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The Pillars of Strategy: Major Demographic Shifts

September 6, 2018
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This is the first in a series of articles describing the latest trends and key questions that often arise during the planning sessions we conduct with community FI boards and executive teams.

When I help executive teams and boards of directors plan their medium- and long-term strategy, I often hear their concerns about changes to the operating environment.

The first concern I hear is the swirl of demographic change. I was with a leadership team earlier this month and the CEO told me this: 

“Fabio, it seems like it is much harder to drive our retail growth – be it household, deposit and/or loans – than it has been in years past.  It feels like it is harder to connect with consumers’ expectations and leverage our historical competitive strengths.” 

This frustration neatly encapsulates the several symptoms of change arising from consumer behaviors now emerging in both the young adult as well as the retirement age groups. 

Let’s tackle the younger end of the spectrum first.  How can community financial institutions maintain relevancy with a generation that has access to seemingly limitless alternatives via their mobile phone?  Engaging in the mobile lives of these consumers is the elephant in the room.  I’ve seen some institutions enlisting the help of Gen Z consumers directly in crafting meaningful solutions to their financial needs. 

If your FI has a presence in the local schools or has a youth financial literacy program targeted to the community, leverage it differently to get them to design answers on how to remain relevant.  Also, you need to brace your organizations for more mobile communications and virtual interactions that will be part and parcel of this relevancy.  The conversation about “Digital Strategy” must be elevated in most organizations from just a “channel” to a way of life.

Meanwhile, as you try to “tune into” the younger consumer, the major (and perhaps more critical) trend requires us to get serious about the changes coming to our legacy franchise for deposits and loans – especially with our Baby Boomer customers.  

The upshot here is that the number of consumers entering into the “harvesting” stage of their financial lifecycles is set to grow by 36% through 2027.  That means living off the accumulated assets, taking out rather than putting in.

On the loan side, Boomers are no longer increasing their balances for homes, cars and credit cards. They still borrow, but gone are the days of ever greater use of credit in ever greater number.  They now look for help managing and paying down debt.  

The next generational segements are either too small (Gen X) or, as in the case of Millennials and Gen Z, are dealing with significant student debt and not yet borrowing for cars and homes in the same manner as prior generations.  Don’t get me wrong, these generations want homes and cars, but affordability and income growth factor into their decisions differently.  Replacing the loan balances requires a renewed focus on lending to younger segments that feeds the relevancy argument.

Also, an ever-growing wave of Boomers will begin harvesting deposits as retirements and wealth transfers take place.  Retaining and replacing these deposits will require a highly focused effort, as our yields remain mired in – what seems to the consumer – the abyss of endlessly low rates. 

Understanding the deposit concentration in your base, not just how much but how well do you know these clients, is absolutely critical to future sustainability of your deposit franchise.  Again while younger generations may replace these dollars eventually, that process will take a long time, for the reasons outlined earlier.

If you are feeling a little like my CEO friend, take heart! There are many ways to convert these challenges into great opportunities.

First, confront the “Past as Prologue” reasoning of our experience and get ready to create new experiences for consumers that align to their needs and expectations.  We all view the future through the lens of our experience, but when it comes to technology, that can often be a hindrance. Keep an open mind to what consumers need and expect from their expanding options.

Second, start asking the youngest consumers to help frame our future relevancy arguments. Most institutions have Baby Boomers or Gen X as their management team; they might be challenged in seeing banking from a young person’s perspective.  Look to the young people on your staff to help with this process as well.

Last, reacquaint yourself with your legacy customers to protect those relationships and connect you to their future generations.  You should know who your top depositors are, who their beneficiaries are, and whether you can develop relationships with those heirs to help invest, manage debt, and achieve their financial goals.