Generation Y has been particularly elusive for traditional financial services institutions. Its members form a considerable segment of the unbanked/underbanked population — two-thirds of consumers age 18 to 24 do not have checking accounts. And, Gen Y has shown far greater propensity than other generations to turn to nonbank resources, such as Web-based services, money service businesses, grocery stores and big-box retailers like Wal-Mart. This generation is also the least likely to seek advice from a traditional financial services institution.
When looking at Gen Y as part of the unbanked/underbanked sector, it is important to remember that, although Gen Y consumers today do not represent the majority of financial assets in the U.S., someday they will. As such, the stakes are high in the quest to court this unique and much-studied generation, especially because the financial services industry has already seen much erosion in its traditional services in recent years.
Take, for example, the traditional "free checking" service. The banking industry today is struggling with the reality that it can no longer rely on nonsufficient funds and overdraft fees to subsidize retail demand deposit accounts. Banks face the catch-22 that, if they significantly increase their monthly service charges, they may drive more potentially profitable customers to alternative financial services outlets because they simply cannot consistently maintain the required minimum balances or are not willing to pay steep monthly fees.
Banks have seen considerable erosion in other service areas across the entire income spectrum. On the high end, brokerages and investment firms have been offering depository and transaction services for quite some time. On the lower end, check cashers and retailers increasingly provide easy encashment and bill-pay services to meet needs unmet by banks. As companies such as Apple, Starbucks, Google and Twitter consider entry into the payments business with innovative offerings targeted at profitable niches, banks face additional threats to their core businesses.
The rapid growth and wide acceptance of debit cards — especially prepaid, the abundance of accessible, well-located ATMs, the ubiquity of cell phones and proliferation of smart phones, have all fueled the success of nontraditional players in financial services.
Consumers no longer need a conventional bank account to benefit from direct deposit of payroll or government benefits. Prepaid debit card providers now not only accept recurring deposits via the automated clearing house network but can also provide convenient access to funds as well as secure storage for any monies left over.
Whereas card providers once faced security roadblocks, they are now able to satisfy the know your customer requirements mandated under the Bank Secrecy Act and USA Patriot Act as well as detect any financial crimes by requiring cardholder registration and verification online or via customer care centers. For example, the Treasury's Direct Express Debit MasterCard, issued by Comerica Bank, is a prepaid debit card for Social Security and other government benefits that serves as a safer alternative to issuing paper checks to the unbanked, who, in turn, would need to find an outlet to cash them.
To gain the agility required to stem this attrition, banks need to partner with players in the ecosystem to protect their brands and revenue streams. A look at how alternative providers court the unbanked/underbanked, especially Gen Y, can offer important insight for traditional institutions.
When working to reach Gen Y's unbanked/underbanked, it is important for banks to keep in mind the generation's unique characteristics. Gen Y's preferences for products and services are influenced by the knowledge and experience of their peers, not the marketing messages sent out by companies — in other words, they prefer a pull versus push approach. Additionally, Gen Y is made up of digital natives who always want to use technology to communicate with all service providers, including banks, and expect the most high-tech, self-service features available.
Today, many nonbanks effectively leverage technology to fulfill needs unmet by banks and to reach unbanked/underbanked consumers, including those elusive Gen Y consumers. For example, nontraditional players such as Zopa, PayPal and Wesabe have effectively leveraged social networking to increase their presence in the financial services industry and to enrich their brands. Banks need to explore these outlets to "go to where the consumers are."
Wireless is another important technology enabler for reaching the unbanked/underbanked. There are more than 229 million wireless subscribers in the U.S. and 20 million prepaid wireless customers, and statistics have shown that the majority of the unbanked/underbanked, especially among Gen Y, have cell phones.
Banks must recognize that wireless providers and wireless applications offer both a threat and an opportunity for them. On the one hand, features like virtual wallets on cell phones further enable consumers to disintermediate banks.
For example, in Kenya, communications provider Safaricom, partnering with Vodafone, effectively leverages the cell phone to provide banking services anytime, anywhere by facilitating deposits, transfers and bill payments via its M-PESA service.
A look at Apple's recent patent applications for an iTunes wallet shows that the U.S. market is not far behind for these types of bankless mobile banking services. With estimates of more than 50 million iPhones sold worldwide, Apple would be well positioned with the critical mass — including strong representation from Gen Y — to support a high-tech alternative to debit and credit point of sale transactions.
However, banks can also succeed by partnering with third-parties, like communications service providers. The Inter-American Development Bank partnered with Telefonica, for example, to provide mobile banking to the unbanked in Latin America. Jibun Bank in Japan, a joint venture between the telecommunications company KDDI and Bank of Tokyo-Mitsubishi UFJ, was the first bank to use the mobile phone as a primary access channel.
In the U.S., mobile carriers such as AT&T, Sprint Nextel, T-Mobile and Verizon have entered into partnerships to provide mobile payments that complement their existing services.
These are just a few of the ways that banks can use technology to reach the many unbanked/underbanked consumers in Gen Y. Challenging, no doubt, but it is clear that this market poses a vital opportunity for banks to prevent further erosion of their core services and subsequent revenue. Additionally, banks must consider that, just as today's unbanked/underbanked consumers have found alternatives to the traditional banking business model, can their banked consumers be far behind?
David Bomser is a senior director of Oracle's financial services global business unit.
