I was sitting in a group discussion at Bank Director’s Chairman/CEO Peer Exchange earlier this year when the subject of the fast growing financial technology sector came up. That morning, we had all heard a presentation by Halle Benett, a managing director at the investment bank Keefe, Bruyette & Woods in New York. The gist of Benett’s remarks was that conventional banks such as those in attendance had better pay attention to the swarm of fintech companies that are targeting some of their traditional product sectors like small business and debt consolidation loans.
The people in the room with me were mostly bank CEOs and non-executive board chairmen at community banks that had approximately $1 billion in assets, give or take a hundred million dollars. And I would sum up their reaction as something like this: “What, me worry?”
In one sense I could understand where they were coming from. Most of the participants represented banks that are focused on a core set of customers who look and act a lot like them, which is to say small business owners and professionals in their late forties, fifties and sixties. The great majority of community banks have branches, which means they also have retail customers, but their meat and potatoes are small business loans, often secured by commercial real estate, and real estate development and construction loans. I suspect there’s a common dynamic here that is shared across the community banking sector, where baby boomer and older Gen X bankers are doing business with other boomers and Gen X’ers, and for the most part they relate to each other pretty well.
There are two trends today that bear watching by every bank board, beginning with the emergence of financial technology companies in both the payments and lending spaces. The latter is the subject of an extensive special section in the current issue of Bank Director magazine. I believe the fintech trend is being driven in part by a growing acceptance—if not an outright preference—for doing business with companies—including banks and nonbank financial companies—in digital and mobile space. The fintech upstarts do business with their customers almost exclusively through a technical interface. There is no warm and fuzzy, face-to-face human interaction. Today, good customer service is as likely to be defined by smoothly functioning technology as by a smiling face on the other side of the counter.
The other trend that all banks need to pay attention to is the entry of millennials—those people who were born roughly between the early 1980s and early 2000s—into the economy. Millennials can be characterized by a number of characteristics and behaviors: they are ethnically diverse, burdened with school debt, late bloomers from a career/marriage/home ownership perspective and they generally are social media junkies. They are also digital natives who grew up with technology at the center of so many of their life experiences and are therefore quite comfortable with it. In fact, they may very well have a preference for digital and mobile channels over branches and ATMs. Although digital and mobile commerce have found widespread acceptance across a wide demographic spectrum, I would expect that the digital instincts of millennials will accelerate their popularity like the afterburner on a jet fighter.
Although they now outnumber boomers in the U.S. population, millennials are not yet a significant customer segment for most community banks. And the universe of fintech lenders is still too small to pose a serious market share threat to the banking industry. But both of these trends bear watching, especially as they become more intertwined in the future. The youngest boomers are in their early fifties. The cohort that follows, the Gen X’ers, is much smaller. Who will bankers be doing business with 10 years from now? Millennials, you say? But will millennials want to do business with bankers then if an increasing number of them are developing relationships with a wide variety of fintech companies now?
A board of directors has an obligation to govern its company not only for today, but for tomorrow as well. And these two trends, particularly in combination, have the potential to greatly impact the banking industry. Learning how to market to millennials today by focusing on their financial needs, and studying the fintech companies to see how community banks can adapt their technological advancements, is one way to prepare for a future that is already beginning to arrive.
For research on millennials and growth in banking, see Bank Director’s 2015 Growth Strategy Survey.