Millennials helped usher in the modern era of financial technology by adopting payment apps like Venmo and investing platforms like Robinhood and Acorns. However, Generation Z grew up immersed in technology, and they will not be drawn in by ease and novelty in the same way that previous generations were. They do not want products that are intended for a large number of people. Instead, they want highly personalized experiences.
Fintech companies are racing to meet those demands with curated and personalized products, such as payment systems that collect data about users in real time and show them how their financial habits compare to those of their peers. Fintech companies are also marketing themselves creatively, focusing on Gen Z's concerns, such as the environment and social consciousness, by offering specialized products that address those needs.
"Incumbent financial firms frequently assume they have trust with younger customers, but they fall short of being the most curated, personalized, and connected to the customer," says Nikhil Lele, EY Americas financial-services digital leader.
So far, the efforts have begun to sway the young generation. According to an EY survey conducted in June 2021, 51 percent of Gen Z consumers identify a fintech company as their most trusted financial brand, while only 23 percent identify a national bank.
New goals and objectives
Three trends are shaping how Gen Z is pushing fintech to evolve: a dislike for credit card debt; an expectation that brands will reflect their personal values; and a desire for community, networking, and self-education within financial services that make investing a fun, recreational activity.
According to a recent Bank Administration Institute survey, only 17 percent of Gen Zers prefer credit cards as a payment method, compared to 46 percent of millennials and 47 percent of baby boomers. Part of the reason for this is that credit is not as readily available to younger adults. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, the majority of which went into effect in early 2010, raised the minimum age for obtaining a credit card from 18 to 21, and severely limited how credit-card companies could market to college students. Younger adults are less likely to be approved for credit if they do not have a credit history.
But there's more going on here. Seeing older generations struggle with consumer debt has instilled in many young people a fear of borrowing. They are wary of predatory lending practices and being hit with unexpected interest charges, so they prefer systems that allow them to borrow without paying high interest rates and that break down exactly how much they will owe over the life of the loan. They're also signing up for debit cards with credit-card-like reward systems, such as the PointCard from fintech firm Point.
This is propelling fintechs like Affirm and Klarna, which are pioneering buy-now-pay-later options, to innovate.
According to a recent eMarketer survey, nearly half of Gen Z consumers will have used buy-now-pay-later to fund an online purchase at least once that year by the end of 2022.
The fintech pays the retailer for the user's purchase, and the user repays the fintech in installments. The plans typically include no fees or interest, customizable payments, and instant approval (or rejection) based on technology that examines cash flow, transaction histories, and credit usage rather than hard credit checks.
These plans also make expenses transparent to younger consumers, who are accustomed to receiving immediate results. For example, someone purchasing a $500 desk through Affirm will be shown various monthly payment options, as well as upfront breakdowns of how much money will be owed on future dates.
Adam Nordby, a 24-year-old engineer in Santa Fe, New Mexico, says he has used several buy-now-pay-later plans to finance emergency purchases such as new car tires. According to Mr. Nordby, Affirm breaks down the total cost of a transaction upfront, offers multiple payment options, and never charges late or missed payments fees. "It's just very transparent about, like, 'Hey, you can't afford this,' or, like, 'We don't trust you to buy this sort of thing," Mr. Nordby says, adding that he appreciated the direct message when Affirm once refused to finance a purchase. "That's important when you're spending money."
Fintechs are also innovating by appealing to the social concerns of Generation Z. Gen Z is widely regarded as a socially conscious generation, holding themselves and others accountable for addressing issues such as climate change, income inequality, and discrimination. They expect their financial services to reflect their preferred identities and values. It is an opportunity for fintechs to become even more specialized in how they design and market their products.
"What's becoming the dominant decision-making factor, particularly for Gen Z, is, 'Does the brand reflect my values?'" says Mark Goldberg, a partner at Index Ventures, a multistage venture-capital firm that has invested in a number of fintechs.
Daylight, a digital bank designed for the LGBTQ community, is one example. It issues debit cards with users' preferred names rather than their legal names, and it has an analytics tool that rates how queer-friendly different businesses are, allowing users to decide how much money they want to spend at those establishments.
Environmentally conscious digital banking Aspiration promotes opening one of its accounts as a way to "help your wallet and the planet." Aspiration promises, among other things, that it will not use consumer money to fund oil or coal projects, and that it will pay to offset the carbon dioxide from every gallon of gas purchased by customers who join its premium membership. In addition, users can earn up to 10% cash back on purchases made at environmentally responsible retailers identified by Aspiration, and they can receive personalized sustainability scores based on their spending habits.
Make it more social
Many Gen Z investors want a social component to how they interact with money in addition to making sure their spending and investments are doing well. The rise of "finfluencers" on social media, as well as the performance of meme stocks such as GameStop, reflect an increasing segment of Gen Z that is finding entertainment and community in financial education and investing.
According to Charley Ma, general manager of fintech at Alloy, a company that provides fraud-prevention infrastructure to banks and fintech companies, the next wave of innovation in fintech for young people will revolve around fostering community. "The idea is to figure out how to make fintech products into a multiplayer game," he says.
Mr. Ma cites the success of the investing platform Public, which allows users to watch and comment on each other's investments, as well as Gen Z's demonstrated interest in cryptocurrency investing, which includes a lot of open discussion on Reddit forums, YouTube comments, and Discord chat rooms.
"Nowadays, if you're a fintech company, you're wondering how to build interesting communities and get people to engage, respond, and interact with one another?" Mr. Ma says "This is the new method of acquiring the next generation." I believe the features you must develop must be much more community-driven."