Banks can't afford to ignore Generation Z

The growing importance of millennials in the workforce has already unleashed major forces of change on the banking industry, fueling the growth of digital technologies and fintech startups. Now banks are preparing for the next generation — Generation Z — to take things a step further.

Generation Z mostly have yet to enter the workforce full time, but many are already earning and saving. The oldest members of the generation are now in college — Gen Z is generally defined as those born after 2000, though some studies have set the generation’s starting point as early as 1995. More than two-thirds of them already have either their own bank account or a joint account shared with their parents. Although most of them are still in school, U.S. members of Gen Z reportedly hold more than $40 billion in purchasing power in the U.S. Many of them already work — about the same percentage of Gen Z is earning money as millennials who are about 10 years older. They also outnumber millennials — and will begin entering the workforce full time in droves within the next half decade.

In some ways, Gen Z’s habits and preferences reflect those of their millennial predecessors. They are technology-oriented, including in how they manage their finances. One survey found that 48% of them already have a finance or payment app on their phone. Additionally, in an ominous sign for banks, 42% of Gen Z said they’re “excited” about the prospect of using tech giants like Google, Apple, Facebook or Amazon for financial services. It’s important to also remember that this generation has grown up interacting with emerging technologies and experiences. Millennials grew up with cellphones. Gen Z has grown up with intelligent voice assistants like Siri and messaging apps like Snapchat.

Gen Z also differs in some ways from the millennial generation. Millennials grew up in the pre-recession economy of the early and mid-2000s, and then entered the workforce full time right when the Great Recession hit. Gen Z has grown up mostly in a post-recession world, watching their parents and older siblings grapple with the fallout of the 2008 economic crisis.

That formative experience helps explain two of Gen Z’s most important financial habits: a strong inclination for saving and an aversion to debt. They have a clear preference for financial products that help them live within a budget — 46% of Gen Z say they already use or are likely to use a prepaid card, compared with 35% of millennials. Similarly, 49% of Gen Z already use or are likely to use no overdraft accounts, compared with 19% of the general population. One-fifth of Gen Z has had a savings account since before the age of 10, demonstrating that habits around saving and financial discipline have been ingrained for many of them since a young age.

Nontraditional banks have a chance to replace banks as primary financial services providers with Gen Z consumers by offering these types of products. Amazon offers a branded prepaid card product for making purchases online, and was reportedly in talks with JPMorgan Chase and Capital One about offering a checking account product targeted at younger consumers. Walmart and American Express also jointly offer a debit account targeted at younger generations. And several fintechs, like Current and Greenlight, also offer debit cards aimed at teens.

For banks to retain their position as primary financial services providers to Gen Z as they grow older, they will need to deliver greater value in terms of financial advice and convenience. In order to save more and avoid debt, Gen Z has pursued financial education opportunities at a higher rate than their elders. Thirty-five percent of them have attended a financial education program or seminar, compared with only 12% of millennials. In addition, 56% of Gen Z reported having discussed financial matters with their parents within the prior six months.

Banks must appeal to Gen Z as trusted sources of financial advice. That will require delivering advice on relevant topics — saving and spending habits, paying down college debt, strategically building credit history — through the digital channels that these young consumers already use for financial activities. Providing easily accessible financial education materials and on-demand responses to questions regarding financial topics via mobile applications, chatbots and voice assistant platforms will allow banks to meet Gen Z’s appetite for financial advice in this fashion. For more complicated questions, banks should allow Gen Z customers to chat in real time or schedule a conversation with a financial adviser through their mobile apps. This will help banks earn the trust from Gen Z, learn more about their financial needs and desires and keep them engaged with their primary financial institution’s mobile app — rather than spending that time on a competitor’s app.