By Genie Driskill

For financial services providers, Generation Y (Gen Y) is a key target market. Its size, earnings potential and purchasing behavior are among the major factors contributing to the attractiveness of this segment. As financial consumers, Gen Y offers unique challenges and opportunities that providers must address as they prepare marketing strategies for the next generation of consumers.

Synergistics Research Corporation recently conducted a major evaluation of Gen Y in order to assist providers in understanding the importance of this target market and their financial services behavior. As part of the study, a national Internet survey of 803 Gen Y consumers ages 18 to 29 was conducted. In addition, 100 interviews with Gen X ages 30 to 43 and 100 with Baby Boomers ages 44 to 65 were conducted for comparison purposes.

Market Profile

A first step in evaluating the financial needs of a unique customer segment is to define that group. Generation Y, often thought of as the children of Baby Boomers, is the generation directly following Generation X, which followed the Baby Boomers. While there is not an official standard, one of the most common definitions of this generation is consumers born in the mid-1970s to the early 1990s. Gen Y is, therefore, a mix of college students preparing for life beyond the campus and recent entrants to the workplace. This segment is also frequently referred to as Millennials and Echo Boomers.

Generation Y is the largest generational group since the 80 million post-WWII Baby Boomers, and represents more than 70 million consumers in the United States who have a collective income of approximately $1.89 trillion. Since most are still in their teens and twenties, their total earnings are expected to grow to as much as $3.5 trillion over the next decade, outpacing their parents by hundreds of billions of dollars. Generation Y spends an estimated $172 billion per year and strongly influences purchasing behavior among older consumers. Industry experts estimate Generation Y could influence as much as half of the spending in the United States.

Relationship Building

As part of its survey, we examined the financial service relationships of Gen Y. As shown in Exhibit 1, almost nine in ten Gen Y respondents indicate having financial accounts and services with a bank or savings institution. A majority have relationships with credit card organizations, and more than four in ten have services with a student loan provider other than a bank. Credit union and insurance companies are used by one-quarter. Fewer Gen Y respondents report using mutual fund companies, automobile or consumer finance companies, and stock brokerage firms. Overall, Gen Y reports using 3.5 different financial institutions on average.

Usage of banks and savings institutions is as wide among Gen Y as other segments. However, usage of a number of other types of institutions including credit unions, insurance companies, mutual fund companies, auto and consumer finance companies, and stock brokerage firms, increases among Gen X and Baby Boomer segments.

In their attitudes, Gen Y tends to be loyal to their main provider, is positive toward using one main institution, and is more apt to trust the advice of this provider than their older counterparts. Only one-tenth of Gen Y respondents agree with the statement, "My relationship with my bank is only temporary." More than half agree with the statement, "I prefer to use only one financial institution for most of my financial needs." Directionally, Gen Y is more likely than the older segments (56% vs. 48% and 42%) to agree with this positive perception of a single provider.

Checking account relationships are established early with Gen Y consumers and for the most part are long standing. Most Gen Y consumers report that they obtained their first checking account while they were in high school and have kept their account even when moving away to college. Many still have the same account they had in college.

Plastic Cards Rule

Gen Y members are heavy users of plastic payment cards, and eight in ten Gen Y consumers report using a debit card. Average monthly frequency is 19.5 times per month. The key features of debit cards include the ability to use them at ATMs, being fast to use, not having to carry as much cash, and being easier to use than checks. Gen Y consumers may represent the beginning of the much touted checkless and cashless society. While they do have checking accounts, they write fewer checks than their older counterparts — Gen Y writes an average of 3.2 checks per month as compared to 5.4 for Gen X and 8.0 for Baby Boomers. In addition, they are not cash junkies. A majority reports they typically carry very little cash, such as less than $20. Cash is typically used only for purchases under $5. For all other levels of purchasing, some type of plastic card is used. (See exhibit 2).

Technologically Savvy

Technology plays a much greater role in the lives of Gen Y than any other generation, as this group has grown up with computers, the Internet, iPods and cell phones, and most use them on a regular basis. Social networking sites have become very popular among the Gen Y segment, and the level at which Gen Y embraces technology and electronic communication is changing the way financial institutions should interact with these younger customers. Improved online banking services and new mobile banking functionality will become increasingly important. Two of the most distinguishing features of Gen Y are their peer orientation and desire for instant gratification — these qualities result from growing up in an age of being "constantly on" and wired. All of these characteristics need to be addressed in developing and marketing financial products and services to this segment.

Gen Y spends a great deal of time online. Gen Y averages 26.6 hours per week online, which is slightly higher than their older counterparts — Gen X (22.1 hours) and Baby Boomers (20.3 hours). A significant majority are regular online banking users. In fact, Gen Y prefers to bank online when compared with going to the branch. Three-quarters agree that they "would rather handle banking matters online than go to the branch."

At the current time, most online banking revolves around information activities. The top online banking activities are checking balances and viewing statements online followed by checking recent transactions. A second tier of activities are transaction related, including making transfers, and online loan and credit card payments. A minority of Gen Y report that they view cleared checks — again, an information activity. Gen Y performs online banking activities an average of 10.9 times per month, the same monthly frequency as Gen X and Baby Boomers.

Online bill payment activity is also significant among Gen Y consumers. Overall this group pays fewer monthly bills (5.8) than Gen X (9.1) and Baby Boomers (11.1). However, Gen Y is more likely than their older counterparts to pay all of their bills online (32 percent vs. 21 percent and 10 percent respectively). Most bill payment activity is at biller sites, followed by financial institution's websites. Gen Y consumers are avid users of online banking and bill payment, and providers should leverage this contact point for cross-selling other services to this up and coming segment. Providers should also make attempts to capture the bill payment activity that is being performed at biller websites. Moving more of this activity to the institution's bill payment service can serve to solidify Gen Y relationships at the institution and retain them as this group's financial experience broadens.

Mobile banking is the next step for online banking. Three-quarters of Gen Y respondents report they own a wireless or cellular phone. One-fifth own a smartphone, and one in six own a Palm Pilot, BlackBerry or other organizer. Close to one-fifth have used a cell phone for mobile banking activities. About one-tenth of owners report using a smartphone for online financial activities, and one in twenty cite usage of a PDA or organizer. Even though current usage of mobile banking is limited, Gen Y may be the segment that takes it mainstream. Providers will need to prepare for increasing usage in the future, and as the capabilities of these mobile devices continue to converge, mobile banking will grow as well.

Strategic Implications

If you asked Gen Y to assess the opportunities that exist among this key target market, they would probably respond "Awesome." Indeed, Gen Y does offer significant opportunities to financial services providers. Banks, in particular, have a competitive advantage with Gen Y, which they should leverage for the cross-selling opportunities inherent in this segment. Banks are the most widely used type of financial institution among Gen Y, and the group expresses a degree of trust and loyalty for their main bank.

Providers need to look at their checking account product line to make sure that it includes a product for this segment. Checking accounts need to be positioned as transaction accounts with Internet and debit card access and with bells and whistles that speak to Gen Y. A number of providers have recently developed creative products for this segment. The widespread use of plastic cards by Gen Y also provides opportunities for innovative product design initiatives and marketing programs. Educational materials regarding credit usage will need to be incorporated into marketing efforts.

Updates and enhancements to online banking and bill payment will be essential as these are the primary channels used by Gen Y. As mobile banking takes hold, mobile payment applications will become increasingly important to this segment. Marketing and communication programs will need to incorporate the various forms of social online media, such as blogs, forums and social networks.

While Gen Y represents significant opportunities for financial services providers, this segment, more than any other in recent times, requires creativity, innovation and thinking "outside the box." There are challenges, but they are interesting and exciting. Gen Y will breathe new life into financial services marketing programs.

About the Author

Since 1981, Genie Driskill has directed studies at Synergistics on numerous topics in the small business and consumer financial services industry. She is responsible for all stages of a project including topic selection and definition, development of proposal and marketing materials, questionnaire development, survey analysis, industry executive interviews, and strategic assessment.