The upcoming fintech crisis of the millennials

Original author: Karen Webster
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imageIn any case, companies providing modern financial services have to focus on the generation whose representatives were born between the 80s and 00s. In the USA, despite the developed fintech industry, projects have to take into account a lot of features of generation Y for successful work .

The author of this material gives a number of nuances and talks in detail about the crisis situation that has developed around millenials in the United States. It may be useful to take note of some of the characteristics presented in the article by domestic fintech projects, which also have to focus on this group of users.


It’s not news to anyone that 70 million people born between 1980 and 2000 - the so-called millenials - are now in a difficult financial situation. But, according to Karen Webster, a new study by Stanford University gives unusual estimates of their financial situation. According to these data, only 50 percent of this generation will be able to start earning more in the future than their parents, and for children from middle-class and lower middle-class families this picture looks even worse. This view of things, Webster believes, raises a number of issues both for society and for payment industry players, retailers, and commercial companies who want to serve millennials. This material details this topic.

It is a fact.

Even though millennials enjoy fintech innovations, for many of them, the chances of earning more than their parents in the future are not only not growing like a snowball, but in reality, they are rather small.

The gap in income levels of 70 million millennials and their parents depends on several things, including the solvency of the latter. It is not surprising that her children from families of the middle class and lower strata feel the most. Or, in other words, almost 70% of the US population.

Let's stop for a minute and think


It’s one thing when a millennial, a child of billionaires who receive their income from operations on hedge funds, does not manage to take their billion in any way and as a result he gets 760 million a year. No one will worry about whether such people can feed themselves for thirty or pay on a mortgage.

But when even half of the millennials born in middle-income families and a third of millennials born in middle-income or lower-income families fail to break the financial records of their parents, then here our society is faced with a completely different set of problems.

And these problems entail very critical consequences for all participants in the payments, retail and commerce market, who strive in every way to benefit from the purchasing power of the coveted generation.

Representatives of which may ultimately turn out to be not so wealthy consumers.

The data speaks for itself


And this topic is not new.

The evidence that the generation that popularized Thai food and turned leggings into an everyday corporate wardrobe is experiencing financial difficulties began to emerge gradually back in 2013. Then a study appeared, according to which, the total equity of the millennials generation is 20 percent lower than the same indicator in the same age group in 1983. If we compare it with the parents of this age group, then the gap between them and generation Y will be twice as large. The concern was not the income level itself or the purchasing power as such, but the possible consequences, which in this situation should affect the pension and the subsequent standard of living of this generation in 30-40 years.

Since then, from time to time, we have received crumbs of useful data on the financial condition of millennials, their gigantic student debts, their love or hatred of money, and also their attitude to employment and career issues. However, only a recent revolutionary study by Raj Chetti, a professor of economics at Stanford, and several of his colleagues, finally again drew attention to the fact that representatives of the generation, whose attention so carefully try to win all brands, most of them are bankrupt are hardly capable of ever or achieve the same level of earnings as their parents.

This is a very remarkable study, including the level of information content. Its authors managed to achieve what no one else could do before: to link together income data for a number of generations. Chetti and his team did this by gaining access to anonymous tax returns from residents aged 30 years and above, collected between 1940 and 1980. You can read the full study here . An excellent overview of the work was done by New York Times columnist David Leonhardt.

Chetti's work is worthy of careful study, but everything you really need to know about his conclusions with just two graphs summed up Leonhardt.

The first of them tells the story of the gap in income levels very eloquently.

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A chance to start making more money than your parents if you ... (were born in such and such a year). Source: nytimes.com

The latest information that we can gather here is that the prospects for earning more than their parents for young people in their third decade began to plummet since 1950. Children born in the 1940s had the highest chances, which is not surprising, given the Great Depression that just ended in the late 30s and the rapid economic growth that followed it, due to the large-scale transition from agricultural to automated production. The subsequent ups and downs of the economy caused by energy crises (70s), the technological revolution and globalization (90s) slightly improved the likelihood for “baby boomers” (generation 50-60s) and a little more for “generation X” "(Born 60-70s).

However, this systematic fall has become even sharper and more palpable for those born in the 1980s, or, as we call them today, “generations of millennials”. On the whole, only half of them will be able to improve their earnings indicators compared to their parents, and this probability is even less when compared with older relatives.

And judging by the kind of lot that fell to the share of some representatives of this generation, even a figure of 50% for them may look optimistic.

Particularly vague are the prospects for most millennials from families with income falling into the category below 100 thousand dollars a year. This story, again, is best illustrated by another graph from the Leonhardt column.

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Born in 1940 in an average American family, the child had a 92% chance of earning more than his parents. (vertical - a chance to earn more than their parents, horizontal - the income-age group in which this or that person was born).

Millennials whose parents are members of the “1 percent club” will be fine, thanks to the good education they received in the best schools and the high-paying jobs that are attached to such a pedigree.

However, for family members with an annual income of 50 to 100 thousand dollars, that is, half of the US population, things are much worse. Only 44% of these young people have a chance to make more money than their middle-class parents. As for 29% of the US population, earning less than 50 thousand dollars a year for a family, for them the prospects look generally very gloomy.

Experts offer different explanations of the situation, each of which is true in its own way.

Some economists relate this depressing financial picture to the growing number of single-parent families. Others believe that the 2008 crisis is to blame, because many millennials reached working age precisely during it. Young people agreed to lower-paid jobs, just to stay busy altogether. As a result, an art student in his last year went to work as a barista in Starbucks, or at a small rate in an already undernourished team of some startup. Well, other peers remained in educational institutions longer if they could not even find something like that. Most of these millennials work according to the “one-time economy” or “gigonomics” model, and many of them are very happy with it. Be that as it may, experts say, millennials will have to work hard,

At the other end of this range, well-educated individuals will receive well-paid jobs as technology continues to move to a new level, changing both job responsibilities and requirements in areas where traditional businesses once hired huge groups of people and paid them high salaries .

All this, as Chetti points out in his work, takes place against the background of a decline in GDP growth, while the rate of increase in productivity is at the level of its historical minimum. The economy will have to show more than six percent annual growth to offset current trends and help millennials, Chetti writes. To achieve such an indicator, according to the most reasonable economists, is almost impossible.

The resulting gap in productivity is not able to explain even the brightest economic minds, not to mention the proposal to get out of the situation. But there is no doubt that this gap exists, making it even more inevitable that the financial future of the millennials will differ from what their parents and grandfathers received earlier.

But we will leave debate over norms and policies. Instead, let's take a closer look at the possible consequences of such a massive decline in purchasing power for the billing, retail, and commercial segments.

Give us the facts


We all read the same stories and heard the same jokes: millennials have a yoke of sky-high debts hanging on their necks, they don’t buy cars and houses, they don’t have credit cards, they don’t save money and change jobs as if tomorrow never comes.

And besides, they are ideal borrowers and, in general, the purpose for which fintech, the payment industry and retail should bet.

Here's how it all looks in numbers.

According to the National Association of Realtors, the rate of ownership of property among people under 35 years old - usually the first purchase at this age - has fallen from 43% in 2005 to 36% for this age group. The age of first-time people buying property also creeps up. If before the average profile of such a buyer looked like a married man (married woman) 29 years old, now this buyer is not married (not married) and he (she) is 33 years old. And all this despite the fact that the rental price now exceeds mortgage payments, and lending rates are at their historic lows.

The essence of the problem is not the lack of desire to own your property, experts say. The thing is, first of all, in the reluctance to make a down payment, and in addition - in the reluctance to fulfill the requirements of the lender, on the basis of which a mortgage is issued. Possessing a low credit rating, jumping from one job to another, millennials prone to one-time part-time jobs, the future earnings prospects of which play against themselves, force lenders - those who in 1970 predicted an almost twofold increase in the profitability of mortgage payments - pretty nervous. And since most buyers who first turn to realtors are not married, the wedding and family also move further and further.

The absence of property (or marriage and family), of course, also means the absence of associated costs for repairs and home improvement, insurance, or an avalanche of expenses for children's things and other obstacles to the realization of the American dream and creating a family.

The same is true of car ownership, a phenomenon that is very rare among millennials. Only 26% of them pay loans to buy a car and even fewer representatives of this generation buy cars without loans. Of course, given that traveling to UberX and Lyft from one point in the city to another costs only a few bucks, buying a car, investing in it and caring for it may seem like a pointless exercise. Those who have cars do not try to get rid of them, but try to refinance the loan in order to reduce monthly payments.

And, of course, we must not forget about credit cards, which account for 36% of all consumer debt. Parents of millennials probably used them as an instrument to achieve their American dream. But among the millennials themselves, only a third have credit cards, that is, in other words, 67% of the representatives of this generation do not use them. If we talk about those who do this, then the average balance on cards is approximately $ 5,800 and 60% of them transfer payment of part of their monthly debt to the next month, while 47% do the rest of credit card holders.

Some millennials do not want to issue a credit card, afraid to get into too much debt, but most of them simply can not get it. A low credit rating is often considered the main cause of failures, but in reality this is far from always the case. Unlike their parents or grandfathers, who could prove that they could earn a lot in the long run by offering banks a healthy credit profile in terms of risk, millennials simply can not do this.

Banks see these trends. They understand that millennials, on the one hand, are more likely to leave partially outstanding debt (and they like it), but on the other hand, they may not be able to cope with payments on loans (but this is already bad for the lender). And at the same time, bankers understand that the peak size of credit card debt usually falls on the age group of 45–54 years, which millenials will enter only in ten years. Without the issuance of cards, or prospects for wage growth, lenders will not be able to seriously rely on millennials and that they will be able to bring them the same credit income as before.

More questions than answers.


For example, how do you understand that millennial is a really good borrower? If it is not a long-term revenue perspective, then how do banks and retailers determine the solvency of such customers? Will the traditional credit card-based model supersede the place of the new transaction model when any risk or limit is assessed for each individual purchase or payment? Who will monitor the process of increasing the limit and what infrastructure is needed to support this model of a one-time loan permit? Will there be new players offering different than usual millennial debt assessment methods? How will credit rating agencies adapt to all of these changes?

And do not forget about the stronghold of the American dream - a mortgage for the purchase of a house. How will you need to change this loan model? In the current situation, it will not be enough to simply offer the millennials a fully digital mortgage payment application, without any changes to the fundamental points in the profiles of such borrowers. Their instability in employment and their reluctance to make down payments makes them poor mortgage borrowers. Lenders, whether banks or alternative organizations, issue loans only to those who, in their opinion, will be able to repay them. Will this lead to an increase in the popularity of innovative solutions that help millennials save or change the structure of mortgages and the rules for its repayment?

Banks, obviously, are carefully considering how else, in addition to lending, they can serve this group of the population. And millennials, of course, will still need banking services. In whatever form they appear - traditional, or in the form of fintech and digital solutions - young people will always need simple tools for storing funds, probably also with the opportunity to borrow them or save money.

Retailers, in turn, will have to come to terms with the reality that only a third of millennial customers visiting their stores carry credit cards with them. For obvious reasons, loyalty programs are in great demand among millennials, as are bonus points and promotions. However, the means of payment for such purchases will be more likely to be debit than any other, which is often, for many reasons, very inconvenient for merchants. Will this situation lead to new types of cooperation between banks, merchants and digital wallet services, aimed at customer service in the new realities? Will retailers have to look for new ways to increase credit limits for this group of buyers? Will millennials swallow branded debit cards?

And more food for thought. One of the most popular materials recently on our resource has become an article on the Walmart layaway loyalty program. This program gained particular popularity in the 30s during the Great Depression and for the most part lost its relevance in the 80s, when credit cards began to be in special demand. Are we heading back to the future again?

And a few more points to conclude


First of all, we should be careful when we talk about the "millennials" in general, since in reality it is a wide and not at all homogeneous group of people. Even though 50% of millennials will not be able to overtake their parents in terms of income, 50% will do so, and a tiny fraction of those who come from wealthy families will ultimately have great purchasing power and resources. But the situation with the other 50% really represents a difficult task for society, payment and commercial systems, which will not be so simple to solve.

Another fact that should be taken into account is that their parents from the baby boomer generation are the wealthiest segment of the economy with the highest incomes, net of taxes. This group of people has the opportunity to spend well even in old age. The oldest "boomers" are now 70, and they are likely to live longer than their parents.

Millennials with such parents probably don't need to worry. They will leave them enough money. Unfortunately, this is not true for most millennials. Their parents are not so wealthy and themselves need their own funds to take care of themselves throughout their, hopefully, long life.

Therefore, if you are one of those people who regret that they are no longer 29, then maybe you should think again.

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