Gen wise?

Forget huge mortgages and car loans. Millennials are all about mobile banking and low-fee investing. While such prudent behaviour may be smart, it spells trouble for financial institutions.

Julia Poletto is on a jam-packed streetcar, heading home to her apartment in Toronto’s trendy Cabbagetown neighbourhood. It’s not exactly a comfortable ride, but it’s a dream come true for the 25-year-old, who works at a nonprofit employment centre helping people find jobs. Just a few short months ago, Poletto was still living with her parents in Orangeville, Ont., where she’d been since graduating with a degree in human rights from Ottawa’s Carleton University in 2013. And before she landed her current gig in June 2015, she spent years working as a barista and in other minimum-wage jobs, unable to find a position lucrative enough to move out of her childhood home and start making a dent in her $30,000 student loan.

Now that she’s settled into city life — paying $800 a month in rent to share a modest two-bedroom apartment with her cousin — Poletto’s next goal is to eliminate her debt. And, after that, travel. “I’ve already started planning a South America trip with a couple of friends for next year,” she says. As for buying RRSPs or a house, that’s not really on her radar. “I don’t have any plans to settle down,” she says. “I’d like to enjoy the freedom of being debt-free before I invest in a home.”

Poletto’s financial priorities are hardly unique to her generation. Facing a precarious job market and burdened with unprecedented levels of student debt, millennials (those generally between the ages of 18 and 34) are forgoing — or at least delaying — big milestone purchases such as cars and homes, a US survey by Goldman Sachs found last year. Lifestyle also plays a role, with young people often preferring to let someone else do the driving (Uber anyone?) so they can stay connected on their smartphones, and opting to rent rather than be house poor by getting into the real estate market.

While prudent financial behaviour such as paying off debt and avoiding massive home loans may be good news for individual millennials, it spells trouble for the personal banking industry, which relies on loans, mortgages and other financial products and services to turn a profit. Add to this the demographic’s distinct preference for technology and mobile-based services — and the fact that millennials now comprise the largest cohort in Canada’s workforce — and it’s clear that mainstream financial institutions will have to make some sweeping changes if they hope to attract and keep younger clients.

Jodie Wallis, managing director of Accenture’s banking practice in Canada, agrees big banks could be doing much more to cater to millennials. “The key for the banks is to engage the millennials now, in advance of these larger lending needs. That means delivering a seamless omnichannel experience with proactive interactions and truly personalized offers,” she says.

In Poletto’s case, for example, her bank could have offered her a personalized incentive in the form of a Spend Analysis app, suggests Wallis. This would help the bank understand more about Poletto’s financial needs and planned purchases so it could then provide specific, targeted advice on how she could pay back her student loan faster. After all, the sooner she pays off her debt, the more disposable income she will have for other things, including financial products.

Now compare this to Poletto’s actual experience at TD Bank. She booked an appointment to speak with a branch employee about her loan, but the loan officer didn’t seem interested in understanding her situation or educating her about options. “The conversation was stressful,” says Poletto. “I had a list of questions I wanted answered but left more confused than when I went in.”

#EPICFAIL

Poletto’s bank obviously missed a major opportunity to connect with her. That’s a serious problem, especially when you consider that millennials switch banks twice as often as other age groups, according to Accenture’s 2015 North America Consumer Digital Banking Survey. And in-person meetings aren’t the only ways the banks are failing to address millennials’ needs. The survey found that nearly half (48%) of millennials would like their bank to start offering online video chats. Whether in-person or online, the discussions need to be tailored, says Wallis. “Maybe it’s a video or text chat, instead of humans for the sake of having humans,” she says. “But the interaction needs to be specifically about them and their circumstance.”

Tangerine, for instance, just launched a real-time chat on its website that will soon be available on its mobile banking app. While most chats deal with general questions only, SecureChat will allow customers to get into their specific account details and transaction information.

This is the kind of technology that could win over branch-averse millennials such as Jason Brown, 26, of Dartmouth, NS. So far he’s stayed with RBC — the only bank that had a branch in his hometown of Porters Lake, NS — but the appeal is waning. To negotiate his student line of credit, for example, he had to endure the time-suck of bank staff presenting him with mounds of paperwork. “There were hundreds of pages of different options but, frankly, it’s available online and easier to read online,” he says.

Jason Brown and Collette Beyer

Brown and his girlfriend, Collette Beyer, 22, have a small apartment overlooking Halifax Harbour, but they’re rarely home. He’s a full-time student studying pipe trade at Nova Scotia Community College and he also works 30 hours a week at two part-time jobs: as a maintenance worker and a tech-support provider for a private college. She’s a dog groomer who works irregular hours.

As a constantly on-the-go couple, they are fans of mobile banking. They primarily use bank apps on their phones to make deposits, conduct transfers and check balances. But Brown can’t wait for the day when he can make purchases directly from his bank account using his phone. When Starbucks launched an app that allowed its customers to pay for coffee and pastries using their phones, he wondered why the banks weren’t the first to offer something similar for all goods and services. “I feel no one bank has anything better going for it than the next one,” he says.

This echoes Accenture’s findings about millennials. Wallis says young people aren’t necessarily comparing banks to other banks, but to tech-savvy retailers that offer millennials top-notch experiences. Think Apple, Google and, yes, Starbucks. “Regardless of whether those expectations make sense for banks, those expectations exist,” she notes. “They have no tolerance for conducting transactions done anywhere other than the channel which they so choose.”

According to a recent report from Deloitte Canada, this may be the year the industry finally responds to millennial desires, with mobile payments expected to increase 150%. But up until now, banks have been positively glacial in their migration to such technologies.

On the contrary, they seem to be doubling down on the brick-and-mortar model. RBC, for example, launched branded retail stores to mimic the feel and experience of a storefront instead of the stuffy, traditional branch. “It’s more like an interactive retail experience, which we believe appeals to millennials,” says Mandy Mail, RBC’s director of student banking at the time of writing.

Linda MacKay, senior vice-president of personal savings and investing at TD Canada Trust, sees the bank branch as the sounding board that completes the connection between all the noise that’s available online. “Millennials want that second opinion or they want someone to validate their choices,” she explains. “Branches still have an important role with face-to-face conversations, especially concerning some of these big-ticket items like a house or investments.”

Perhaps. As Brown bluntly puts it, “I do everything from my phone. I probably won’t go into another bank branch unless I get a mortgage.”

DEATH OF THE MORTGAGE?

“Unless” is the key word in Brown’s statement, of course. A mortgage may simply not be in the cards for him or for many of his contemporaries. Like Poletto, he wants to pay off his $28,000 student debt and $15,000 student line of credit first. And right now, he and Beyer barely earn enough to pay their living expenses. He calculates they won’t even qualify for a mortgage until he’s 32 — and that’s assuming his student debt repayment plan works out as he predicts, and he’s able to increase his work hours once he graduates in April.

Even in a best-case scenario, the couple isn’t interested in taking on a mortgage if it means years of sacrifice. “My parents bought a house that was too big and expensive, and they spent most of their lives scraping by as a result,” Brown notes. “I don’t want to get myself into a situation like that.” Adds Beyer, “I don’t want to spend my whole life paying off a house I can’t afford.”

If the banks don’t seem concerned about this attitudinal shift in home ownership, it may be because they haven’t felt its effects yet. Indeed, for every Canadian millennial who eschews a mortgage, there’s another who’s already got one. In contrast to the US, where just 36% of millennials own a home, a recent TD Economics report found that more than 50% of Canadian millennials own a home — a higher percentage than previous generations at similar ages.

It’s possible Canadian millennials are receiving more parental help than their US counterparts, as the TD report points out: “Parents of millennials in Canada have benefited from a near-doubling in the average home price over the last decade. No doubt, some of this wealth and resulting financial wiggle room has been passed down to children.” Recent news reports have highlighted another way boomer parents are helping their cash-strapped kids: by cashing out their RRSPs or other investments. That could be yet another costly trend, at least as far as the financial institutions that manage those investments are concerned.

Even among millennials who are fortunate enough to have family help and are on decent financial footing, obtaining a mortgage can be a reality check. Take Sean O’Connor. At first, it was difficult for the 26-year-old to accept that he and his wife, Stephanie, 27, couldn’t afford a house in Vancouver where he grew up. He had no student debt (his parents paid for his post-secondary education — a bachelor of commerce from Montreal’s McGill University) and he had little trouble finding work after graduating. Still, the couple had to drain most of their investments and get money from their parents to put together a traditional 25% down payment on a townhouse in South Surrey, BC, about an hour outside of Vancouver. “We bought at the lower end of our affordable mortgage as we knew that there were still a lot of uncertainties,” O’Connor says.

Those uncertainties include the cost of raising their two young kids, aged three and 11 months, on one income.

Stephanie stays at home with the kids and plans to do so until they’re in school; O’Connor recently satisfied his “entrepreneurial itch” by leaving an executive position at a construction company to join Grow, a financial technology startup. Although he’s a vice-president of partnerships, he took a 50% pay cut from his last position in exchange for an equity stake in the new company.

O’Connor had the foresight to obtain his mortgage while he was still working for the construction company. He knows it would have been much more difficult to qualify for the same size mortgage in his current job, because the banks don’t look kindly on ambiguous forms of income, such as equity, commission or contracts. He believes the natural entrepreneurial inclinations of millennials sometimes work against them when dealing with financial institutions.

“Millennials get punished as contracted employees. The cash flow is still relatively the same, but the data used as outputs to show our financial health doesn’t make it into the traditional metrics,” he says. “A credit report is largely dependent on things like your mortgage or car loans. Well, we tend to rent longer. We may not own cars. We have made Uber one of the fastest-growing companies in the world.”

As more millennials move toward entrepreneurship — up to two-thirds have the goal of starting their own business, according to at least one US study — banks may need to change their overall risk policies, concurs Wallis. “They need to figure out how to use data other than a pay stub from a corporate employer to supplement what they know about the customer to support their risk policy,” she says.

INVESTMENT INNOVATIONS

The stereotype is that most millennials don’t have investments or, if they do, they don’t amount to much and are in low-risk products such as GICs, in an attempt to avoid drastic market losses like those of the 2008 financial crisis. But a CIBC study released last December found that two-thirds of millennials do have investments — everything from mutual funds to stocks, bonds and GICs. What they don’t have is adequate financial know-how.

According to the study, 82% of millennials who own investments say they don’t have enough knowledge to manage them. “This is even though they are doing the investing themselves and find all kinds of research,” says Jamie Golombek, managing director, tax and estate planning, at CIBC Wealth Advisory Services.

Here’s the problem. Traditional financial advisers often have account minimums that many millennials can’t meet, but do-it-yourself investing doesn’t offer the advice millennials crave. Thankfully, this is one area in which financial institutions are starting to comprehend the needs of millennials, with the advent of robo-advisers, which marry professional advice with a DIY element.

O’Connor uses a robo-adviser service — an app from online portfolio manager Wealthsimple — which essentially provides a computerized financial plan. Here’s how it works. First, he filled out a detailed questionnaire to determine his risk tolerance. Then the robo-adviser helped him choose a portfolio from one of 10 predetermined plans that best suited his situation. Finally, an algorithm automatically rebalances and reinvests the investments on his behalf. If he has any concerns or issues, he can get a response by email, text or phone on a 24/7 basis.

Sean O’Connor

O’Connor appreciates the flexibility, low cost and transparency of the advice. “It has a really easy on-boarding process,” he says. “I like the financial strategies they put together for people. You put the money in and leave it alone for the time being. And I don’t have to walk in with $20,000 or $100,000 to feel relevant. I can contribute small amounts.”

Globally, robo-advisers, which are mostly independent players at this stage, had US$20 billion in assets by the end of 2015. That number is expected to balloon to US$450 billion by 2020, according to MyPrivateBanking research.

In January, the Bank of Montreal was the first of the big five Canadian banks to make its own robo-adviser available to investors. Other banks are expected to follow suit. O’Connor thinks the move is a step in the right direction to woo millennials, and predicts BMO’s platform will likely be “a little more expensive [than independent robo-advisers] and a little less convenient, but under a more trusted brand.”

And trust is what it all comes down to, even for millennials. They may have a higher-than-average switching rate when it comes to banks, but this is still a conservative country. Drilling down a bit deeper into Accenture’s numbers, consider this. While 37% of Mexican customers surveyed switched banks in the past year, just 7% of Canadian customers did. That’s not to say that change won’t happen — it definitely will — but the pace will be more methodical and gradual. Great news for the banks that are busy playing catch-up.

And many unanswered questions remain as millennials grow older. “We don’t know what happens when life events do happen to them, and how that will change [their decisions] over their lifetime,” Wallis says. “We don’t know yet if there is truly a behavioural shift and a reluctance to take on debt or just a delayed set of financial needs.”

About the Author

Deanne Gage


Deanne Gage is a Toronto-based writer and editor.

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