prominence of goal-based investing in the industry. For this discrepancy we see three possible explanations. Firstly, it could be that we happened to only talk to a nonrepresentative subgroup of millennials. Secondly, goal-based investments could be something particularly appealing to older generations, but not to millennials or thirdly, it could be that the notion of goals is broader for millennials and to some extent latent. Regardless, we will engage in further research to clarify this.
Meaningful > Optimized Investments
Both millennial groups stated that they will likely turn to increased investment activity with growing income even if they didn’t enjoy dealing with money. However, we noted a fundamental and clear paradigm shift in both groups.
Instead of striving for increased wealth and looking later how this could fulfill a purpose, both groups exhibited a strong desire to first search for a purpose that they can serve their money with. Whether and by how much that money grew through the investment was secondary, especially for the financially illiterate group. This is in line with the prior finding of not having a specific financial goal other than being able to comfortably secure their only slightly increasing consumption.
Many of the interviewed millennials reported that it is crucial for them to know where their money is flowing exactly. Equally important was to be transparently informed about which services they pay for, how much and why. Moreover, both the financially literate and illiterate millennials reported that they felt a strong informational asymmetry between them and the ‘financial world’. They also stated that the most important quality to bridge that asymmetry was trust.
The place where trust is most present for both millennial groups is in the family. Unsurprisingly, this is also the place where millennials currently are receiving – and in the future reported so seek – their financial advice from. This trust is built upon the best interest of the parent for their child. Associating a particular experience further strengthens this trust. Whether the parent, which was often explicitly mentioned as the father, was literate in financial matters or not was at best secondary.
Ease of use vs. Morality
At the same time, scepticism is what both millennials groups have when it comes to banks and their employees. Moreover, the financially illiterate group said that they didn’t really understand what a bank does and that they often didn’t feel fully informed by banks. By how much this picture is shaped through news or the recent financial crisis remained unclear.
These feelings and views are clearly reflected in the attitude of millennials towards banks. Every interviewed millennial reported that it is more a ‘having to use’ rather than ‘wanting to use’ a bank and the majority of both groups stated that their last bank visit was either some years ago or so long ago that they couldn’t even remember. Most of the millennials are still with the bank where they had their first account. However, this connection is very fragile and according to both millennial groups, only existent because of the high switching costs and the lack of alternatives. All of the interviewed claimed that the banks in the market didn’t offer anything distinguishable.
However, when asked whether they would feel comfortable entrusting their money one of the GAFAA (Google, Apple, Facebook, Amazon and Alibaba) tech giants, many of the financially literate and illiterate millennials alike faced a conflict that is indicative for this generation. They distrust the GAFAAs because of their ‘business model with personal data’ and their ‘recent privacy issues’ that were covered in the media.
However, contrary to the banks, the tech giants offer a certain convenience that creates a moral conflict for the millennials. Both the financially literate and the illiterate group voiced the concern that although they are sceptical and would rather not use the GAFAAs for financial matters, they fear that the offered services will become so convenient, easy, and widely adopted that they can’t evade using them. This is in line with a lot of moral conflicts millennials face, such as with traveling, textiles, and food.
In our opinion, these findings form a fertile ground for new players with new products and business models to serve these pain points and moral conflicts. Looking at recent developments in the financial industry, one can see neo banks such as N26 or Revolut already heavily challenging the incumbents in some fields.
Regardless of whether challengers or incumbents will address those needs, we are certain that this new generation will profoundly impact not only the future of offered products and services, but also how they are distributed and how providers of these services earn money.
Off to new shores
Based on what we found through our discussions with the interviewed millennials, we set up the following hypotheses, which we’re keen to further explore in our research:
Information – Customization – Transparency
Hypothesis No. 1
‘Future financial products will be characterized by extensive and very granular background information that is smartly aggregated. All products and fees must be presented and explained transparently, and each customer will receive a tailored product.’
Talking to millennials showed that they attach more value to profound and extensive information provision than to the nature of the investment product (i.e., whether it’s equity, fixed income, etc.). It seems very important for them to precisely know in what projects, regions, and topics they would – and in the future could – be investing in and that this is in line with their moral compass. The information provision is expected to be very granular when requested, but at the same time aggregated to an easily understandable level.
So far, only customers at the higher end of wealth received genuinely customized service. We expect this to change as future generations will demand the same customized experience they are currently already receiving from the entertainment industry (e.g. Spotify or Netflix). We expect the investment universe to grow considerably due to the tokenization of assets, which makes it possible in currently non-bankable assets. Moreover, we expect the investment universe to become very granular in nature. However, we expect each individual to receive a dynamically adjusted personalized portfolio that goes well beyond risk/return personalization down to incorporate preferences at a very granular level.
Moreover, all products and services should be offered with an easily understandable and transparent fee. Millennials want to know precisely which part of the product and/or service they are paying how much for and why.
Advisory – Joint Goals – Performance
Hypothesis No. 2
‘The business model will change from a fixed-fee transaction model towards a flexible-fee advisory model with joint goal setting.‘
Currently, an investor mostly pays for an active or a passive managed portfolio, which essentially translates to a fixed, charged fee for transactions conducted in his or her name. This fee structure is something many interviewed millennials expressed discontent over. We expect these ‘transaction fees’ to drop considerably and transactions to be simplified and/or automated in a way that individuals can easily execute their trades.
At the same time, we expect the investment universe to grow to an extent where it becomes challenging to keep track of everything. In this setup, we expect tailored, meaningful advisory to become very valuable while leaving the execution option to the client. Talking to the millennials showed that they didn’t want to pay management fees, which they translated to ‘doing nothing’. However, millennials at the same time exhibited a high willingness to pay for tailored services where they saw the direct value (e.g., personalized financial planning).
If millennials decide to embark on a journey with a bank, it will be essential to form a trustful relationship, which in our opinion could be characterized by personalized advisory and a joint goal setting at a very low fixed fee and higher flexible fees. This means that the client and the bank could sign an agreement in which they would record joint goals and decide on actions with both outcomes in which these goals are achieved, but also on outcomes in which the jointly set goals could not be achieved. This way, we think that one can foster loyal, successful, and long-lasting client relationships.
This could translate to a flexible pay-for-performance fee in which the bank would earn a share in the case of achieved goals and would provide some form of a discount when goals are not achieved. Of course, the basis for such a model is that the joint goals are realistically set and that both parties are equally informed about all opportunities. Some banks already offer models where a performance fee is charged. However, they reserve this right only for positive outcomes.
Omnichannel – Online – Flexible
Hypothesis No. 3
‘Products and services will be distributed almost exclusively online to the customer. This includes external apps and whenever the customer pleases.‘
Our talks have shown that millennials want to be able to invest through multiple and simple channels. However, they want to decide when and where. This is because not only have lifestyles grown to be very distinct, but also time and the decision on how to spend it, has become among the most valuable things. Moreover, we believe that everything that can be done online will be done online. Millennials want to be able to individually execute simple operations such as transactions or investments easily through an app: anywhere, anytime.
We think that a system similar to omnichannel online shopping could be established where an investor could theoretically decide at 2 am to invest in a cool project that he/she just read an article on or watched a documentary on – directly at the end of the article or the documentary, respectively.
However, for more complex matters such as the planning of their finances, millennials want to be able to request assistance or advice when needed. In doing so, they want to have multiple options. Either they are approached in a personalized way online, or they are given the opportunity to walk in and talk to specialized advisors or to be able to schedule an appointment for when it suits them – somewhat similar to an Apple store.