Beyond Generation Z: Digital Account Opening for Everyone
Here’s the challenge – keep pace with the rapidly-evolving expectations of young consumers entering the market. It was Millennials. Now it’s Generation Z (defined roughly as consum…
Here’s the challenge – keep pace with the rapidly-evolving expectations of young consumers entering the market. It was Millennials. Now it’s Generation Z (defined roughly as consumers born after the turn of the 21st century). Generation Z expects nothing less than on-command, transparent and seamless processes when it comes to acquiring virtually any product or service. Want a Starbucks iced-latte-hold-the-milk on your doorstep in less than 30 minutes without ever having to leave your house or pull out your wallet? There’s an app for that. Want your groceries delivered fresh without ever having to leave your couch? There’s an app for that. Need office supplies, home goods, books? There’s apps for them too. And here’s the most important part — you can see when your order is being prepared, when the deliverer picks it up, who the deliverer is, where the deliverer is at all times and you can see the estimated time of arrival. Welcome to the on-demand generation. The question is: can you keep up?
Banks have been trying. According to a 2017 report from the Digital Banking Report, 66% of banks offer online account opening and 18% offer mobile account opening. That’s not good (banks are working on bringing those percentages up) but the real problem isn’t that they are not trying to offer digital account opening, it’s that the digital account opening they are offering does not meet the expectations of those pesky Gen Z consumers.
In this respect, a majority of banks have a long ways to go and it is not clear if the path they are on will get them where they need to go.
The reason is simple — in the rush to meet consumers’ expectations for a digital account opening process, too many banks slapped a digital front-end on their existing account opening processes (some of which were older than the consumers that the banks were looking to attract).
The result was a digital account opening process that worked great, just as long the applicant was an established consumer with a perfect credit score, no identity verification risks, and no desire to switch between channels without starting the process all over.
Unfortunately for banks, established consumers with perfect credit are not looking for new credit, and the process does not work for the majority of younger consumers that are looking for credit. What happens to the consumer who can’t get instantly approved for credit because they have a thin or missing credit file? (not an uncommon problem with Millennial and Gen Z consumers) What happens if the applying consumer just moved to a new city for work (also not uncommon among Millennials and Gen Z-ers) and they trip a fraud flag because their listed address doesn’t match their address on file? In these examples, too often the result is that the applicant is booted out of the frictionless, automated account opening process and are told that they will hear back on their application in 5-7 business days.
We need to ensure that digital account opening works for these consumers too, which means we need to rebuild the processes that sit under the shiny digital front-ends. And when we do that, we also need to challenge some of the assumptions and conventional thinking that has been holding us back.
A great example – the concept of friction. Conventional wisdom suggests that we should remove as much friction from the digital account opening processes as possible. That’s true, to an extent, but sometimes the pursuit of a frictionless, Amazon-like “one click” experience can obscure a larger truth—consumers want to feel in control.
Take a closer look at Amazon. It offers one-click shopping for customers whose definition of control is all about speed and convenience. But it also offers an impressive (almost overwhelming) amount of information — customer reviews, product comparisons, Q&As – to help customers who feel more in control shopping online when they can take their time and get all their questions answered.
Amazon built a digital shopping experience for everyone. Banks need to do the same.
Let’s return to the example of a young consumer, who recently moved, and whose application has tripped a fraud flag during the origination process. To move the application forward, work needs to be done to confirm that the consumer is who they say they are. Conventional wisdom might suggest that the bank take all the work off the consumer’s shoulders and get back to them in 5-7 business days. Alternatively, the bank could acknowledge that many consumers would rather own process and timing with self-service digital options for confirming identity like digitally submitting a picture of a recent utility bill to confirm their new address, rather than staying in the dark over the status of their application, wondering why it’s taking so long.
In our rush to modernize the origination process to meet the expectations of today’s digital natives, we may have made some faulty assumptions. Now, it’s time to take a step back and figure out what these (and all) consumers actually want. Technology is no longer the barrier. Our mindset is, and it needs to change.
Popular Posts
Average U.S. FICO® Score at 716, Indicating Improvement in Consumer Credit Behaviors Despite Pandemic
The FICO Score is a broad-based, independent standard measure of credit risk
Read more
The GSE Data Is Public. Here's What It Shows About Credit Score Modernization.
Independent Milliman analysis of GSE historical data confirms what anyone can now verify directly: FICO® Score 10T is the most predictive score.
Read more
FICO® Score High Achievers: Is Age the Only Factor?
<p>FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores.</p> <p>As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>.</p> <p>But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores.</p> <p>In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li><strong>Balance and utilization.</strong> Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of <u>available</u> revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards<em>. </em>The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li><strong>Benchmarks.</strong> I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data.</p> <p>In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage.</p> <p>In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances.</p> <p>Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!</p>
Read moreTake the next step
Connect with FICO for answers to all your product and solution questions. Interested in becoming a business partner? Contact us to learn more. We look forward to hearing from you.