Generation Z: How Banks Can Adapt to the Next Generation of Connected Customers
When the Great Recession hit in 2008, it dealt a huge blow to millennials who were just venturing into adulthood and created a domino effect exacerbating their financial struggles. Unlike millennials, Generation Z was preparing to enter a more stable world with improving economies and employment rates – until the coronavirus pandemic derailed those plans.
Despite these setbacks, a report by the Center for Generational Kinetics (CGK) shows Gen Zers still seem to have clear financial goals, usually associated with later life stages. Ninety-one per cent plan to buy their own home someday, 69 per cent think saving for retirement should be a priority and 66 per cent are worried about accumulating or not being able to pay off debt.
This clearly shows traditional banks have a sizeable opportunity to engage with and support Gen Zers. More importantly, they have a significant advantage over many challenger and digital banks: trust. Traditional financial institutions have a long history of demonstrated success, proven stability and scale, which are key when assessing trust and exactly what customers desire during uncertain times like these.
The question is, can banks capitalize on the opportunity? I believe they can—so long as they’re cognizant of Gen Zers’ goals, their own capabilities (or rather, what may be limiting their capabilities), and their willingness to go out of the way to design products for digital-native Gen Zers.
Understand the Gen Z mindset
Generation Z, born between 1997 and 2015, is presently the youngest working generation. They are digital natives and choose to align more with fintech companies rather than the traditional banking system, primarily due to the convenient and hassle-free experience fintechs offer.
They’re also more financially savvy, which is warranted. Gen Zers saw their parents—most likely to be baby boomers or millennials—struggle during the Great Recession, and many are saddled with student debt. Despite the challenges, this generation is already planning for their retirement and are driven to be financially aware. While most millennials already use various financial products such as credit cards, debit cards and are availing loans, many Gen Zers are yet to go beyond opening a bank account, which presents a significant opportunity for traditional banks.
Design personalized products and services
To attract and retain Gen Zers, banks will need to develop products that offer value, and are authentic and educational, catering to Gen Z’s desire to learn innovatively, and are tailor-made for this audience. Like all customers, Gen Zers think about their needs, not about banking products and services. Banks can no longer expect to create satisfied customers by merely holding their money; they need to become facilitators that provide the vital support their customers need to achieve their overall goals.
To develop these personalized products, banks need to stay at least several steps ahead of their Gen Z customers, predicting their needs every step of the way. By leveraging data intelligence (including credit profile, account information, transaction history, loan information, personal profile, household information and more), banks can create a complete profile of their customers. This will help them develop a customer-centric business model by giving them a deep understanding of each customer that will allow them to design meaningful touchpoints with their customer. If banks allow insights to guide them on how they design personalized products, it will enable them to build a loyal client base.
Seek out value networks
The pandemic has forced banks to digitalize at an unprecedented pace, but they must place more focus on open innovation. Collaboration is not a new concept and is gathering steam as banks look to improve their operations to shore up competitive differentiation and attract the newer, digital-proficient generation. More recently, banks are realizing this power of collaboration, and are not just partnering with fintechs but with Big Tech companies too, so they can together increase the pace of innovation for customers, especially millennials and Gen Zers.
Google Pay recently launched its “Plex” bank accounts in partnership with 11 banks and credit unions. The service is set to roll out in the U.S. in 2021, and will give people a chance to open digital bank accounts with traditional, trusted financial institutions. This is just one example of how banks are embracing innovation and collaborating with other industry players to unlock the power of their respective ecosystems, deepen their existing relationships, and design ways to serve a new generation of customers.
It’s exciting to see banks embrace the idea of building a partner ecosystem that operates outside current industry boundaries and can help establish disruptive revenue streams. Banks understand they need to rebuild themselves as consumer platforms that are inherently digital – but unless they have the right technologies to underpin the value chain and value networks they need for their Gen Z customers, they are not likely to succeed.
Build agility, augment capabilities
Today, traditional banks face existential challenges—very different from the ones they faced 20 years ago. They’re now required to think more strategically while adapting easily—and quickly—to changing circumstances. Bank CEOs aren’t required to be tech experts, but they do need to understand their business runs on data, and they must understand how to utilize this data effectively.
Nearly 80 per cent of banks lack the technology to provide great customer experiences, and their hands are tied because they’re using outdated core systems. Relying on traditional core banking systems is like trying to lift a pen with your elbow instead of using your fingers. Banks should instead consider hollowing out the core to create a system of engagement which sits below the channels and on top of the system of record and provides intelligence and the ability to assemble all products into one catalogue.
Many core banking systems are aging, antiquated and inefficient. If banks can employ this type of layer to automate the way they handle data, they can significantly improve their operations, customer service and economics – and they can do it by augmenting their capabilities rather than replacing them entirely.
Customer-centricity is key
Banking is often perceived as a chore, and people are often intimidated by the world of finance. Given the exceptional interest Gen Z has taken in managing their finances early in their lives, banks are in a unique position to make that process easier for them and streamline the experience by using data to make better credit decisions. But traditional banks can only do this if they work towards earning Gen Zers’ trust.
As of now, some banks are yet to tap into all the available opportunities to add extra value to clients and help them meet their broader goals. If banks can better understand Gen Zers’ priorities, goals and expectations, they can deliver customized, value-add value services while also creating opportunities for partners. For instance, if a Gen Zer is keen to buy a house but has yet to start saving, their bank could first educate them about the mortgage market, and then go beyond to identify and share methods to help them plan and save to reach this milestone.
Many have predicted the fall of the traditional bank for years, but the traditional bank has a bright future. Physical bank branches remain key for customer engagement. According to research by Qudini, four fifths of Gen Z customers want their bank to offer a face-to-face service, with 81% stating this was important or extremely important. Banks already realize that they need to evolve and have acted to do so. Many are now looking to make bank branches into experience centers, something similar to Apple Stores that allows them to offer a place for customers to explore products and services, address complicated banking problems, and make them feel safe discussing their financial objectives and challenges.
The financial value of Gen Zers to the banking system is expected to increase significantly in the next five years. The traditional approach to banking, customer engagement and customized services will not appeal to this new generation. If banks want to earn Gen Zers’ trust and business, they must be able to design and innovate products that are different and hyper-personalized. But they first must realize that their business runs on data—quality data.
Banks cannot afford to simply design products and services based on today’s demands. They must envision and radically innovate for the next generation of new customers now to transform themselves for the future. Banks that fail to evolve for the times – and the audience – run the risk of being left behind and missing out on engaging with this crucial demographic. If traditional banks don’t put away their inhibitions and evolve with the times, they may no longer appeal to a whole generation of customers, endangering their operations as time goes on and technology takes center-stage.