Data: What motivates millennials' payments

Younger consumers today have a very different view of, and utility for, general purpose bank and private label retail credit cards when compared to older generations. These differences have impacted how banks, card issuers and other financial services businesses serve them as they grow into adulthood, purchase homes and start families.

Millennial spending habits have also led to the growth of the direct lending personal loan industry, which at one time was considered mature. Today, POS installment lending has become one of the hottest sectors in financial services, drawing billions of dollars in capital to existing firms as well as leading to the establishment of major startups such as Affirm, Klarna and more.

While many factors have contributed to this attitudinal shift away from preferring credit cards at the point of sale, there are two notable ones. The first factor is the explosion of student loans, which are severely burdening America’s youngest adults and their parents. The second factor is the unintentional blowback of the Credit Card Accountability Responsibility and Disclosure Act of 2009, which restricted access to credit cards and permanently changed the business model for banks issuing credit cards, leading them to prefer older, more affluent consumers with established credit.

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The U.S. national student loan debt at the end of Q3 2018 stood at a staggering $1.442 trillion, according to the Federal Reserve Bank of New York. In comparison, when the oldest millennials — now aged 34 — began graduating in 2006, the country’s student loan debt level stood at only $447 billion. This greater than threefold increase has been due to a variety of factors such as states reducing their funding for universities, schools needing to add the latest technology and experienced teachers to attract students.

The net effect is that the cost burden to maintain or improve U.S. colleges and universities has largely shifted to young adults and their parents to the tune of almost $1 trillion in the last 12 years.

Based on the data from the Federal Reserve Bank of New York Quarterly Report on Household Debt and Credit, for the third quarter of 2018, consumers between 18-29 years of age own 26 percent of all student loans and 30-39 year old consumers own an additional 33 percent of the loans. Due to these high student debt obligations, other debts such as credit cards and mortgages are being delayed until much later in life. Only until consumers reach 50-59 years of age do credit card loans exceed student loans, which for this age cohort are likely taken for their children.
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The CARD Act of 2009 effectively eliminated the ability of credit card issuers to operate on college campuses by banning certain marketing practices and forcing universities to disclose their profitable arrangements. By eliminating fee harvester cards, banning retroactive rate increases, eliminating universal default and limiting the ability for card issuers to raise interest rates, the CARD Act forever changed the credit card issuer business model. Gone were the starter credit cards that many Baby Boomers and Gen Xers received in college and allowed them to begin their credit histories.

While the CARD Act has many positive consumer protections that are greatly needed, an unfortunate consequence is that most consumers who leave college today and for years afterwards are not considered in the prime credit risk category. Lack of credit trades, no or limited credit history, and massive student loans that need to begin to be repaid makes these younger consumer unpalatable, thin file, higher credit risks.

Data from Experian’s eighth annual State of Credit report, released in 2018, shows that the average 18-20 year old has an Experian Vantage score of 634 and the 21-34 year old consumer is only four points higher at 638. Experian defines the Vantage score ranges along the following categories: Superprime (781-850), Prime (661-780), Near Prime ((601-660), Subprime (500-600), and Deep Subprime (300-499). In other words, a 22 year old desiring to obtain their first credit card with a limited credit history other than student loans and a Vantage score of 638 will find it difficult and most likely will need to settle for a low credit line, high interest rate card if they are offered one at all.
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When it comes to ownership of bank credit cards and private label retail store cards, generally the older a person gets, the more of them they tend to own until the age of 70, when things start to decline. Length of credit history, a good mix of different types of credit, and a long history of making on time payments are among the five key factors that go into earning a good credit rating based on how FICO scores are evaluated that inherently favor older people who are responsible with credit.

The other two factors, few new credit accounts opened recently and amounts owed, probably also play against younger consumers since they are more likely to have opened many new credit accounts in a short amount of time and they tend to have higher credit utilization rates.

The youngest of consumers studied in Experian’s report were the 18-20 year old segment, who held an average of 1.44 retail store cards and 1.55 bank credit cards, while those aged 50-70 held almost twice as many of both types with 2.71 retail store cards and 3.53 bank credit cards. Even consumers over 70 hold more retail store cards (2.35) and bank credit cards (2.98).

While younger consumers are still able to obtain mortgages and other kinds of debt as they establish families and households, there may be more than lower credit scores that may be limiting their obtaining retail and bank credit cards.
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For a generation that has been burdened with an unprecedented level of student debt, having a dampened enthusiasm about undertaking additional debt could be understandable.

So when Credible Labs, an online marketplace for student loan refinancing, conducted a study to explore millennial attitudes toward credit card debt the results were eye opening. In the 2018 survey of consumers 18-34 who carried credit card balances, it found that millennials are more afraid of credit card debt than death itself. Even the threat of war and the inability to retire scored much lower, despite being plausible possibilities.
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Using payment instruments such as debit cards and cash for purchases has always meant that a consumer could spend only up to the value that they had in their bank account or wallet at the time of purchase.

Decades ago, paper checks had a multi-day delay in their redemption, but that has disappeared with the advent of Check 21, mobile check deposit capture, and e-check ACH conversion. With high returned check fees from banks hungry to generate revenue, consumers no longer consider float when writing checks. Also, ACH/EFT has seen a similar fast track with the advent of Same Day ACH and instant transfers.

According to a 2015 Visa Payment Panel Study, millennials prefer to use debit cards at point of sale, which should be no surprise given their aversion to debt. While credit cards are the second most popular payment form at 27 percent of usage, it lags the combined total usage of immediate or fast payment methods (debit, cash, ACH/EFT and check) at 67 percent.
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The growth of the online installment loan market has attracted significant investment from venture capitalists, card networks, banks and others, as well as led to the creation of companies such as Affirm, Afterpay, and Bill Me Later (now called PayPal Credit). The ability to offer small-dollar point of sale installment loans through e-commerce has brought renewed energy to what was once considered a mature market.

Based on origination data from LendingPoint, a fintech lender focused on providing personal loans to enable retailer driven sales, millennials and Gen Z consumers (18-35) have had a major impact on its business. This group of consumers have doubled in their share of LendingPoint’s total number of personal loan originations from 2015 to 2018.