Teens and young adults face stark economic realities. Job prospects are limited. In today's tighter credit environment, getting a credit card, buying a car and saving for the down payment on a first home will likely require patience. Achieving financial independence will take longer.

But there may be a silver lining: A bit of financial conservatism could be healthy for young people, especially those who watched their parents overspend and overextend their finances. How will they make their way through the proliferating products and channels offered by the financial services industry? How will they use and manage credit? Will they save?

Banks can help determine the answers to these questions, but they will need to act fast. They are already facing increased competition for the allegiance of these young consumers, and it appears they are falling behind.

With Internet-only banking, general-purpose reloadable prepaid cards, burgeoning money-services businesses and mobile banking, these "Gen Y" consumers have an array of options that did not exist a mere decade ago.

Our research shows that young adults, who collectively earn $214 billion annually, are over-represented among the unbanked and make up a fast-growing user base for money-services businesses.

In the Center for Financial Services Innovation's 2008 national survey of unbanked and underbanked consumers, just over half of those 25 and older had a checking account, but only a third of those 18-24 years old did.

The Gen Y respondents were far more likely to receive their income in cash, and only 14% used direct deposit, while a third of older respondents used it.

Older respondents were more likely to favor banks for making financial transactions, but those 18-24 preferred grocery stores or big box retailers. They said they would be less likely to turn to a bank for financial advice, and only 17% would turn first to a bank for a loan of $1,000 or less, versus 39% of older consumers.

Young people who had recently visited banks or credit unions were more likely to be turned off by the experience. Twenty-five percent found their visits "not at all pleasant" or "somewhat unpleasant," compared with 9% of older respondents, and 39% of the younger respondents said they would be unlikely to return as a result of the experience.

The recent financial crisis is but one reason young people are more apt to mistrust financial institutions. These people are less familiar with what banks do. Many of their parents' interactions with banks are less visible to them, since Web sites and ATMs have supplanted regular visits to the branch.

Banks are beginning to offer text alerts and have dabbled in mobile payments and social networking, but they are still generally seen as antiquated institutions to many in this demographic.

A few banks and credit unions have opened branches in high schools to serve students who are bringing in significant earnings from after-school jobs. On campuses, college ID programs that double as prepaid debit cards are increasingly becoming students' first deposit accounts.

But many nontraditional providers are ahead of the banks, particularly in their use of technology to communicate with customers. For instance, the general-purpose prepaid cards that are now ubiquitous at check cashers, supermarkets and superstores are increasingly being offered with a range of mobile balance inquiries and transaction alerts that compete successfully for young people's attention and help them manage their funds.

Banks must find the right products and deliver them through the right channels to reach Gen Y consumers. This generation will enjoy a wide range of financial choices as they become earners. The choices they make will affect not only their lives, but also the future of the banking industry.

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