Morgan Stanley
  • Research
  • Jul 31, 2019

How Millennials and Gen Z Could Reinvent Banking

Millennials and their younger cohort will reshape the financial industry in their tech-savvy, mobile-first image, with ramifications for all consumers, companies and investors.

Today’s high schoolers have a portfolio of online accounts ranging from social media to music streaming but there’s still one account they can’t have without a parent’s signature—bank accounts.

They breathe mobile, juggle payment apps and consider terms like 'online shopping' redundant. What’s not online?

Yet, the very anticipation of their coming-to-age could remake the financial landscape in the coming years. After all, Generation Z—roughly ages 6 to 21—has been practically raised with a smartphone within eyeshot at all times. They breathe mobile, juggle payment apps and consider terms like “online shopping” redundant. What’s not online?

As Gen Z ages into the key 25- to 40-year-old sweet spot for borrowing, they will combine with Generation Y (a.k.a. the Millennials, ages 22 to 37) and could reshape the financial industry in their tech-savvy, mobile-first image. The resulting changes could benefit consumers in every age bracket and offer growth opportunities for the industry and investors.

Youth Nation

The latest numbers offer a preview of what’s to come: a world where 47% of 16- and 17-year-old smartphone owners use mobile banking options, ramping up to 71% among 18- and 19-year-olds, according to Morgan Stanley Research and AlphaWise, the firm’s proprietary survey and market data research arm. Those figures derive from a survey of 6,000 consumers, age 16 to 34 years old, conducted in December, 2018, by Morgan Stanley Chief U.S. Economist Ellen Zentner, in collaboration with AlphaWise.

The survey also offered insight into Millennials, who this year became the most populous generation in the U.S. at 73 million, overtaking the 72-million-strong post-war Baby Boomers. According to Morgan Stanley loan projections—derived from forecasts of historical household formation—population growth, consumer borrowing trends by age, and income growth, Millennials are now the largest driver of net new-loan demand, and will remain so for the next decade.

Banks have been waiting a while for this next pocket of growth. Gen X, which hit its 25- to 40-year-old financial stride during the financial crisis, “is not providing as big a boost to lending as Baby Boomers did," says Zentner. Millennials are expected to pick up the slack. “Going forward, our expectation is for loan growth of 4%, in line with the historical average, excluding the early 2000s boom period leading up to the housing crisis."

Millennials could become the largest borrowers over the next 10 years

Source: Federal Reserve, Morgan Stanley Research forecasts

The Zooming Z's

By the year 2034, Gen Z will comprise the largest generation ever in the U.S., peaking at 78 million, according to Morgan Stanley’s population forecasts, which suggest faster growth than do models from the U.S. Congressional Budget Office. As their aggregate borrowing levels increase in the 2030s, Gen Z may account for a third of all U.S. consumer debt by 2040.

Today, however, most of them still are kids, not bank customers. Yet, they could still set the pace for how the industry will evolve. “Why? Because some kids get their cell phones as young as 10 years of age. They can have their own social media account from 13 years of age. But they can't get a bank account on their own until 18," says Betsy Graseck, Morgan Stanley U.S. Large Cap Bank Analyst and Global Head of Banks and Diversified Finance Research. “So, banks are missing this critical five year window, where young people are beginning to live their lives connected to their smartphones."

This includes sending and receiving money and paying at point of sale and online with their phones. As Fintech and Big Tech players expand their payments functionality, banks will need to invest in teen banking—or risk being left behind. “When these kids turn 18, the banks will have to fight to explain why these consumers should use them as their primary financial institution, not just as a back end," Graseck says.

Indeed, 50% to 80% of smartphone-owning Gen Z are already using mobile banking. This is roughly the same pace as the Millennials, according to the Morgan Stanley survey.

Gen Z already using smartphones to
bank at 50% to 80% the pace of Millennials

Source: Alphawise, Morgan Stanley Research forecasts

Ensuring first-rate mobile platforms for teens will require ongoing investment by banks to stay cutting edge from a feature, functionality and interface perspective. One move in this direction is teen-driven accounts. Although teen accounts require parental signatures, they enable teens to access their funds and, importantly, join in the banked population.

“These accounts would allow younger users to learn how to monitor their own budgets and spending, all with a parent's permission and ability to monitor the account. While several banks offer this today, they are more the exception than the rule. Saving and spending tools are also a plus,” Graseck says. Efforts like these will help put the banks' brands front and center, not simply as a back-end function that facilitates transactions.

Traditional customer service will also need to change to attract the Gen Z crowd, which has higher expectations and different habits. “Banks still need to ensure that their call centers are offering excellent customer service, but they also need to invest in Artificial Intelligence and other technologies that can seamlessly address customer questions and needs, without requiring a phone call, and without becoming a frustration point," Graseck says. “Mobile or digital chats with customer service representatives are critical for this generation which prefers texting to an intrusive phone call.”

Banks, customers and investors should expect more experimentation and shifts in strategy and tactics along the way, especially as current technology continues to improve. The result should increase convenience and streamline financial services. This would be a boon for customers, with potential to lift bank growth and bottom lines over the long run.

For Morgan Stanley Research on Gen Z and banking, ask your Morgan Stanley representative or Financial Advisor for the full report, “In the Coming Youth Boom, Millennials Fuel Loan Growth; Gen Z Up for Grabs?" (April 11, 2019). Plus, more Ideas.