Gen Z Is Up for Grabs

“She was like, what am I gonna do with cash? How am I gonna spend this? What am I to do … push it into my iPhone and suddenly it’ll work?” Dorsey recalled during a recent webinar for credit unions and banks. “It was so funny to me because in her mind she was like … cash? One it’s dirty. You don’t touch it. She learned that in school and two, everything she wants to buy, she buys using a mobile device. To her, money is digital.”

The generational trends, particularly among Gen Zers and millennials, are not moving in favor of credit unions, community banks and regional banks. Nevertheless, according to Dorsey, millions of young consumers in Gen Z are “really up for grabs.” But, he added, community-based financial institutions need to act quickly to compete for them because the fintechs, neobanks, big banks and big tech companies are aggressively working to capture the lion’s share of their business.

The size of Gen Z, those born between 1997 and 2012, is about 68 million. Millions of them are young working adults who are using a wide range of online and mobile financial apps. However, new research showed at least 25% of those Gen Zers are still searching for a financial provider that can offer them the products and services they want and need now and well into their future.

During the webinar, Dorsey highlighted the newest research findings of Alkami Technology’s digital banking transformative trend study based on a national survey of 1,500 U.S. consumers from Gen Z, the millennial generation, Gen X and the boomer generation who hold a bank account and are active in digital banking. The study noted 22- to 25-year-olds from Gen Z were surveyed, and 26- to 35-year-olds from the younger millennial generation were also surveyed.

While the research revealed concerning trends among the generations that are driving big changes in the financial services industry, it also presented promising opportunities for financial institutions, including credit unions.

The key, and not that all surprising, revelation from Alkami’s new research was that digital banking engagement is highly correlated with greater financial institution product penetration and adoption. Specifically, the study found digital banking users who access their mobile app or online banking multiple times every day have 1.71 times the number of products with their primary financial institution (PFI) than those accessing digital banking at least once a year. According to the study, that’s a big difference.

A surprising finding of the study was that the type and size of a financial institution and/or technology company apparently has a big impact on consumers’ expectations about their relationships with that organization going forward.

The study showed consumers who are customers at regional and community banks and members of credit unions are less likely to believe that their relationship will grow with their financial institutions compared to those who bank with major national banks, neobanks or online-only banks, fintechs and big tech firms.

According to the study, only 27% of regional and community financial institution customers, including credit union members, said their relationship will likely grow over the next 12 months, compared with 35% of major financial institution customers, 51% of neobank consumers, 53% of fintech customers and 57% of big tech consumers.

“This is one of the most important discoveries from the national study because it serves as a call to action for (regional and community banks and credit unions) and their leaders as they consider the urgency and importance of innovating to best serve customers and members,” the study said.

The study found that Gen Zers and millennials are significantly more likely to state that a neobank, big technology company or fintech is their primary financial provider. Gen X and boomers are more likely to be customers or members of a major national bank or a credit union, community bank or regional bank.

However, the encouraging news from the study was that consumers from the younger generations are currently exploring and testing out different options for where they want to build their longer-term financial relationship. According to Alkami’s research, 25% of Gen Zers felt unsure about the future of their PFI relationship over the next year. Among younger millennials, that percentage was 21%.

This opens an opportunity, albeit a time-sensitive one, to attract young consumers at the right time and life stage to build longer-term relationships as their financial needs grow. The study noted these emerging generations are increasingly earning more money and entering new, more financially complex life stages, including the generational transfer of wealth.

“This to me is very exciting because we’ve seen this through our larger work too. When we’ve asked Gen Z and millennials about money in general, they are still trying to find the right banking partner and banking relationship. There is no question about it. It’s also a time when they are establishing their loyalty,” Dorsey said. “And by the way, the number one generation to refer somebody to their bank or credit union is millennials and Gen Zers. The younger you are, the more likely you are to tell other people and the more likely they are to move their banking relationship.”

The study also found that consumers across all four generations want a “great digital experience.” But the study noted nearly half of Gen Zers and millennials who have had a bad digital experience with a financial provider have opened an account with another financial institution.

What may be an essential part of that great digital experience for consumers is providing them with an app that delivers a convenient, easy and secure way to make payments and move money. Kelly Payne, chief ­marketing officer at MOCA, an Austin, Texas-based fintech that serves credit unions and banks, noted these mobile app features have made neobanks and fintechs the market leaders in the payments space. MOCA leaders believe one way to answer this competition is to help financial institutions set up a neobank-style mobile app under their brand name to offer their members/customers, he said.

“Everyone is trying to figure out what to do with the neobanks and fintechs, and the conventional wisdom is to go open a digital branch,” Payne said. “That’s expensive, it’s time-consuming, it’s risky. But why don’t we just offer a neobank-style account in-house? You’re still going to need some expertise, but it’s a lot less risky, it’s a quicker time to market and you’re catering to the people who like the ‘Chime app’ experience, but they also want to walk into a branch, and they appreciate the trust and security that an established financial institution can give them.”

Despite common beliefs, Gen Z has a slight preference for traditional banking over neobanks because of concerns over digital security, according to MOCA.

Credit unions can also appeal to Gen Z with safe, secure payments technology such as real-time, two-way fraud messaging that uses text messaging to alert members, and card controls for credit and debit cards.

What’s more, a 2021 consumer survey by the Deloitte Center for Financial Services identified at least 10 digital banking attributes that may help financial institutions keep and attract young consumers.

It was perhaps not surprising that four of the 10 attributes related to the objective of improving consumers’ financial health. They were: Sending more relevant offers or rewards to fit the consumer’s lifestyle (listed by 42% of Deloitte’s survey respondents), understanding the consumer’s financial situation and providing solutions (34%), helping consumers achieve financial goals (31%), and educating consumers or providing them with tools to help them become more financially savvy (26%).

These attributes may be even more top of mind for Gen Z because they grew up witnessing the nation’s challenging and difficult economic times, noted ­Mickey Goldwasser, vice president of Payrailz in Glastonbury, Conn., a digital ­payments company offering artificial intelligence-powered predictive payment solutions to banks and credit unions.

For example, Gen Z and their families lived through the recessions that followed the dotcom bubble and 9/11, which were relatively short-lived economic slowdowns. But they also lived through the Great Recession, which lasted for a year and a half, and the young Gen Zers saw firsthand how home foreclosures, small business bankruptcies and jobless parents affected their communities. Gen Zers also saw how many millennials and Gen Xers struggled with student debt obligations.

As a result, Goldwasser said he believes Gen Zers learned to take financial responsibility seriously.

“They’re more apt to weigh the impact of their actions, such as deciding on whether to attend college, community college or a technical/trade school, against all the financial benefits and risks involved,” he said. “They’re not apt to buy something and then figure out how they can afford it. They want to know how they can afford to buy something that they want, and that’s where a financial institution can come in and help them plan toward their financial goals and work with them as a partner to achieve their dreams.”