Gen Z distrusts banks. Many in the under-26 age bracket blame banks for the current economic woes of the world. In their eyes, “too big to fail” means the fat cats always win, at the expense of the young and excluded.  

Many don’t see why banks even need to exist. In their eyes, decentralized finance based on blockchain-enabled P2P platforms is at some stage going to eliminate the need for centralized banking.

That lack of faith with the established banks is already having major disruptive effects. The Gen Z cohort is much less likely to stick with its first choice of bank account provider. In the past, many young people signed up with the same bank as their parents and stayed put for life. But that is changing dramatically quickly. In the UK, for example, the clear majority (57%) of Gen Z adults switched provider within two years of turning 18, compared with just 26% of Millennials, 19% of Generation X, and 16% of Boomers at the same stage in their lives. From Boomer to Gen Z, that’s a 3.5x
increase in the likelihood of switching. 

Unless banks do something, fast, to get this segment onside, then their long term prospects are gloomy.
According to Morgan Stanley, Gen Z takes over as the largest driver of net new loan demand in 2026, when it starts to dominate the key 25- to 40-year-old lending sweet-spot. 

Lending to Gen Z

The established banks are aware of this dynamic, of course, and trying out various strategies to deal with it. These range from amping up Purpose-led philosophies likely to resonate better with younger customers, to taking stakes in challenger neo-banks, where they get privileged access to the impact of new approaches and technologies. 

Given that lending is the primary driver of banking profitability, that is also a key area of interest. The problem is that banks find it relatively hard to lend to Gen Z because younger people tend to have “thin files” — credit histories that lack enough detail to enable accurate decision making. The reason is simple enough: these customers simply haven’t got the years on the clock to have made enough financial choices to generate data that is meaningful to banks using conventional lending underwriting models and processes. 

As well as making it difficult to open up a Gen Z client-base, this is also problematic because Gen Z appears to be much more relaxed than earlier generations about taking on debt and then non-payment of those loans. In the UK, bankruptcy claims against young people increased 10x in just three years, with under-25s now accounting for 6.5% of all bankruptcy cases.

No shortage of metadata

One thing that Gen Z does have aplenty, however, is metadata. It’s no shock to assert that this generation lives on devices more than any predecessor, resulting in an unprecedented trail of smartphone and app metadata. 

With the right security and privacy safeguards, this is all information that could be used to make more accurate decisions about lending. At first hearing this might sound unlikely, but many lenders are already quite a way down this path. 

It goes back to work in 2015 by
economist Daniel Björkegren, who examined the phone records of 3,000 borrowers. He concluded, by analyzing call time and duration, and how much money users spent on their phones, that the bank in question could have reduced defaults by 43%.  

The science of behavioral analysis based on metadata has evolved considerably since then.
A 2018 working paper by the Federal Deposit Insurance Corporation’s Center for Financial Research found that even minimal metadata, such as device operating system and email host, can yield predictive models for credit default.
A 2021 research report showed that even Tweeting provides usable insights that can be used in behavioral scoring systems.  

So the concept is well-grounded and we also know that numerous fintechs around the globe are building AI lending models today based on many forms of alternative data, including smartphone metadata, as proxies for repayment and risk. As a result, lenders are reducing first party fraud and defaults using data other than traditional that is collected, with users’ explicit consent, during the loan application process or any other interaction. 

What we are finding is that even things like app installation patterns, IP address, mouse movements, typing patterns, and session duration (to name just a few) offer important insights into future propensity to repay. 

An opportunity to engage with Gen Z

Metadata is the opportunity for banks and card providers to become more relevant to Gen Z, with greater ability to service a segment of the population that historically has been credit-file-invisible. What is more, this can be achieved with lower defaults, even in a group that appears to be less concerned about non-payment.  

Higher lending volume while reducing costs from non-payment equals greater profitability. For established banks — where operating costs have typically been too high and whose products have been too expensive — this makes them more competitive against the challengers who are currently vacuuming up the Gen Z market. 

And this approach is not likely to alienate the target customers. As smartphone natives, Gen Z is less concerned about sharing data than older segments might be.

A survey by McKinsey found that Gen Z is the most likely to allow apps or sites to collect their data. By showing them that lenders can use that data to provide Gen Z with access to credit at a lower cost, then they can create relationships that could last for decades.

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• Source: https://www.finextra.com/blogposting/24897/banks-must-connect-with-gen-z–before-its-too-late?utm_medium=rssfinextra&utm_source=finextrablogs