Mobile-first Gen Z doesn't fear credit cards, debt

As Gen Z starts entering adulthood, financial institutions are beginning to ask what the new generation wants in terms of lending, and how will they choose to access it? For the executives who’ve been busy serving up financial products to millennials, there is an additional question on everyone’s mind — will this new generation be as slow to adopt credit cards and personal loans as millennials, or is it going to be different?

Gen Z is defined as consumers born between 1995 and 2010, so the oldest are just 24 and the youngest are still in grade school at the ripe age of nine. Millennials, born between 1980 and 1994 range in age between 25 and 39 years.

While Gen Z is just beginning to transition into adulthood there are some healthy indicators of how it is approaching credit as well as how it manages debt.

Probably one of the most important factors in determining access to credit is an individual’s credit score. As could be expected, younger consumers tend to skew heavily into groups such as subprime and near prime. According to the Q2 2019 TransUnion Industry Insights Report, over half (51.5%) of Gen Z is non-prime compared to 41.4% of millennials and 36.3% of Gen X.

However, that means almost half of Gen Z is prime or better, so traditional lenders can readily serve this new consumer segment with standard products meant for lower-risk consumers. This is a critical point for banks, credit unions and others that want to get in on the ground floor without taking on undue risks. The important thing for lenders to address is how these new consumers will want to be approached and how they will apply for loans.

Older generations such Boomers tend to have great credit scores, but the issue is that these consumers are typically not in the market for new credit cards and personal loans.
“We are always interested to see new generations come into the market and determine if they are going to act like the previous one [millennials] or their parents [Gen X and Boomers] when it comes to obtaining credit," said Matt Komos, vice president of financial services and consulting at TransUnion. "What we see with Gen Z is that they are very willing to take advantage of certain financial products such as credit cards.”

The dramatic growth of credit balances among Gen Z consumers was the fastest of all generations in the past year. According to the Q2 2019 TransUnion Industry Insights Report, Gen Z grew its overall credit balances by 29% in Q2 2019 from the same quarter in 2018. In comparison, the Silent Generation and Boomers were declining in their overall debt load.

For banks, credit unions, and fintech lenders this a clear signal that Gen Z are not like millennials, who delayed the uptake of certain financial products such as credit cards, auto loans and mortgages.
Despite only a portion of Gen Z being credit eligible in terms of age, the adults in that generation are already taking on debt across a variety of products.

Based on data from the Q2 2019 TransUnion Industry Insights Report, Gen Z already carries 5.2% over general purpose credit card debt and 5.1% of auto loans. While millennials are showing a healthy appetite for carrying auto loans and card debt, they are saddled with almost half of the country’s student loan debt. According to the Federal Reserve Bank of New York, total student loan debt in the U.S. stood at $1.48 trillion in Q2 2019, and 10.8% of it was 90+ days delinquent or already in default.

“The important thing lenders need to know about selling credit products to Gen Z is that they are a mobile first generation, unlike millennials who are an online first generation," Komos said. "This means the expectations of how loans and credit cards are sold needs to meet with their mobile first expectations. Anything short of an Uber app-like experience will turn away Gen Z prospective customers."
When it comes to getting rewarded at work, the majority of Gen Z wants general purpose prepaid cards that can be used anywhere over retail prepaid cards that can be used at a single merchant or shopping in a merchandise reward catalog. According to a recent study by daVinci Payments, the “use anywhere” prepaid card reward was preferred three-to-one over all other options combined by Gen Z consumers.

The study found that an overwhelming majority (78%) of Gen Z workers planned to leave their current employer in the next two years, yet 70% stated that they would stay on the job one year longer if they were to receive three $50 prepaid reward cards over a one year period. It’s clear that money is a motivator to stem attrition, but for Gen Z the payment functionality of prepaid is an essential element in how it gets delivered and used.

Despite this, the daVinci study found that 85% of Gen Z are not eligible to participate in work rewards programs. “They are not eligible because the majority of employers do not dedicate a significant portion of rewards for employees with less experience,” said Rodney Mason, chief revenue officer at daVinci Payments.
A strong factor in Gen Z’s favor as it comes into financial services is that its members are good at managing their debt. Based on serious delinquency data from the Q2 2019 TransUnion Industry Insights Report, Gen Z manages its debt load with almost the same level care as Gen X consumers. While the overall serious delinquency rate is much lower, it does include Boomers and the Silent Generation who are paring down their debt levels.

“Gen Z is different in their approach to managing debt," Komos said. "While they don’t have the earning power or assets of older generations, they already understand the importance of managing debt and avoiding mistakes."