Millennials Attitudes to the lending market

Contents

04 Executive summary

06 Introduction - Who are millennials?

08 Millennials’ appetite for borrowing

11 Brand and service

16 Brand lessons to learn

18 Conclusion

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What will you take away from this report?

• An understanding of millennials’ (18 to 34-year-olds) and how they prefer to interact with lenders

• Our view on how lenders can adapt to meet the needs and expectations of this generation

Target Group spoke to 1,000 millennials from across the UK to obtain a better understanding of what matters most to these borrowers of the future when they look to take out a personal or unsecured loan.

This research makes clear the importance that millennials place on enjoying a comprehensive multi-channel service, particularly when dealing with lenders.

Researching products

At every step of the process, millennials will look to an online facility first. When researching a product, millennials will turn immediately to price comparison sites (53%) and the lender’s own website (41%). Lenders

must devote considerable thought to how they are positioned on comparison sites, if at all, and where they appear on search engines. A significant presence will be of the utmost importance if they are to captivate millennials.

Applying for a loan

Given the option of how to apply for a loan, many prefer to do so online, whether on their computer (40%), a website on their mobile phone (11%) or via an app on their mobile phone or tablet (11%). Value is placed not just on the rate of interest they enjoy on their loan, but on the efficiency of the online process, and how quickly the funds are delivered to them.

Communication going forward

Even after the loan is received, most prefer to keep in contact with lenders online rather than in person.

Millennials make use of a variety of technological devices, and expect the firms they deal with - including lenders - to do the same.

Nonetheless, lenders would be mistaken to equate millennials with digital-only offerings. A sizeable percentage (29%) prefer the reassurance of dealing with lenders in person, and lenders must meet their needs too.

Executive summaryLenders are increasingly having to appeal to a new type of consumer as expectations around technology streamlining the application and servicing processes rise. Therefore, in order to take advantage of this opportunity, providers are going to need to adapt.

> 53% of millennials turn immediately to price comparison sites.

> 41% of millennials use the lender’s own website.

> 29% prefer the reassurance of dealing with lenders in person.

This is a generation that expects a multi-channel service, and the option to choose which one to use at any one time, even moving between channels at different stages of the loan process.

53% 29% 41%

Loan Application

Preferred ways for millennials to apply for a loan:

40%11%11%

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Lenders must get the balance right between an online and offline service in order to win favour with millennials.

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Our results confirm that consumers most often cite value for money and prices as the most important factors when considering insurance policies.

Introduction - Who are millennials?A generational shift is underway. Millennials - those aged 18-34 - are growing in size and importance across the world.

This generation represents the borrowers of tomorrow, so adapting to meet the needs of this swelling demographic is crucial. But what do we know about them?

When it comes to money, millennials face a number of challenges. Research earlier this year by the Resolution Foundation1 suggested that millennials may become the first generation to earn less than their predecessors. It found that a typical millennial will have earned £8,000 less during their twenties than a typical person from Generation X (those born between 1966 and 1980). Should Brexit result in a recession, the gap between what a millennial earns over their lifetime and that of a Generation X worker will only become more pronounced.

For millennials, home ownership is increasingly a pipedream. The Resolution Foundation found that millennials are 50% less likely to own their own home by the time they

were 30 than the previous generation. With house prices expected to continue to rise as a result of the shortage of property in the UK, this problem looks likely to continue. Indeed, millennials are so reliant on help from their parents and other family members to buy property, that the ‘Bank of Mum and Dad’ is now one of the biggest lenders in the UK, involved in a quarter of all property transactions in 20162. We have even seen product innovation already emerge in this space. Barclays entered the market with its ‘Family Springboard’ mortgage – where younger people can buy a home without a borrower deposit if their family can provide 10% of the property’s price as security (returned after three years with interest if repayments are kept up3). But as our research will reveal, millennials are far less likely to turn to the Bank of Mum and Dad when their borrowing requirements are less substantial than a mortgage.

> Already account for a quarter of the UK’s population, and will hit the 17 million mark by 2019.

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£8000

A typical millennial will have earned £8,000 less during their twenties than a typical person from Generation X.

1 http://www.resolutionfoundation.org/media/press-releases/millennials-facing-generational-pay-penalty-as-their-earnings-fall-8000-behind-during-their-20s/ 2 http://www.legalandgeneralgroup.com/media-centre/press-releases/press-releases.asp?newsid=2836 3http://www.barclays.co.uk/mortgages/family-springboard-mortgage

Millennials have enjoyed greater access to further education than their predecessors. In the 1960s around one in ten (10%) went to university. For millennials, that figure is nearer 15%. Though even here there is a sting in the tail - millennials were the first to have to pay for university education, and so are leaving their studies with significant debts.

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Similarly, headlines such as ‘Why millennials go on holiday instead of saving for a pension’ are not out of the ordinary6. However, the truth is rather different, as our research highlights, with just 29% of millennials feeling that borrowing is acceptable so long as it has been carefully considered.

There are a number of possible reasons for this. Many millennials will have been working when the credit crunch hit the global economy.

Having seen what can result from a laissez faire approach to credit, it is arguable that a significant number of millennials are now sceptical towards borrowing. Equally, this generation is more aware of the challenges that arise from falling into debt - millennials will have been confronted with stories about debt and the impact it has on lives across any form of media they choose to use. Because of this greater understanding of the realities of credit, they may now be more averse to making use of it themselves.

Similarly, this generation are leaving university in the red - they were the first to have to pay tuition fees for higher education, and are now finishing their studies with debts of an average of £44,000, higher than any other nation in the world7. A reticence about taking on further debt unless required is understandable.

Millennials’ appetite for borrowingThere is a perception that millennials are somewhat carefree4 when it comes to money. There have been suggestions that this generation are, at least in part, responsible for the substantial growth of payday lenders in the UK in recent years5.

Why borrow?

Respondents were presented with a range of possible reasons for taking out a personal loan. For those starting out on the property ladder8, home improvements or the purchase of a new car proved most popular; more than 72% of millennials said they would consider taking out a personal loan to pay for such spending. This was slightly ahead of the 71% of millennials who would consider taking out a personal loan in order to pay for education, whether for themselves or someone else. Around 67% said they would consider a loan in order to consolidate existing debts.

The results suggest a degree of financial independence that may not have been expected. Much has been made of the importance of the Bank of Mum and Dad to millennials, though these figures suggest that this particular bank may be more likely to come into play for mortgages and taking the first step onto the housing ladder. For smaller scale spending, our research suggests millennials are more inclined to make use of a personal loan than turn to the Bank of Mum and Dad. This may be a result of parents not wanting to support the types of purchases millennials may use a personal loan for, or they may even be looking to promote the financial independence of their children.

At the other end of the scale, a little under 40% of millennials said they might consider or would definitely consider a personal loan in order to pay for new clothes, while 39% said the same for socialising costs. While these were the least popular borrowing options, it is notable that there is still a significant number of millennials who are open to taking on debt in order to pay for spending which might be classed as frivolous.

4 http://www.aviva.co.uk/investments/save-smarter/modern-day-spending/article/social-pressure-burning-hole-gen-os-pockets/ 5 http://www.independent.co.uk/news/business/news/more-than-40-of-yoing-people-millennials-use-payday-loans-or-pawnshops-a6802206.html) 6 https://www.ft.com/content/94e97eee-ce9a-11e5-831d-09f7778e7377 7 http://www.dailymail.co.uk/news/article-3562667/Graduates-average-44-000-debt-Students-leaving-English-universities-owe-world-following-tuition-fee-hikes.html

8 https://www.theguardian.com/business/2016/may/03/parental-help-behind-25-percent-of-uk-mortgages-bank-of-mum-and-day

However, our research shows millennials are cautious about borrowing. When asked about their attitude towards lending:

> 15% were completely against borrowing altogether.

> 47% argued borrowing should be avoided unless it is absolutely necessary.

> 29% suggested a certain amount of borrowing is not a bad thing provided you carefully consider it and manage repayments.

15% 29% 47%

Millennials’ possible reasons for taking out a personal loan:

Home improvements or a new car

Education Consolidate existing debts

New clothes Socialising costs

72% 71% 67% 40% 39%

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Doing their homework

Perhaps unsurprisingly, a price comparison site is the first port of call for the majority (52%). Use of price comparison sites has grown substantially in recent years, across the full gamut of financial products. There are a number of reasons for this according to a study by the UK Regulators Network9, ranging from wanting to find the best deal to the desire to save time. These sites have evolved in recent years, so that many not only offer a general impression of the sorts of rates available, but tailored prices to match the user’s situation. The knowledge that users

will only be presented with lenders applicable to their circumstances is a strong selling point. As we see throughout this research, while price is a crucial factor for millennials, it is often just as important to offer a fast, smooth online service.

Meanwhile, 40% will cast their eye over the lender’s website, while more than 20% will use social media and 17% will consult blogs, perhaps in search of first hand consumer experiences, while acknowledging price comparison sites do not cover all of the market.

It is perhaps most notable that despite the myriad of technological research options available to them, the second most popular form of research for millennials are friends and family - around 51% would turn to their relatives or friends for their insight. Even here though technology likely plays a part, with research suggesting that families are increasingly relying on communicating with each other via social media rather than in person10. Clearly the personal touch can still be provided, even via technological means.

9 http://www.ukrn.org.uk/wp-content/uploads/2016/09/201609027-UKRN-PCWs-Report.pdf 10 http://www.dailymail.co.uk/femail/article-2350572/Seven-parents-turn-social-networks-communicate-children-Twitter-Facebook-replace-family-chats.html

Brand and service

> The company is stable and secure financially.

> The company makes the money easily available after the loan has been approved.

> The company offers an excellent online experience throughout the application process.

When asked which of the following is most important about the provider from which you are looking to borrow:

23% 20% 50%

Stability of the firm

Having come of age during the credit crunch, and subsequent financial fall out, millennials are very interested in the relative stability of the financial services firms they use, even above the speed and quality of service they receive.

It’s notable nonetheless that for one in five offering a satisfying experience online is deemed most significant. Increasingly we are seeing financial services firms operating entirely online, from banks like Atom Bank to mortgage brokers like Habito. For a

sizeable number of millennials, online is the default option – 61% said their preferred method of applying for a loan involved a website or app, whether on a computer or via a mobile device. New entrants, free of the often cumbersome legacy technology of their more long-standing rivals, may be best placed to take advantage of this attitude. Challengers have, from the outset, the opportunity to outsource non-core functions, allowing them to focus on what makes the brand – interacting in a helpful and seamless way with the customer.

By focusing their own expertise on what they do best, these new entrants are creating shockwaves within the lending industry, and it is making the big players sit up and listen.

Equally, it should not be ignored that speed and ease of access to the funds once approved is most important to a quarter of those surveyed. Once a loan is approved, millennial borrowers expect those funds to be delivered swiftly.

When it comes to researching financial products, millennials make use of a significant network of information, utilising the technology at their fingertips.

52%40%20%17%51%

COMPARISON WEBSITE

LENDERS’ WEBSITE

SOCIAL MEDIA

BLOG

FRIENDS AND FAMILY

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What’s more, a single online offering will not suffice. Quizzed on their favoured method of applying for a loan, applying through a website on a computer was most popular at 40%. But there was also sizeable interest in applying on a website through a mobile device (11%) or through an app (11%). This was echoed when asked how they would want to communicate with a lender after taking out a loan - through a website via a computer came out top (27%), with mobile device (11%) and via an app (11%) again performing strongly.

This is a crucial point for lenders to note - technology is constantly evolving, and the formats through which they offer their services must adapt to that. Millennials do not expect simply to have the option of applying online - they expect that option to be available across the various technological mediums they use. Many millennial customers also expect to be able to begin their loan application on one device, before completing it on another.

This presents challenges for lenders and borrowers alike however. Keying in a full loan application via a mobile phone greatly increases the risk of errors. As a result, lenders must devote additional resources at the back end to double check applications. There may come a time when banking apps offer the chance to prepopulate application forms, particularly for existing customers, cutting out this risk of error and offering a truly streamlined, reliable service; ultimately make lenders more competitive.

Lenders that are not only early adopters, but who foresee the path of future technological innovations and shape their service accordingly, will be best placed to win over millennials. The flexibility required to do that will pose a more significant challenge to older lenders who are still battling to overcome legacy technology, rather than the new entrants for whom technology is not just an added feature but a central aspect of their offering.

The sharp growth of peer-to-peer lenders should be noted with interest by the more traditional lenders. These firms combine not only the smooth experience of an often entirely online journey, but are also manifestly innovative, cutting out the middle man in the loan process, and offering a competitive, if not market-leading,

interest rate to boot. This combination of technology and disruption has been an alluring one - cumulative lending through these sites has grown from £5.1bn in the first quarter of 2016 to almost £6.5bn in the third quarter14. If this trend is to continue we may soon see cheaper lending for borrowers as the cost of servicing these loans falls in a digitally enabled industry.

There may also be opportunities found in integrating loan processes with third party retailers. There have already been examples of this, such as RateSetter partnering with mobile phone network Giffgaff in offering financing for mobile handsets15. This form of partnership is only likely to become more prevalent - lenders must be quick to spot opportunities to forge these relationships.

11 https://www.ratesetter.com/borrow 12 https://www.quickquid.co.uk/# 13 http://www.telegraph.co.uk/news/2017/01/19/fraud-cyber-crime-now-countrys-common-offences/

14 http://p2pfa.info/third-quarter-data-reveals-continued-peer-to-peer-growth 15 https://www.lovemoney.com/news/23304/giffgaff-selling-handsets-ratesetter

Meeting millennial expectations

Millennials have grown up alongside incredible technological developments. As a result, they expect lenders to embrace technology.

When asked which aspects of service were most important to them, more than 42% highlighted the ability to apply quickly online and get an instant decision, while around 41% said the speed at which the loan would be processed and the funds made available.

It’s a service that peer-to-peer lenders in particular are keen to trumpet - RateSetter for example makes a big play of the fact that via its “fast online application” you may receive the funds within 24 hours11. However, the battle on rapid availability of funds has even been raised further by payday lenders, with the likes of QuickQuid promising the loan to be delivered within 10 minutes of approval12. Speed does need to be balanced with safety, though. With fraud and cybercrime making up the majority of common crime, lenders need to make sure they have mitigated against risks13.

The days of being satisfied with a process where you must wait days or even weeks for a response to your loan application are long gone. Millennials expect an immediate response along with rapid availability of the funds to complete same day transactions.

40%

27%

11%

11%

11%

11%

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Preferred method of applying for a loan:

Preferred method of communication with a lender after taking out a loan:

> 42% said the ability to apply quickly online was important.

41%

42%

> 41% said speed of loan processing and the funds made available was important.

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Marrying technology with the human touch

However, embracing digital propositions should not come at the cost of losing the ability for customers to interact with an actual person throughout the borrowing process. The option of face to face communication was valued by a sizeable portion of the millennials we spoke to.

For example, a significant 30% said they would prefer to apply for a loan in person. Similarly, a quarter said they would want to maintain communication after taking out the loan in person in a branch, while 21% would prefer to speak to someone on the telephone.

Viewing millennials as a digital-only generation would be a big mistake. An entirely online process may be sufficient for the majority, but lenders who maintain a physical high street presence - or at least the ability for customers to interact with them, instead of via their computer or mobile device - are well placed to attract business from the significant minority who seek the reassurance of a more personal relationship with their lender.

The challenge is for lenders to find the right balance, marrying the speed and efficiency of an online proposition with the ability to turn to the personal approach when necessary.

Spreading the word

Millennials have more methods for sharing their opinions and experiences than any generation before them. More than 75% have created a social media account, compared to only 50% of Generation X and a paltry 6% of the Baby Boom generation16.

So it is perhaps unsurprising that so many of them would share their experiences of a lender, whether good or bad. A huge 88% said they would be fairly likely or very likely to do so.

A quarter would use social media to tell someone about their experience with a personal loan lender, while writing an online review (38%) and

sending an email of complaint (31%) are also popular options. Around 56% said they would most likely tell someone about their experience face to face.

Given that social media is a significant outlet for both researching - and sharing their experiences of lenders, this is a medium that should be utilised. With twitter for example, lenders are able to publicly engage with potential borrowers, to personalise their message and offering.

Social media is also a strong source of data for assessing potential borrowers, though the fierce media reception to

Admiral’s plan to use Facebook to build personality profiles of their customers17, which would influence a potential reduction in the customers quote, suggests that lenders must tread carefully here. There may come a time for innovations within social media and lending to come together to help lower costs and attract new customers, however, it is clear from previous examples that appropriate regulation and implementation is required to support such innovations.

88% 38% 31% 56% Millennials have more methods for sharing their opinions and experiences than any generation before them.

would share experiences of a lender.

would write an online review.

would send an email of complaint.

would tell someone face to face.

16 https://www.theguardian.com/us-news/2016/feb/01/millennials-not-on-social-media-twitter-facebook-instagram 17 https://www.theguardian.com/money/2016/nov/02/facebook-admiral-car-insurance-privacy-data

Lenders should look to offer a choice of contact methods at each different stage of the loan process in order to meet the varying needs and preferences of millennials.

30%

21%

> 30% still prefer to apply for a loan in person.

> 21% still prefer to speak to someone on the telephone.

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A further 60% said they usually stuck to the same brands where possible, describing themselves as quite loyal, showing that brand recognition may also have a part to play in decision making.

In fact, just a mere 4% showed no loyalty at all, claiming to not have a favourite brand of any kind.

Interestingly, there is a clear correlation between the brands that enjoy the greatest brand loyalty and those who millennials believe offer the best customer service. Respondents were allowed to select more than one option, and these three firms came out head and shoulders above the rest for offering superior customer service:

> 62% Amazon

> 41% Google

> 40% Apple

This marries up with the latest study into brand loyalty by Brand Keys, where all three brands featured strongly. Indeed, a number of them featured on more than one occasion within the top 20 - for example, Amazon came in second as a result of its tablets, eighth because of its general retail services and tenth on account of its video streaming service18.

Innovation is key here. A study by Deloitte19 found that millennials describe themselves as innovative, and prefer to spend their money with brands which they also consider to be innovative. This is clearly the case with Amazon, Google and Apple.

All three have built fearsome reputations for breaking the mould and offering customer solutions which have immediately become an integral part of our daily routine. Indeed, regular customers of these brands may actually describe their brand loyalty as part of their identity - there is a whole Apple Community online, incorporating both websites and podcasts.

Because of this focus on innovation, millennials may be less likely to want to use lenders that they perceive to be part of the status quo. Instead, it is brands which demonstrate a ‘disruptive’ approach who are most likely to win favour.

This puts alternative finance firms in a strong position. According to the first EY FinTech Adoption Index20 a quarter of those aged between 25 and 34 have used at least two different FinTech products in the last six months, higher than other age groups.

Alternative lenders are telling a compelling story, and it is one that is already winning favour from millennials. Not only do they offer speed, convenience and competitive pricing, but they are also free of the baggage and mistrust that afflicts the more traditional lending giants.

To capture the hearts - and business - of millennials, lenders must not only offer competitive products but a compelling story to buy into too.

Brand lessons to learnSelect brands enjoy significant loyalty from millennials. More than a quarter of those surveyed described themselves as very loyal, always sticking to the same brands while they continue to provide excellent customer service.

> 60% stuck to the same brands where possible.

> According to the first EY FinTech Adoption Index a quarter of those aged between 25 and 34 have used at least two different FinTech products in the last six months.

It is brands which demonstrate a ‘disruptive’ approach who are most likely to win favour.60% 4%

> Only 4% showed no lo yalty at all.

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18 http://brandkeys.com/wp-content/uploads/2015/10/Press-Release-2015-Loyalty-Leaders-Top-100-List1.docx 19 http://www2.deloitte.com/global/en/pages/about-deloitte/articles/business-must-encourage-innovation-for-growth.html

20 http://www.ey.com/gl/en/newsroom/news-releases/news-ey-adoption-of-fintech-could-double-among-digitally-active-consumers-within-next-12-months

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It is crucial that lenders offer a broad range of omni-channel, multi-device solutions.

Millennials make use of a number of different forms of technology, and expect to be able to deal with lenders in a way and at a time that is convenient to them. Millennials want the option to conduct the whole process online, from researching their products, applying, and then maintaining communication after borrowing, all without speaking to another human being, if they choose to do so. Whether this would be the case for more substantial borrowing, such as a mortgage, is open to debate. Yet the emergence of digital mortgage brokers over the last year suggests there is clearly a market for an entirely online process, even for major borrowing.

But choice is the crucial aspect here. A sizeable number of millennials

still place importance on human interaction with financial services providers. Lenders cannot concentrate their efforts online at the cost of offering a satisfactory experience for those borrowers who prefer to conduct the process in person. This is not a question of either/or, it has to be both.

Lenders must also embrace innovation. Millennials are not content with the status quo - they have entered the jobs market during or after the financial crash, so finding regular work has been a challenge. They may have the prospect of home ownership become ever more difficult and been warned that they will be working well into their twilight years.

ConclusionThis white paper highlights a number of fundamental lessons lenders must take on board if they are to meet the needs of millennials.

Firms that embody the spirit of change, who show that they want to disrupt and reshape the way financial services work are best placed to win the hearts, minds and business of millennials.

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