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The Coming Millennial FinTech Crisis

Stashed in: Young Americans, Awesome, economics, Personal Finance, Demographics, Fintech, Millennials

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How is the financial sector going to deal with people approaching their prime spending years who don't qualify for credit cards, car loans, or mortgages?

build a bubble?

Not necessarily. It means there may be an opportunity to invent new financial service products. 

Food for thought:

For instance, what does it mean for a millennial to be a good credit risk? If it isn’t the prospect of long-term earnings potential, then how does that change how banks and retailers think about extending credit? Or should it? Will the traditional credit card model give way to transactional credit models where risk is decided and credit extended one item at a time? Who, then, extends that credit, and what infrastructure is needed to support that one-item-at-a-time credit authorization? Will new players emerge with different methods of aggregating millennial debt? How would credit rating and scoring agencies have to adjust to accommodate any and all of these changes?

Then, there’s the bastion of the American Dream — the home mortgage. How will mortgage lending have to change? It may not be enough to simply offer millennials a totally digital mortgage application experience if the underlying facts about their borrowing profile don’t change: They’re not considered great credit risks given their employment idiosyncrasies, and they can’t come up with a down payment. Lenders — whether they be alt-lenders or traditional banks — only lend money to people they believe will pay them back. Will that mean a shift to banks and innovators helping millennials save and/or creatively thinking about how mortgages are structured and repaid?

Banks, clearly, are thinking hard about serving this group beyond just lending to a group of customers that may be hard to serve on that score. Yet, millennials still need banking services, FinTech, digital — of course — but more basic options to act as a store of funds, possibly with options to pay down their debt and help save their money. How will this force banks to think differently about the portfolio of products that they offer to millennial customers — and price them — who may not ever use credit at the same level as their parents?

Retailers, on the other hand, must contend with the reality that only a third of the millennial customers that walk into their stores have credit cards with them. For the obvious reasons, value for money is a key driver of loyalty for millennials, as are rewards and promotions. But payment, for most of them, is more likely debit card-driven than not. And while Durbin’s made debit cheaper than dirt for most retailers to accept, it’s cramped banks’ style when it comes time to doling out rewards when those cards are used. Will serving this group be served with a healthy dose of new thinking about how banks, digital wallets and retailers collaborate to serve this new customer and still maintain their own healthy bottom lines? Will retailers be challenged to think differently about how they extend credit to this group of customers? Will millennials take the retailer-branded debit card bait?

Food for thought: One of the most popular articles on this holiday season was the piece we did on Walmart’s layaway program. Layaway became popular in the 1930s during the Great Depression and was largely disbanded in the 1980s as credit card usage skyrocketed. Is it time for retail credit to go back to the future for this demo?

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