It's a Millennial's Credit Card Market, You're Just Living in It
But antiquated methods of assessing creditworthiness mean that American millennials (and the credit card issuers that court them) are missing out on a potential frenzy that Canadian millennials already enjoy – a credit market catering more and more to their generational tastes.
U.S. Millennials Struggle with Credit Approval
A 2016 Bankrate.com survey found only one in three American millennials carry a credit card; a 2017 Federal Reserve survey found that those 18 to 24 prefer to pay in cash; and TD Bank revealed that if America’s millennials do carry a card, it’s usually a debit or prepaid card, not a credit card.
According to a study from ID Analytics — a data company based in San Diego, California specializing in consumer risk management — it’s not that American millennials don’t want credit cards, but that they can’t get approved for them.
“The issue we saw was that lenders were struggling to get a clear picture of the creditworthiness of these individuals,” says Kevin King, director of marketing at ID Analytics.
“Most of these large credit bureaus build their credit scores on the type of credit behaviours that were big in the ’80s and ’90s, but a lot of new credit products that we wouldn’t initially think of as credit products have come into the space. They offer a lot of insight into how millennials are paying for and managing credit, but those aren’t getting captured.”
These newer financial products include online loans, cellphone plans (often paid in instalments) and other fintech platforms that millennials are known to use, like peer-to-peer lending services.
In Canada, cell phones have been appearing on credit reports since at least 2013, and some online and peer-to-peer lenders do report to credit bureaus, making it possible and perhaps easier for Canadian millennials who utilize these services to get approved for a credit card. However, in the U.S., often the only credit-related behavior that may appear on a younger millennial’s credit report is student loan debt, which may be to a millennial’s detriment.
“If you’re in your mid to late 20s and the only thing that shows up on your credit report is a loan that could be the size of a mortgage with a relatively low ability to repay it, that’s a huge hurdle for millennials to try and overcome,” says King.
But with American millennials poised to outnumber baby boomers in 2019, US consumer credit reporting agencies have started to follow Canada’s lead. Apartment rental data is showing up on U.S. credit reports and card issuers are broadening what they will consider when approving a millennial, paying companies like ID Analytics for ‘alternative’ credit data and scores that reflect cell phone plans and online loans.
“The epiphany credit card issuers are having is that a lot of millennials are underestimated and pay their bills faster than older generations if you know where to look,” says King.
While American millennials are seen as valuable because they may dominate the credit card market one day, Canadian millennials already dominate today. And the entire industry is pivoting according to their wants.
Canada’s Millennials (+ Gen Z) Dominate Credit Market
The latest data compiled by TransUnion at the end of 2017 and released in March of 2018 shows that both millennials’ and Generation Z’s (those born in 1995 and later) combined share of the Canadian credit market has risen 12.2% between 2015 and 2017. These young cohorts make up 31.6% of the consumer credit market, which means both generations’ credit card habits and preferences are very significant to credit card issuers and the cardholder population across Canada.
J.D. Power & Associates’ inaugural Canada Credit Card Satisfaction Survey notes that more than half of Canadian credit card holders (51%) have used mobile apps to manage their account, redeem rewards and take advantage of other benefits. The same survey found that the better the mobile platform, the higher overall customer satisfaction. The big five banks rank average in that index. The highest ranked issuer? President’s Choice Financial – a brand with no physical branches, built entirely on mobile with flexible rewards.
“Everyone likes the convenience of being on their phone, but millennials are the early adopters so they are driving the change,” says Jordan Bishop, founder of the Toronto-based boutique travel agency Yore Oyster, which includes a popular travel rewards blog.
“For the big tech companies like Google and Facebook, mobile has been part of their world for over a decade, but banks are conservative institutions, so they’re always slower embracing technology.”
When it comes to rewards, Abacus Data – a Canadian consumer research firm specializing in millennials – notes that one quarter of millennials have not collected rewards from Canada’s biggest reward programs in the past three months, compared to only 9% of older generations. Further generational lifestyle differences abound: Millennials value experiences over things; they look for social connectivity in all spheres of their lives; they shun cash transactions; they want their savings to be automated; they expect all of the above to be integrated together.
Canada’s New Credit Cards for Millennials
In response, credit and prepaid cards clearly marketed to millennials are popping up in Canada.
Brim Financial, Stack, Koho and Amex’s CobaltTM all take a ‘mobile-first’ approach: Accounts can be managed entirely on mobile, from signing up to paying the card statement to tracking rewards. They also offer flexible rewards that are not always tied to specific brands or products, but can instead match the cardholder’s individual lifestyle. Other innovative, millennial-friendly features offered by these cards include:
- No foreign transaction fees (Brim & Stack)
- Automatic round-ups of purchases are transferred to savings (Koho)
- Hyper-accelerated earn rates for restaurants, bars and food delivery (CobaltTM)
While it’s too early to know if all of these brands have actually prevailed in attracting the millennial audience they want, there’s preliminary evidence to indicate that at least Amex’s CobaltTM strategy has succeeded. The vast majority of interest we see for the card on GreedyRates is from the 25-34 age cohort.
While the CobaltTM was developed by a major financial corporation, it’s unclear if other millennial-oriented startup credit products will ultimately stand on their own, or if they’ll be scooped up by traditional players.
“I think these brands we’re seeing now will ultimately get acquired by the big banks in a bid for more customers. But after that, you’ll see more technology companies with banking products, rather than existing banks adapting to technology, representing a fundamental shift in mindset around banking products,” says Bishop.
The future could mean more companies that move fast and take risks with new credit products, rather than the more conservative and reactive approach of the big banks.
*This post was not sponsored. The views and opinions expressed in this review are purely my own.