Spending: Tearing Down the Millennial Wallet
Part 1/4 of Roadmap: Fintech for a New Generation
co-authored by Robert Li and Francis Wilson
To examine the financial lifestyles of Millennials and Gen Z, we can start by looking at their most frequent touchpoint with financial services: payments. On average, Americans make approximately 70 payments every month. There are a few secular trends driven by Millennial and Gen Z habits and preferences that create opportunities for novel businesses to thrive in context of these interactions.
Electronic Payments and Money Dashboards
Millennials and Gen Z are embracing electronic payments more eagerly than other age groups. Millennials are the generation least likely to carry cash with them when leaving the house. They tend to shop online more, which necessitates some form of electronic payment. Even though cash payment, which still accounts for 27% of consumer payments, is unlikely to become obsolete in the near future, 82 percent of millennials believe society will eventually become cashless.
Habitual use of electronic payments has potentially dangerous consequences for the consumer. There are psychological implications of going cashless: studies have shown that electronic payments tempt users to overspend without noticing it. Individuals who are less aware of their personal finances are particularly prone to this risk: a Bankrate.com survey recently found that Millennials are the only generation where the majority does not track spending against a budget. As both a payment and financing method, credit cards deceptively expand spending power, but irresponsible use leaves unsuspecting individuals with expensive balances (averaging 14.65% APY). “The harsh reality is that credit cards make it easier to justify overspending,” says Jason Huynh, head of credit and analytics at Tally.
Although liberal spending habits enabled by electronic payments are not unique to millennials and Gen Z, modern tools addressed at these digital natives offer new ways to manage spending. Having a “money dashboard” helps users keep on top of their own spending behaviour, and many fintech companies offer this feature. Sourcing data externally from users’ financial accounts at various financial institutions and credit bureaus, these fintechs can show users a timely view of their personal balance sheet and cash flow statement. Using the money dashboard to drive user engagement, some of these apps have built additional tools that enhance the usefulness of the aggregated financial data, including personalised advice, spending alerts, and goal-setting features. While many fintechs offer money dashboards free-of-charge, users must first permit the fintechs access and visibility into their financial accounts. Piecing together otherwise siloed data from different platforms forms the basis of a holistic understanding of users’ financial condition and behaviour, enabling fintechs to underwrite financial products to their customer base. For consumers who are encumbered with expensive credit card balances, Tally monitors user credit card activity and helps users reduce their balances over time, by means of offering an affordable debt consolidation loan. For individuals who are living paycheck-to-paycheck, Brigit can help by watching users’ bank balances and proactively dispersing a cash advance when users are at risk of overdraft. Most neobanks, such Dave, Current, and MoneyLion, have a money dashboard at the front and centre of their UI, from which they promote their numerous products offerings.
Debt Aversion and BNPL
‘Debt aversion’ amongst millennials and Gen Z presents a market opportunity for those providing less intimidating/onerous alternatives to traditional forms of credit. Although Millennials and Gen Z are no strangers to debt, they find the concept of carrying debt to be stressful. In fact, debt is such an overwhelming influence on millennial thoughts and behavior that a recent survey by Credible showed that debt scares them more than death. This fear of debt is not unfounded: late fees, overdraft fees, and compounding interest are expensive.
Catering to this attitude are a rising category of PoS lenders, referred to as Buy-Now-Pay-Later (BNPL), who embed themselves seamlessly in the e-commerce payment flow of their partner merchants and have since penetrated offline retail as well. Compared with credit cards as a source of financing, BNPL is an attractive alternative to consumers for being non-committal, having straightforward payment options and fee schedules, and charging cheaper interest rates — while pricing varies, some lenders offer as low as 0% APR subsidised by the merchant. Over the last few years, a number of these alternative lenders have emerged, such as Affirm, Afterpay, and Klarna, to name a few.
