The future of debt

The future of debt

Young adults’ reluctance to borrow might change how you approach your lending products and strategies.

December 19, 2017

To lenders, this generation of young adults seems like a new breed.

Borrowing money doesn’t represent the freedom to make large purchases that were once out of reach. It represents the opposite—a “#debtsentence,” according to an analysis of millennial social media trends around borrowing conducted by the Filene Research Institute.

Young adults embrace the sharing economy, and are open to new solutions for housing and transportation. And they expect financial services to be delivered online with the speed and convenience of a Domino’s pizza ordered with a tweet. So how do credit unions respond to these shifting attitudes and expectations? By sticking to their mission, experts say.

“Our product isn’t loans,” says David Klavitter, chief marketing officer for $1.6 billion asset Dupaco Community Credit Union in Dubuque, Iowa. “Our product is helping people improve their financial positions with better money decisions.”

Credit unions must reimagine their products to survive in a changing society, says Andrew Downin, Filene’s managing director of research. The most successful innovations will be those that stem from an understanding of which problems members want to solve.

To stay relevant with millennials, credit unions must address this group’s negative attitudes toward debt, their expectation of fast service, and the impact of the sharing economy on major purchases.

Negative attitudes around debt

The top two emotions young adults associate with debt are anger and fear, according to “Millennial Money Chatter,” a Filene report. Those attitudes reflect many millennials’ experiences during the Great Recession, when families lost jobs and then homes because they couldn’t repay their debt.

That experience, in addition to high student loan debt levels and lagging wages, has resulted in young adults being cautious about the debt they take on, often postponing major life events such as getting married or buying homes.

But credit unions are addressing those fears through a variety of educational programs. Combined with an improving economy, those fears are starting to diminish.

At Dupaco, “The Great Credit Race” is a contest designed to educate the public about the importance of having a good credit score. Participants compete to improve their credit scores with the help of Dupaco advisers, and the credit union shares their progress.

“It’s a unique way to educate people about how to build a great credit score,” Klavitter says. “It aligns with Dupaco’s differentiator of member intimacy. We exist to educate people. The race is a fun way to reinforce the credit union’s value proposition.”

The largest and most common expense for young adults is college tuition. The average student loan balance is $25,500—60% more than the $15,900 average from 10 years ago, according to Pew Research. But one credit union is doing its part to educate students about how much college will cost.

Fort Community Credit Union in Fort Atkinson, Wis., piloted “Debt Dragon,” a Filene i3 program, in local high schools this year to educate students about student loan debt before they enroll in college.

Debt Dragon allows students to predict how much money they’d need to borrow to attend the college of their choice. It also estimates their student loan payments upon graduation, depending on how much debt they accumulate.

“The point is not to scare them away from an education, but to get them to start talking about that debt and how they’re going to approach it,” says Marissa Weidenfeller, director of marketing at the $237 million asset credit union. “I ask a lot of high school seniors how they plan to finance college, and they have no idea. They’re planning to go, but it’s like, ‘We’ll figure it out when we get there.’”

NEXT: As fast as pizza delivery

As fast as pizza delivery

It’s tempting for credit unions to measure themselves against financial services competitors when evaluating convenience and speed of service. But in the age of instant video, music streaming, and Amazon Prime, credit unions need to consider millennials’ expectations.

“You have Amazon, Netflix, and Venmo, where you can send money with the click of a button,” says Jordan van Rijn, CUNA’s senior economist. “So, younger generations are expecting technology to be able to offer those things to them. It puts a lot of pressure on credit unions to provide that technology to make interactions easy and efficient for their members.”

Sometimes, the best option to provide world-class service is to partner with a national provider. That’s what $374 million asset Day Air Credit Union has
done by offering its checking accounts through Kasasa, a CUNA Strategic Services alliance provider that specializes in branded products.

Not only does Kasasa provide fast service, it caters to millennial interests with its rewards and cash-back programs, offering perks such as iTunes and Amazon gift cards, says John Theobald, vice president of lending at the Kettering, Ohio, credit union.

Young adults also expect to be able to communicate with their credit unions on-demand in the format they prefer, whether that’s via chat, in person, or over the phone. And they don’t want to receive mass marketing messages.

Young adults also expect to be able to communicate with their credit unions on-demand in the format they prefer, whether that’s via chat, in person, or over the phone. And they don’t want to receive mass marketing messages.

“We’re making our marketing efforts more tailored for the individual,” says Christel Ventura, assistant vice president of consumer lending at $1.9 billion asset GTE Financial in Tampa, Fla. “If we see they’ve been shopping a lot at Lowe’s, which might mean they’re doing some home improvement, we might send an email to that member and say, ‘You might be interested in a home equity loan.’”

Although young adults borrow less overall than other generations, they’re also the most likely to make impulse purchases, according to “How Millennials Want to Work and Live,” a recent Gallup study.

Because mobile banking gives millennials the ability to essentially carry multiple credit union and bank branches in their pocket at all times, it’s becoming easier for consumers to use multiple financial institutions for different services.

“We know the need will arise when they’ll need to borrow on the spur of the moment,” Downin says. “So being able to capitalize on that with quick and efficient channels is a way credit unions can meet the needs of millennials.”

NEXT: The sharing economy

The sharing economy

The future of auto lending—the bread and butter of many credit unions—is high on many lenders’ minds as technology advances. Self-driving and longer-lasting vehicles, and fewer driver’s licenses, all seem to point to a future where fewer people buy and own cars.

In 1983, 92% of Americans ages 20 to 24 held driver’s licenses. In 2014, that figure dropped to 77%, according to a 2016 University of Michigan study.

While the trends seem to indicate auto lending will decline in the future, it’s increasing at credit unions in the short term.

“We’ve seen nothing but increases in lending at credit unions, particularly with auto loans,” says van Rijn. “It’s been growing dramatically, leading to some of the highest loan growth rates we’ve seen in decades.

A lot of people are going to credit unions because of the value credit unions offer, the lower rates. There also has been a lot more indirect auto lending among credit unions.”

While auto lending remains strong, Downin thinks credit unions should begin to imagine a future that doesn’t rely on individual auto loans. “I’m not suggesting credit unions abandon auto loans. But we’re starting to think about what it would look like to finance a pool of self-driving vehicles for our members, or to provide self-driving vehicles for members,” he says.

“You’re still financing access to transportation for members, but instead of a loan it’s a monthly fee for access to membership.”

Projecting the impact of self-driving vehicles, Ventura says financing a vehicle that spends most of the day

driving will be different from financing one that’s parked all day. The former vehicle will depreciate much faster, requiring lenders to adjust the loan terms.

If auto lending does decline, credit unions might be able to recoup lost revenue by investing in payments technology, says Theobald. Day Air has already aligned its debit and credit cards with Apple Pay to be competitive with other financial institutions.

Alternative payments systems like Square and Venmo now represent modern payments to most young adults, and they could easily expand to provide other financial services, Klavitter says. “And now Square is applying for an industrial loan charter,” he adds.

“Credit unions can’t afford to hit the snooze button. We must remain relevant for our members.”

The credit union difference

Credit unions should focus on telling their story in ways that resonate with millennials, because the prosocial mission aligns with young adults’ interests, even if they’re not fully aware of credit unions and their fundamental differentiation from banks.

Adding a millennial advisory board could be a way to address that disconnect. Those groups can discuss products and services that appeal to young adults, and build awareness of the credit union difference.