The Next Generation of Banking: Is Your Institution Ready for Them?

In earlier decades, the differences between generations were fairly obvious. Younger people tended to dress differently, listen to different music, and embrace a different set of social mores from their parents.

But there were limits to how far young people could operate outside the cultural norm. Everyone still tuned in to the same three television stations, for example. And with no Internet or wireless communication, attitudes were more thoroughly shaped by regional and local environments.

Today’s young people operate on a much longer leash. They may spend literally hours each day engaged in activities that their parents have never heard of-nor contemplated as necessary. Social networking through sites like Facebook, Twitter, Kudzu, YouTube, as well as activities such as instant messaging, texting, podcasting, and mobile browsing all come naturally to those born between roughly 1982 and 1997, known collectively as Generation Y.

Sometimes, it can all be a bit much for the baby-boomer banker who has just mastered e-mail to handle. But the momentum of Gen Y’s habits can hardly be ignored. “The main thing to understand is the dramatic numbers of people of college age that understand and use social networking software already,” says Tade J. Powell, vice president and director of marketing and public relations at First Farmers Bank & Trust, a $631 million institution based in Converse, Indiana. “The acceptance of this software is incredibly high.”

Gen Y’s use of social media is not the only factor that distinguishes it. Their attitudes also have been shaped by certain singular experiences, including the high school massacre at Columbine, the scandalous demise of large corporations such as Enron and Arthur Andersen due to fraud and accounting chicanery, and, of course, 9/11.

All of these factors affect the way Gen Y approaches the world-which has huge implications for marketers. Tried and true formulas for relaying marketing messages and closing product sales that have worked in the past simply will not resonate with this audience. “To confuse Gen Yers and think of them as little baby boomers or extensions of Gen Xers is to misunderstand them,” says Rich Weissman, president and CEO of DMA, a database management company in Portland, Oregon.

With 70 million in its ranks, Gen Y is nearly as large as the 80-million strong baby boomer group who raised it, and far larger than the 50 million Gen Xers born between roughly 1962 and 1981. It is not a group to be ignored, but also not one easily engaged. For banks, cracking this market involves more than just keeping up with new technology. It also means rethinking the types of products offered and the way they are marketed.

Bridging the gap

Understanding Gen Y is the first step to reaching out to it, yet this generation is highly skeptical and doubtful. “They look at the world through much more leery eyes,” Weissman says. Gen Yers expect absolute honesty and are keen detectors of marketing spin. And having grown up with Internet and mobile technology, they expect it as a matter of course.

All of this has implications for how banks position their products for Gen Y. While the concept of bundling, say a savings/checking account and a debit card, has become standard practice in bank marketing, Gen Y does not relate. Wary of gimmicks, Gen Yers would prefer to purchase separate products, each with explicit pricing, and do their own bundling, Weissman says. They are also skeptical of the concept of free products. “They want to understand exactly what the pricing is,” he says. “If you say it’s free, it better be.”

Gen Yers are also less inclined to respond to mass advertising. They would rather go to a blog or a comparison website to hear what real people have to say about a particular product. While banks view their websites as electronic brochures and places to conduct transactions, Gen Yers see them as places to communicate.

The use of advanced technology is a given to Gen Yers. Banks have to offer all the latest technologies and avoid overhyping them, at the risk of being ridiculed.

“They will be embarrassed by the notion that you are enamored by it,” Weissman says.

Finally, Gen Yers hold the distinction of being the most educated population in the U.S. yet they are “incredibly financial services illiterate,” Weissman says. They often draw a blank when it comes to calculating the interest rate on their credit card, or understanding how a mortgage works. Given Gen Y’s penchant for self-education, this void presents banks with an opportunity to teach them.

Strategies that work

Security Savings Bank, a $241 million institution in Henderson, Nevada, is keeping all these characteristics in mind as it strives to expand beyond its traditional customer base of retirees living on fixed incomes. The Las Vegas community Security Savings serves has evolved over the four years the bank has been under its current management to include a much greater mix of younger people, says Jesse Torres, president and chief operating officer. “We have to change to become more relevant,” he says.

Under the banner “Join the Conversation!” the bank’s website now displays buttons that transport users directly to Facebook, the social networking site and Kudzu, a site where customers rate businesses. On the Facebook page the bank created, it hosts online discussions, releases information, and displays pictures of customers who have declared themselves fans of the bank. The bank’s Kudzu page shows a brief description of the services it offers, a map of how to get there, and numerous reviews from customers.

Through these links, Security Savings is embracing the type of two-way conversation Gen Yers like to see from their service providers. But it also represents a bit of a leap for the bank, which is essentially ceding control of what people say about it, even as it hosts the conversation. “You have to feel comfortable that this is a community,” Torres says. Bank officials want to see the comments, even if they are negative, so they can fix any problems. “It takes some corporate thick skin at times,” he adds.

There are other ways to have a presence on Facebook without hosting a site that invites discussion and commentary. Some banks are opting to run advertisements on Facebook, without actually having a page there. “Bankers don’t understand the social networking thing,” says Kristin Brandt, vice president at Sundin Associates, a bank marketing and advertising agency in Natick, Massachusetts. “One thing that’s easy to understand is advertising on Facebook.”

With a Facebook ad, banks can reach Gen Y customers and still retain control over the message. A pay-per-click model keeps the cost modest, and the investment can be capped at, say, $25 a day. A Facebook ad would be just one component of an entire campaign, Brandt says. “It’s a traditional model applied to nontraditional media.”

First Farmers Bank & Trust has not seen any reason to wade gently into the new communications channels favored by Gen Yers. It has had its own page on Facebook for several months, displaying press releases, announcements, and videos, as well as photos of its employees dressed for Halloween, among other information. Its website also links to YouTube, where videos display interviews with some of the bank’s customers, awards prizes, and introduces online banking and other services.

Powell says the bank views these efforts as an extension of its existing communications channels. For example, it now posts news releases and information from its external bank newsletter on its Facebook page, as well as on its website. “We’re just making sure that information about our organization and products is available in a format that this generation is utilizing as their primary form of communication,” he says.

First Farmers has not encountered any problems with negative commentary. “If we did, we would deal with it the same way we would with any other medium,” Powell says. In fact, response to the online efforts has been “incredible,” Powell says, although he concedes the feedback is anecdotal, since there is no way to track the number of hits on a Facebook page. First Farmers is not angling to increase product sales or generate revenue through its presence on Facebook and YouTube. “It’s more of an informational initiative,” Powell says.

Alternative approaches versus traditional

A bank’s efforts in alternative media should be about adding value to existing relationships, not necessarily creating new ones or generating revenue, says Brandt. “If you think you’re going to start podcasting and get a flood of new accounts, you should stop right now,” she says. “There’s a lot of enthusiasm now, but we just don’t know what the return on any of these things is going to be.”

At Security Savings, the main goals are to get customer feedback and increase awareness of its brand, Torres says. Ultimately the bank expects to save money by getting honest feedback from its Facebook page, rather than spend tens of thousands of dollars surveying its customers. “Our intent is not to market products, but to find out the needs of folks out there and learn how to tweak our products and services to make them more competitive,” Torres says. Product-pushing is verboten, he adds. “Once we do that, we drive them away.”

The good news is that acquiring an online presence where Gen Yers hang out is not an expensive endeavor. After all, almost any 14-year-old can upload a video to YouTube. “There’s very little capital expense, and it’s not hard to find internal people to do the uploads,” Powell says.

Some internal resources may be required, however, to develop active communities. One of Security Savings’ challenges, Torres says, is to provide fresh content that piques peoples’ interest. “You have to get creative about how you bring people into the community,” he says. “You have to provide something of benefit.”

Security Savings is attempting to do that through a recently posted offer on its Facebook page to donate $1 to the American Cancer Society for every person who signs on as a fan of the bank. And in the spring when it rolls out its annual college program, which awards five $1,000 scholarships to local youths, it will post the application, as well as tips on how to maximize the chances of winning, on its Facebook page. “These communities are not built overnight,” Torres notes.

Some banks are choosing to build communities through interactive marketing campaigns. Tailor-made for Gen Yers who see few barriers between their personal and public lives, these campaigns offer nearly limitless opportunities for banks to get creative. Some examples include the My Ugly Room contest from UMB Financial Corp. in Kansas City, Missouri and the Pay Yourself First contest from FNBO Direct, the online banking arm of First National Bank of Omaha.

In a bid to generate interest in home equity lines of credit, the $9.6 billion UMB ran a contest in which participants submitted photos and stories about rooms in their homes sorely in need of renovation. Visitors clicked an “ugly meter” to rate the ugliness of rooms, and the ugliest each week was awarded a $100 gift card. The top 10 entries, as determined by popular vote, were entered into a random drawing to win a $10,000 gift card.

UMB posted photos of 126 rooms on its myuglyroom.com website. Its solace for participants whose rooms were not ugly enough to win was a link to an online application for a home equity line of credit. It also made an educational podcast about the basics of home equity lending available on its website. The bank plans to continue using social media sites to appeal to Gen Y customers and other users, says Pamela Blase, a company spokesperson. “Understanding how to effectively represent your brand on sites like Facebook, Twitter, and YouTube, and entertain as well as inform, takes some serious planning,” according to Blase.

FNBO Direct has similarly pushed the limits of creativity in its Pay Yourself First contest, which is ongoing until April. The bank invited participants to upload a one-minute video to YouTube describing what they are saving for and how they are doing it. Out of 150 submissions, FNBO selected 20 semifinalists to receive prizes of $500 each. It then selected five finalists who will compete through April to save the most money, with each dollar being matched by FNBO up to $5,000. The grand-prize winner will enjoy an all-expenses paid trip to a luxurious resort.

Though the campaign is far from over, bank officials already are calling it a home run. It reinforces the bank’s core attribute of teaching people the value of savings, says Rajive Johri, president and director of $9.9 billion First National Bank of Omaha. And it appears to be boosting the bank’s bottom line as well. Since the campaign was introduced, online sessions at FNBO Direct have increased by 40%, balances are up 20%, and the number of new accounts has increased by double digits. Tapping into social media technology to support the Pay Yourself First campaign has been extremely cost effective, he adds. To achieve the same numbers through television advertising alone would have cost 10 times more, he says, “and we would have been fighting all the clutter.” Further, the contest will continue to generate its own publicity over the next several months as contestants blog about their experiences on a special website where visitors can vote for their favorite contender.

The power of a dollar

FNBO’s focus on savings is a message that truly resonates with Gen Yers. This generation has grown up with access to easy credit and, particularly in the current economy, is beginning to feel the crush of overspending. As a result, many banks are coming to market with accounts that make saving easy and painless. One technique is to round debit purchases up to the nearest dollar and move the excess amount into savings. Another is to automatically transfer $1 from checking into savings for every debit-card purchase or electronic transaction made.

In a report released in October, Synergistics Research Corp. of Atlanta found that Gen Y consumers “express significant interest in this type of ‘no-brainer’ savings program.” One-fifth of Gen Yers who have checking accounts already participate in such a savings program, and more than half express interest in doing so, Synergistics says. Interest is particularly high among Gen Yers who use a debit card 20 or more times a month.

The right fit

Having a product set that appeals to Gen Yers is the first step to targeting that market, Brandt of Sundin Associates says. “You’re not going to get anywhere if what you’re trying to market is premium money-market accounts,” she says.

While Gen Yers will not bulk up the balance sheet with heavy deposits, as baby boomers can do, they can be relied upon to generate significant fee income, DMA’s Weissman says. After all, this is a group that is accustomed to spending 99 cents on a ringtone, he notes.

Weissman advises hiring Gen Yers and listening to them. “Banks are run by baby boomers who still think like baby boomers,” he says. “Gen Yers are not young baby boomers. They are an altogether different group.”