Millennials, those born between 1980 and 2000, are becoming a larger part of Australia’s economy. They are beginning to reach an age where their collective wages and overall wealth are a notable part of our national income and aggregate consumer spending. Investment banks and market researchers alike have been tasked with understanding how the typical millennial consumer is motivated to make various fiscal decisions, from spending and saving to investing and acquiring finance. What has become clear is that their unique upbringings combined with inhabiting an ever more connected world has shaped their preferences and habits, influencing their desires and how they make decisions as consumers.
Millennials were the first generation to be raised with internet and information technology rapidly changing the world around them. They were the first to be raised with social-media connecting them to friends and chronicling their experiences, firstly on MySpace (don’t mention the name around Rupert Murdoch) and later on the now widely used Facebook. Perhaps this environment of sharing one’s daily life with hundreds of their peers has led to what is described as the YOLO phenomena, which can be broadly summed up as preferring to live in the moment as opposed to living with a longer-term perspective. KPMG, in their recent ‘Banking on the Future’ report, suggested it was as the result of being ‘taunted by the image crafting phenomena’ of social media. Whether it is as a result of perceived peer pressures or rather simply the desire to share experiences with other people, it has forged some interesting differences between this tech exposed generation and their parents’.
Some of the key lifestyle differences include:

  • A fast paced yet often time poor lifestyle, which places a high value on convenience.
  • Their careers are more likely to span multiple professions and the average job tenure is now shorter. A recent Gallup research report noted millennials were three times as likely as the general populace to have switched jobs in the last year.
  • Millennials are significantly more likely to be living at home with their parents than previous generations, with the average 23-year-old almost 20% more likely to be shacking up with their mum and dad. This number would most certainly have tracked further north since 2011 due to worsening home and renting affordability.

Figure 1. Young Adults living arrangements
Source. ABS

  • Further to the above point, since the 1970s the average marriage age has jumped from 23 years to 30 years. The number of 18-31 year olds married and living on their own has halved. They are also increasingly putting off parenthood, with millennials 30-50% less likely to have children at various times throughout their 20s. Promisingly, however, up to three quarters still wish to get married and have a family during their lifetime.

Figure 2. Ages of various generations for parenthood
Source. Goldman Sachs

  • They are more trusting of technology companies, but not in equal measures. KPMG notes that 84% of millennials said they would consider banking with a tech giant, with Apple and Google cited as being more trusted, with Facebook less so.  In China, for example, 1 in 3 internet users utilize their social media account on WeChat (similar to WhatsApp) to pay for a service.
  • Millennials were found to highly value travel and eat out at a notably higher rate than their parents. This shift has assisted the rise in services such as Uber, Deliveroo and AirBnB.

FCR = Fast-casual (Nando’s, various hip burger bars city wide)
CDR = Casual dining
QSR = Traditional fast food (McDonald’s, KFC)
Figure 3. Generational Eating Habits
Source. Morgan Stanley
These trends have crafted a generation with its own intricacies and preferences, just as the generations before them lived markedly different lives to their parents. Some of the inferences we can make from the above trends are that millennials place higher value on the present than the future, and thus generally prefer the thrill of an experience as opposed to the gratification of ownership. They place a high value on convenience and service and are willing to pay for it. As a result of having children later and living at home longer, millennials have more disposable income for non-essential goods and services which makes them a coveted demographic for companies to capture.
Just as millennials change workplaces and employers at a much faster rate, they do the same in their relationships with banks and financial institutions. High interest savings accounts are the product of choice for millennials at banks and apps and internet banking often poll as two of the biggest influences on a millennials choice of bank, with many having multiple accounts to cherry pick the best features of each one. In the US, which collects more data in the area, credit card debt for under 35s has fallen to its lowest point since 1989, when records were first collected by the Federal Reserve. A 2016 FICO study found that millennials were roughly 2 to 3 times more likely to switch banks due to fees, with their second biggest reason being after having a negative experience with their previous bank.
Finance companies and banks need to adapt to the changing habits and preferences of each new generation to continue growing their businesses. Some companies, such as Apple and PayPal, have read these trends well and subsequently created services to cater for them. On the other hand, Australian banks have generally been playing catch up with the innovations of various technology companies, giving them the opportunity to carve out a part of the market as their own.
Some of the common preferences in financial products for millennials cited by various reports on the demographic by Goldman Sachs, Deloitte’s and KPMG include:

  • Time and convenience: Millennials put a high price on time and convenience and are often the two most important factors in deciding whether to use a certain financial service – this holds true for other non-financial services too. A part of this is for the services they are using to have integrated and seamless online services and smartphone apps.
  • Low/No Fees: Simply put, millennials do not like fees – at all. As previously mentioned, they were up to three-times more likely to cite it as a reason when leaving a bank than other generations.
  • Experiences over ownership: Some might argue that this is at least partly due to the high cost of home ownership, but regardless of the reason, the trend is there.
  • More trusting of tech companies: Having already grown up sharing everything from what food they just ate for dinner to compromising pictures of themselves heavily inebriated at parties, it is not all too surprising that younger generations are less concerned with the idea of sharing sensitive data over the internet and their financial data with non-banks.

Many companies are on the front foot, looking to acquire the business of this upcoming and big-spending generation of consumers. These providers have identified the above trends amongst millennials and tailored their products to suit their unique demands:

  • On payments; PayPal, Apple and Google have been making considerable moves into the Australian market, with Apple Pay recently signing up ANZ, ING and Macquarie and positioning themselves for a slice of the highly valuable terminal fees pie. Whilst it might seem counter-productive for an incumbent bank like ANZ to the wolf in the chicken pen, but some reports have suggested that hundreds of thousands of transaction-accounts have likely been opened at ANZ as a result of this decision. With Visa and MasterCard maintaining their fees, Apple Pay will eat into the bank’s share of the transaction fees it is used for.Locally listed ChimpChange is attempting to disrupt the banking sector in the U.S. by targeting a market which, when compared to Australia, is still highly fragmented and charging high fees for basic transaction accounts – averaging $10-$15 a month on low balance accounts. Their idea was to partner with a sponsor bank and various transaction processors to be able to offer a quasi-banking service, where one can deposit money and cheques to pay for various bills and daily expenses. They can also enjoy faster/instant settlement times, no account keeping fees and a highly integrated mobile app that offers automated budgeting information to its users. Combing two of the most sought after features of a financial service for millennials – no/low fees and high quality mobile app, has seen its user base grow quickly from approximately 10,000 users at the beginning of the financial year to almost 70,000 by its last update in February.

Figure 4. Millennials banking preferences
Source. KPMG/AFR

  • On credit; international companies like RateSetter and Lending Club are looking to disrupt personal loans by creating market places for investors and borrowers to be matched at a mutually accepted interest rate, all whilst using various credit-rating agencies and big-data analysis to determine who to extend loans to. Whilst these companies own data suggests they do not approve a large percentage of their credit applications, the tens in billions of loans issued worldwide by these services is having a quickly growing effect on loan volumes at banks.Locally, credit cards appear under some threat in younger demographics by companies such as Afterpay and ZipMoney. Much like when PayPal first launched and was boosted by its decision to attract the consumer and charge the retailer, these companies have adopted similar models, offering no interest and no/minimal fees to consumers whilst charging a fee to the business offering their service. They work in a similar way to American Express, who justify charging higher fees to merchants based off the fact that their card holders are bigger spenders with more disposable income. AfterPay, for example, charges no fees or interest to their customers and allows them to pay off their purchase over 8 weeks, offering an attractive way to manage ones cash flow between pay-cheques. This inherently leads to their users spending a larger amount, on average, than users of other payment methods and gives them a strong selling point when doing deals with various retailers.

Figure 5. Total loans issued by Lending club – growing as millennials come of age
Source. Lending Club IR

  • On investments/savings; father and son duo Jeff and Walter Cruttenden identified that whilst having poor savings habits, millennials still had the desire to put save for their futures. They had the novel idea of rounding up consumers’ everyday transactions to the nearest predetermined amount. For example, at a $5 round up, a $12 meal would cost the user $15 – with $12 going to the business and $3 to their investment account to be invested in various ETFs. This method of setting aside micro-amounts of capital in a relatively low impact on the user’s overall budget has proven immensely popular, with the company managing over 1.1m accounts with $257m AUM.Another app targeting the time-poor and convenience angle is Digit, a micro-savings service, which uses data-analysis over your standard transaction account to look for savings opportunities that it claims the user will not meaningfully notice. It analyses your balance, upcoming income, upcoming expenses and recent spending patterns to calculate a ‘non-essential’ amount that the app can move from your account to your digit savings account. It also has text-message functionality which allows for manual deposits, withdrawals and balance enquiries, which is also free. The company makes money on the interest its deposits generate, offering a rate of 0.20% to its users, which is much lower than the 1% on offer elsewhere. The company had processed over $350m into its savings accounts as of its last public update.

Given the general lack of large-cap tech exposure available on the Australian equities market, investors looking to gain exposure to these thematics would be best served through investments in the U.S. equity markets, through companies such as Google, PayPal and Apple (Google and PayPal are owned by Clime and the Clime International Fund).
Predicting which fintech start-ups will prosper in a rapidly changing world is a difficult task, clouded by the fact that each niche can be quickly flooded by copycats, delaying growth in these companies’ user bases that are required for them start enjoying the benefits of scale. A number of these smaller companies are in the early stages of proving the sustainability of their businesses, though offer fascinating insights into how tech entrepreneurs are adapting to the demands of millennials and how Australia’s incumbent financial businesses will need to adapt to respond to their needs. Those that can do so successfully will be rewarded with substantial profits, given the large economies of scale that exist with tech-focussed finance and the winner-takes-all nature of the market.