Analysis Featured

Millennials and Alternative Lending

millennial credit
Source: Zoot Enterprises

People born in or after 1981 are referred to as “Generation Y,” or “Millennials.” Putting tags aside, the fact is one of the largest generations in history is about to move into its prime spending years and, therefore, it is not surprising at all as to why they are the center of every business plan and strategy. Financial institutions and online lending platforms are making a beeline to cater to this demographic.

Millennials in Numbers

Roughly, millennials account for 1.7 billion individuals globally. They represent approximately 25 percent of the entire world population and will account for 75 percent of the workforce by 2025. In the United States, there are 92 million millennials as compared to 77 million baby boomers making millennials the largest generation in US history. More importantly, 63% of global millennials do not have a credit card, and 70% of them feel their relation with banks is only transaction-based.

millennials

Opportunities for P2P lenders

Digital engagement is at an all-time high among millennials, and they are savvy online consumers by default. This demographic offers myriad opportunities for alternative lending companies for the following reasons:

  • Technology Disruptors: Millennials are technology driven and wish to do all their activities digitally. This gives a lucrative opportunity to online lending companies to target them by serving innovative yet tailored products. According to the Consumer Mobility Report, it was observed that nearly one in six (16 percent) in the US are considering options other than cash and checks for doing transactions. The overreliance of this generation on technology works in favor of online lenders as they are able to structure products which are accessible by millennials on their smartphones or tablets.
  • Drowning in Debt: According to HSBC’s 2016 report, the average cost of studying in the US is approximately $33,215, and with the increasing cost of a college degree, millennials are burdened with staggering student loans. It was observed that average debt per graduate student is $57,600, with an average default rate of around 11.8%. Students are drowning in debt and are putting off future plans like buying a home or getting married. A trillion dollar market is in upheaval, as these millennials will look for cheaper and flexible student loans.
  • Lack of Trust: According to a three-year study conducted by Scratch/Viacom Media Networks, it was observed that 71% of millennials would rather visit a dentist than a bank. And another 33% of millennials are of the view that they won’t need banks in the coming five years. Also, 33% of them are willing to switch their banks within 90 days. These loyalty numbers don’t augur well for traditional financial institutions.
  • Low Credit Score or No Credit Score: Millennials are increasingly finding it difficult to secure lending from traditional banks because they either don’t have any credit score or have a low credit score. This is a vicious cycle as banks only lend to individuals with a good FICO score, but you only get a good FICO once you secure and pay off a loan.
  • Preference for Liquidity: As per the PricewaterhouseCoopers and George Washington University’s Global Financial Literacy Excellence Center report, it was found that in spite of having little knowledge about finance; merely 27% of millennials are seeking financial help from professionals, and 42% rely on payday loans for liquidity.

A snapshot on millennial borrowing:

millennial credit
Source: Zoot Enterprises, Inc.

Strategies Used by P2P Lenders

The evolution of our financial system can be gauged from the fact that fintech startups targeting millennials have raised billions in funding from VCs and other institutional investors. These online lenders have differentiated themselves in the following manner:

  • Credit Worthiness – Millennials struggle with their credit score as they usually have a very short financial history. Online lenders understand that a millennial can’t be evaluated on the basis of a single number. They have built their lending algorithms on other qualitative characteristics like social media usage, college degree, and location. Even the time of the loan application is a relevant factor.
  • Banks Going Down the Fintech Path – Fintechs are nimble organizations and are able to react to customer demand on an almost real-time basis. Banks are slow-moving mammoths but have the advantage of ultra-low cost of funds. Instead of competing, many startups have partnered with banks for either becoming their tech partners or onboarding them as their financial partners for lending to millennials. Case-in-point is the OnDeck and JP Morgan partnership for the bank’s SMB clientele.
  • Mobile – Lenders can now disburse loans in minutes. The applicant can actually now apply through his smartphone without even leaving his home. Their systems allow for uploading and verification of all applicable loan documents digitally. This removes any hassle of physically going anywhere for your credit requirements. As compared to weeks of waiting for a response from a brick-and-mortar bank with a fintech lender on your side, you can decide to buy your dream house in a day.
  • Trust Factor – According to Experian’s latest research, millennials are embracing online lenders for their comfort, speed, and convenience.

a) 47 percent of millennials said they are likely to use alternative finance sources in the near future.
b) 57 percent reported that they are willing to use alternative companies and services that innovate to meet their needs.
c) 13 percent said they’ve already taken out a loan from an alternative or non-bank lender.

Being a young startup is actually working in the alternative lender’s favor as it helps them disassociate from traditional bankers who have always been considered as behind-the-curve and untrustworthy. They are leveraging their hip and social image to attract image-cautious millennials.

Conclusion

Originally, traditional banks seemed to have missed the bus in understanding and serving the millennial market. But with acquisitions, strategic partnerships, and massive tech investments, banks like JP Morgan and Goldman Sachs are reinventing themselves. On the other side, many clones of the same underlying business model are springing up in the online world. This herd mentality has led to the commoditization of innovation and the novelty factor. It is imperative that the alternative lending sector matures and consolidates to ensure its continued growth and success.

Author:

Written by Heena Dhir.

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Allen Taylor

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