The coming fintech crisis millenialov

Companies that provide modern financial services, in any case, have to focus on the generation whose representatives were born between the 1980s and 00s. In the USA, despite the developed fintech industry, projects for successful work have to take into account a lot of features of generation Y.

The author of this material gives a number of nuances and tells in detail about the crisis situation around the millenial in the United States. Some of the characteristics described in the article may be useful to take note of domestic Fintech projects, which also have to focus on this group of users.

It is no news to anyone that 70 million people born between 1980 and 2000 - the so-called millennials - 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, in the future, only 50 percent of the representatives of this generation will be able to start earning more than their parents, and for children from middle-class and lower-middle class this picture looks even worse. Such a view of things, Webster believes, raises a number of issues for both society and the players in the payment industry, retailers, and commercial companies wishing to serve the millennials. This material reveals this topic in detail.

It is a fact.
')
Even in spite of the fact that millennials enjoy Fintech innovations, for many of them, the chances of earning more than their parents in the future do not just not grow like a snowball, but in reality are rather extremely small.

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

Stop for a minute and think

It's one thing when the millennial, the child of billionaires who earn their income from operations on hedge funds, cannot manage to take their billion, and as a result, it goes 760 million a year. No one will worry about whether such people can feed themselves for thirty or pay for a mortgage.

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

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

Representatives of which, in the end, may not be so wealthy consumers.

Data speak for themselves

And this topic is not new.

The data that a generation that popularized Thai food and turned leggings into the subject of everyday corporate wardrobe is experiencing financial difficulties began to emerge gradually in 2013. Then there was a study, according to which, the total net worth of the generation of millennials is 20 percent less than the same indicator of the same age group in 1983. If we compare it with the parents of this age group, then here the gap between them and the generation Y will be two times larger. Not the level of income or purchasing power as such, but the possible consequences that should in this situation affect the pension and the subsequent standard of living of this generation in 30-40 years, caused concern.

Since then, we have from time to time received crumbs of useful data on the financial condition of the millennials, their gigantic student debts, their love or hatred of money, as well as their attitude to employment and career issues. However, only a recent revolutionary study of Raj Chetti, a professor of economics at Stanford, and several of his colleagues, finally, again drew attention to the fact that members of a generation whose attention so carefully trying to win all brands, most of them bankrupts, 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 something that no one else could have done before: to tie together the data on the income of a number of generations. Chetti and his team did this by gaining access to anonymized tax returns for people in the age group of 30 years and above, collected from 1940 to 1980. You can get acquainted with the study here . A wonderful overview of the work was done by New York Times columnist David Leonhardt.

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

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


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

The latest information that we can learn here is that the prospects for earning more than their parents for young people in their third decade have begun to plummet since the 1950s. 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), technological revolution and globalization (90s), slightly improved the probabilities for “baby boomers” (generations from the 50s – 60s) and a little more for “generation X "(Born 60-70s).

However, this systematic decline has become even more dramatic and tangible for those born in the 1980s, or, as we call them today, “millenial generations”. In general, only half of them will be able to improve their earnings in comparison with their parents, and even less this probability in the case of comparison with older relatives.

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

The prospects for most of the millennials from families with incomes falling under the category below 100 thousand dollars a year are particularly vague. This story, again, is best illustrated by another graph from the Leonhardt column.


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, horizontally - the income-age group in which this or that person was born).

Millennials, whose parents are in the “1 percent club,” will all be well, thanks to the good education they received in the best schools and the high-paying jobs that are attached to this pedigree.

However, for family members with an annual income of 50 to 100 thousand dollars, that is, half the population of the United States, things are much worse. Only 44% of these young people have a chance to earn more money than their middle-class parents. As for 29% of the US population, earning less than 50 thousand dollars a year per 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 crisis of 2008 is to blame, because many millennials reached working age precisely during it. Young people agreed to lower-paid jobs, just to stay busy at all. As a result, an art student in his last year went to work as a barista at Starbucks, or a small bet on an already undernourished team of a startup. Well, and other peers remained in educational institutions longer, if they could not even find something similar. Most of these millennials work according to the model of a “one-off economy” or “gigonomics” and this even suits many of them. Be that as it may, experts say, the millennials will have to work hard to eliminate the income deficit that has accumulated over the past 8 years (and some of them will have to pay additional debt on student loans).

At the other end of this range, well-educated individuals will get high-paying 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 wages. .

All this, as Chetty points out in his work, occurs against the background of a decrease 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 of annual growth in order to offset current trends and help the millennials, Chetti writes. To achieve such an indicator, in the opinion of the most reasonable economists, is practically impossible.

The resulting performance gap is incapable of explaining even the brightest economic minds, let alone proposing a way out. But there is no doubt that this gap exists, making it even more inevitable that the financial future of the millennials will be different from what their parents and grandfathers previously received.

But we will leave disputes over norms and policies. Instead, let's take a better look at the possible consequences of such a large-scale decline in purchasing power for the payment, retail and commercial segments.

Give us the facts.

We all read the same stories and heard the same jokes: Millennials have a yoke of transcendental debt hanging around their neck, 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 goal for which Fintech, the payment industry and retail should rely.

Here is how it all looks in numbers.

According to the National Association of Realtors, the rate of ownership of real estate among persons under 35 years old - at this age the first purchase usually occurs - has decreased from the typical 43% in this age group in 2005 to 36% at present. The age of first time people buying property is also creeping up. If earlier the average profile of such a buyer looked like a married man (married woman) is 29 years old, now this buyer is not married and he and she are 33 years old. And all this despite the fact that the cost of rent now exceeds mortgage payments, and lending rates are at their historical minimums.

The essence of the problem is not the lack of desire to own their property, experts say. The whole thing, above all, is the reluctance to make the first installment, and also the reluctance to fulfill the lender’s requirements, on the basis of which the mortgage is issued. Not having a high credit rating, jumping from one job to another, millenialy, prone to one-time jobs, whose future earnings play against them, make lenders - the very ones who in 1970 predicted a nearly two-fold increase in the profitability of mortgage payments in our time - pretty nervous. And since most of the buyers who are turning to realtors for the first time are not married, the wedding and the family also move further and further.

Lack of property (or marriage and family), of course, means the lack 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 the creation of a family.

The same is true of car ownership - a very rare phenomenon among millenials. Only 26% of them pay loans to buy a car and even smaller representatives of this generation buy cars without loans. Of course, given the fact that trips to UberX and Lyft from one point of the city to another cost just a few bucks, buying a car, investing money 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 should not forget about credit cards, which account for 36% of the total consumer debt. The parents of the millennials probably used them as a tool to achieve their American dreams. 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 it, the average balance on the cards is about $ 5,800 and 60% of them transfer the payment of a part of the monthly debt to the next month, while among the other credit card holders, 47% do so.

Some millennials do not want to issue a credit card, being afraid to get stuck in too much debt, but most of them simply cannot get it. A small credit rating is often considered the main cause of failures, but in fact this is not always the case. Unlike their parents or grandfathers, who could prove that they could earn a lot in the long run, offering banks a healthy risk profile, milleniali simply cannot do.

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

More questions than answers

For example, how to understand that millenial is a really good borrower? If this is not a long-term income perspective, then how do banks and retailers determine the solvency of such customers? Will the traditional, credit card-based model yield a place for a new transactional model when every risk or limit is assessed as part of every single purchase or payment? Who will monitor the process of increasing the limit and what infrastructure is needed to support such a model of a one-time permit for a loan? Will there be new players offering different millenial 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 this loan model be changed? In the current situation, it will not be enough just to offer the millennials a fully digital mortgage repayment application, without any changes to the fundamental moments in the profiles of such borrowers. Their instability in employment and unwillingness to make initial contributions turns them into bad mortgage borrowers. Lenders, whether banks or alternative organizations, issue loans only to those who, in their opinion, can repay them. Will this lead to an increase in the popularity of innovative solutions that help Millennials save or change the structure of the mortgage and the rules for its redemption?

Banks, obviously, carefully consider 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 find themselves - traditional, or in the form of fintech and digital solutions - young people will always need simple tools for storing funds, probably also with the ability to borrow or save.

Retailers, in turn, will have to come to terms with the reality, which is that only a third of the millennial customers who visit their stores carry credit cards with them. For obvious reasons, loyalty programs are in great demand among millennials, as well as bonus points and promotions. However, the means of payment for such purchases will be debit rather 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 serving customers in new realities? Will retailers have to look for new ways to increase credit limits for this group of buyers? Will the millennials swallow the bait in the form of branded debit cards?

And food for thought. One of the most popular recent materials on our site has become an article dedicated to the Walmart layaway loyalty program. This program became particularly popular in the 1930s during the Great Depression and for the most part lost its relevance in the 1980s, when credit cards began to be in special demand. Are we going back to the future again?

And a few more points to complete.

First of all, we should be careful when we talk about “millennials” as a whole, because in reality this is a wide and not at all homogeneous group of people. Even in spite of the fact that 50% of millenials cannot outrun their parents in terms of income, 50% will do it, and a tiny part of those who come from rich families will ultimately have a large purchasing power and means. But the situation with the other 50% really represents a difficult task for society, payment and commercial systems, which will not be so easy to solve.

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

Millennial children with such parents probably don’t need to worry. They will leave them a legacy of sufficient funds. Unfortunately, this is not the case for most millenials. Their parents are not so wealthy and they themselves need their own means to take care of themselves throughout their, let's hope, long life.

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