From transactional to experiential: Banking for Generation Z

For banks, investment firms and insurers, Generation Z – defined loosely as the cohort born in or after 1995 – is the next great market segment, accounting for approximately one quarter of the entire U.S. population. Gen Z is larger than the millennial generation and even larger than the baby boom generation.

However, success in reaching this attractive market segment is a tremendous challenge because of three significant issues:

·         The Great Recession: The housing-driven financial meltdown of 2007-2010 dimmed the optimism of every generation, but it made Gen Z remarkably pragmatic about money and particularly mistrustful of big banks (and large institutions in general).

·         True digital natives: Millennials came of age just as the internet was taking hold, but Gen Z is the first generation to be true digital natives. They have grown up with streaming music and video, texting and social media – using a smartphone is more than deeply familiar. Gen Z won’t tolerate a non-digital experience.

·         Fintech competitors: A generation ago, the universe of serious financial service competitors was well known; the only real decision point for consumers was global versus local and, in investing, mutual funds versus brokers. But digital-only fintech companies are everywhere now and often offer a better value proposition and a more compelling customer experience. For example, the online-only Ally Bank has a great app and pays 1.85 percent interest on savings accounts while a well-known brick-and-mortar national bank pays 0.01 percent on deposits up to $24,999. If what you need is an easy way to save, why would you choose the brick-and-mortar bank?

What does this all mean for traditional banks trying to engage with Gen Z? It means you have your work cut out for you. Your branch network, capital base, ability to provide 20 or 50 or 100 different services, and even the brand equity you built over decades – none of these things are particularly compelling to Gen Z. In fact, they may work against you.

It also means that your digital presence must be incredibly robust, networked to ecosystems and up-to-the-second—not to mention powerful, fluid, valuable and fun.

Overcoming the first hurdle and delivering on the second require two significant shifts: a shift in mindset and a shift in your company’s technological mission.

Demanding a different digital experience 

In today’s Business 4.0 world, customer experience has emerged as a key source of competitive advantage, and no group takes experience more seriously than Gen Z. They are looking for a digital experience aligned with how they manage every other aspect of their lives: from the screen of a smartphone or tablet.

Making a money decision – from splitting the cost of a pizza or Lyft to saving for a vacation or investing for retirement – should be as easy and straightforward as sending a text (as Apple Pay Cash is doing) or posting on Instagram. Gen Z won’t want to meet with mortgage experts or investment advisors. Instead, they’ll expect highly automated, digitally-delivered services – accessible through whatever digital device they happen to have at hand and wherever they happen to be.

We characterize this shift as moving from a transactional mindset to an experiential mindset. Traditional bank customers think in terms of transactions. They want to pay bills, get cash and save or invest as their cash flow permits. Gen Z (and this will spread to earlier generations) is different – they want experiences that match their lifestyles.

Of course, they have to pay bills (usually online), but they carry cash less frequently than other generations (if at all). Their transaction context is often social, as well: “Let’s split the cost of this Lyft ride three ways.” Gen Z will gravitate to financial firms that embrace this sharing mentality – either by building their financial functionality accordingly or by partnering with service providers and social graphs.

Redefining “the bank” with digital technologies 

Focusing on the user/customer experience demands leveraging different technologies and shifting the organizational mindset; generally, this takes the form of an agile approach. Agile development poses many technical ramifications, but it’s also important to think about the underlying agile philosophy: evolutionary development, early delivery and continuous improvement. In short, organizations must learn to embrace speed and flexibility by transforming not just systems and stacks but also people and processes.

This is harder for traditional banking players than it is for lean fintech start-ups. Companies will need to simplify and modernize technology stacks by adopting decomposable microservices, JavaScript runtimes and lightweight, reactive systems, for example, and will need to embrace cloud computing.

They also need to accept open banking systems (now required in some jurisdictions, like the United Kingdom) that interoperate with other providers. Artificial intelligence and analytics will help predict and manage cash flow, eliminate friction, automatically rebalance investment portfolios and search for relevant opportunities from among a slew of provider ecosystems.

The successful banks for Gen Z – and, eventually, for all market segments – will allow users to do their banking through any channel and will work alongside a constantly shifting array of “Uberized” partners. And traditional brick-and-mortar branches may also play a role in the digitally-dominated Gen Z future.

Imagine a bank that adopts today’s most advanced digital technologies in the branch – for example, implementing a facial recognition program identifies customers as they walk in, personalizing their experience and increasing the relevancy of offers and services. This customer might apply for a mortgage online and walk into the branch for biometric verification – no teller required.

Instead of banks serving as a kind of financial supermarket, with everything that the average consumer might require, banks could evolve into a financial services apps platform. One that has the infrastructure, robust payment networks and ability to transact around the globe; one that leverages its infrastructure by partnering with numerous service providers to deliver maximum value to consumers while providing superlative digital experiences.

As every generation does, Gen Z is redefining what it means to be a consumer. If banks want to serve this emerging market, they’ll have to redefine what it means to be a bank.