Why digital transformation and alternative data are key to appealing to new generations
As the buying power of youth continues to grow, more and more traditional financial institutions are sitting up and taking notice. Fintechs and neobanks/challenger banks have been ahead of the curve, looking at key ways to digitize services, utilize advanced technologies like artificial intelligence and machine learning, and access alternative data for a more holistic view of an individual’s risk. And now the time has come for all financial services to follow suit. The World Bank’s Global Findex Report reveals that by 2021, 76% of adults in the world had an account or credit product at some type of financial institution. However, the distribution of this account ownership is higher among adults over the age of 25 than in young people between the ages of 15 and 24. This young cohort is hungry for providers that will not only meet their financial needs but offer them a seamless customer experience in the process. Sixty-six percent of Latin American youth surveyed by Mambu said they prefer to do business with the same financial institution, while 81% of them prefer one app for everything. Loyalty is up for grabs and financial services providers need to take advantage of this opportunity.
But without access to traditional credit history and credit scores (which many younger consumers may not have), financial institutions can find it challenging to determine who is worthy of credit. This is where advanced technologies like AI/ML, real-time data (including alternative data), and more automated risk decisioning comes into play. These technologies are key to a smoother, faster onboarding experience for youth – and help ensure that you are encouraging growth, without increasing your risk.
Why is appealing to this younger generation so critical to the continued growth and success of financial services providers? We’ve looked at four key things to consider:
- Digital Footprint: Young people use the digital ecosystem for a variety of different day-to-day activities and possess a unique confidence when using online services and mobile apps. Their knowledge and comfort with all forms of emerging technology means they have high expectations when it comes to customer experiences – they must be agile and accessible in order to meet the needs of youth. Additionally, being digital natives ensures the new generations leave a greater digital footprint, with extensive information available on social networks, consumption data, web presence, etc. This digital footprint contributes to the development and analysis of much more effective, accurate risk profiles and helps prevent fraud while expanding who you can safely lend to.
- Debt Capacity: Being people new to credit who may just be starting their working life, youth have more capacity to access innovative and flexible credit services. In addition, they are interested in obtaining products that help the advancement of their personal projects and ventures, which are scalable over time. For example, when first starting out, a young entrepreneur may need to access credit to start a new business – as the business scales, so do their credit/financial needs.
“In Latin America, older people have already had a long journey in their credit life, many of them are over-indebted with products from years ago and that have high interest rates. In this way, young people represent new opportunities for the financial sector that seeks to include them as customers, giving them a greater probability of accessing products and services,”José Luis Vargas, EVP & GM, Latin America, Provenir
- Innovation: Young people set trends and demand change, defining the future of the industry. They have opened the door to new forms of business, growth opportunities and make increased demands of the market for products that fit the needs of young people and their lifestyles. Digital natives are looking for hybrid platforms that are easily accessible, and which facilitate processes or procedures in real-time, with flexible rates and a frictionless customer experience. Their desire for continual innovation works to keep the entire industry fresh and exciting.
- Portfolio Diversification: A wider variety of clients, with different characteristics, interests, investments, and risk profiles, allows financial services providers to obtain capital from different sources and reduce the risk represented by a more limited pool of customers. This gives institutions greater investment options and allows them to modify strategies to achieve greater market share. Younger generations with an interest in accessing a variety of credit products (and not just traditional ones) are a great opportunity for the financial industry to penetrate new market niches and increase loyalty across a variety of customer types.
While there has been progress made in recent years on the types of individuals who are deemed creditworthy – particularly with the increased usage of alternative data to produce more accurate risk profiles – there are still gaps in access to credit services and products for the younger generations. Financial institutions must be prepared to use advanced technology solutions and adapt their risk strategies to capture the attention of young consumers and meet their particular needs.