Will Millennials Bankrupt Neobanks?

Many a neobank seems to be founded on the premise that Gen Y and Gen Z (collectively "Millennials") are digital natives and prefer digital interactions to physical ones in everything including financial services.

Personally, I don't find any serious shortcomings in the online, mobile or social media offerings from any of my traditional banks and, in sharp contrast, virtually every neobank offering I've come across is a little more than a leadgen tool. But that's not the point of this blog post.

The point of this blog post is to do a reality check on the founding premise of neobanking.

First, a couple of personal experiences:

Example 1 

My tenant called me in the middle of the night, requesting me to pay his electricity bill immediately. He explained that he was traveling to the USA - where it was middle of the day - and hadn't carried his credit card.

Example 2

I listed my apartment on Housing.com, a leading real estate portal in India. Founded by a team of alumni of IIT Bombay, the startup bills itself as India's first map-based housing portal. A potential tenant viewed my listing on Housing and called me to ask if my house was situated within 5 kms radius of his office and child's school. (In case you're wondering why I'm talking about a real estate portal in this context, Housing has been included in Finovate's latest FinTech Unicorn List).

*****

I was a bit intrigued with the aforementioned interactions. As Millennials, shouldn't these guys know how to make an online payment without the plastic card in their hand or use Housing's mapping feature to answer their own question?

Lest you think it's only my tenants, let me share the following highlights from a few articles on this subject.

1. Millennials are not as tech savvy as you think (Wall Street Journal article http://blogs.wsj.com/experts/2015/05/13/millennials-arent-as-tech-savvy-as-you-think/).
2. Previous generations in India used to flock to "blade companies" offering 150-200 bps higher interest rates without bothering too much about the credit risks associated with informal and unregulated lending (see my blog post Calling B.S On Banking The Unbanked for more). While Millennials are attracted to tech-mediated versions of informal lending, they're not able to get CIBIL - India's equivalent of FICO - scores of borrowers and are reportedly pulling out of online P2P portals as quickly as they joined them. As a result, "borrowers far outnumber willing lenders" on these portals (Economic Times article http://economictimes.indiatimes.com/wealth/savings-centre/analysis/need-a-loan-p2p-portals-can-help-you-borrow-at-lower-rates/articleshow/36541500.cms).
3. An overwhelming majority of Millennials (73%) of Millennials wouldn't consider a branchless digital bank (Converse of the finding "27% of Millennials would consider a branchless digital bank" from First Data's report https://www.firstdata.com/en_us/all-features/millennials.html).
4. In some product categories, especially financial services, "consumers of all ages are still picking up the phone to talk to someone" (Digiday article http://digiday.com/sponsored/marchexbcs-283-328-phone-call-hanging-customer-service/).

Millennials no doubt spend a lot of time on mobile devices. But that doesn't mean that they're savvy / comfortable enough to complete financial transactions or take financial decisions without some degree of physical interaction with objects or people. Some members of the digerati claim that banking is only data and can be completely digitized. Well, with my personal interest in fintech software, I wish that were true but a combination of personal experience and anecdotal evidence signals that customers see a lot more to banking than 0s and 1s. And, just because Millennials can do something digitally, doesn't mean that they will do it digitally.

Ironically, the very same demographic that neobanks are banking on - pun intended! - might actually prove to be their undoing.

Maybe it's time they followed the advice of leading experts and widened their appeal to other market segments:

• “There’s this obsession with millennials. The truth is millennials aren’t spending any money with anybody because they don’t have any.” (Forrester Research analyst Sucharita Mulpuru in Bloomberg article http://www.bloomberg.com/news/articles/2015-04-09/retailers-urged-to-ditch-millennials-in-favor-of-older-shoppers).
• Stessa Cohen @stessacohen: Don't know why #fintech targets only millennials. All the apple airs in cafe other day had very experienced owners (https://twitter.com/stessacohen/status/587259753627258880)

Nimble as they pride themselves to be, this pivot shouldn't be difficult for neobanks.