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The Young Mass Market: Hope

October 5, 2017
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At Raddon, we often state that age and income are the best predictors for how a household will consume financial services.  Where someone is in their life determines whether they are a young borrower or an older saver, better than their generation does.  After all, Baby Boomers might be depositors looking for retirement now, but forty years ago, they were the ne’er-do-well young borrowers discoing on Saturday Night Fever.

By our methodology, we have six consumer segments, based on age and income.  Four of these are above the median household income, and they traditionally get a lot of focus.  We did an entire research study on the High-Income market, for instance.  But we – and by “we” I mean not just Raddon but the banking industry in general – spend very little time focusing on the two lower-income segments, which we name the Fee Driven and Low Income Depositor segments.  Fee Driven are age 18-44, earning less than $50,000 in income, while Low Income Depositors are 45+, also earning less than $50,000.

Figure: The Consumer Segments

We call the first group “Fee Driven” because the primary way they provide profitability to an institution is through fees, as opposed to their higher-income counterparts, the “Credit Driven” who provide profitability through borrowing.  Lately, though, the fees have dried up.  Overdraft income is down, interchange income has plateaued.  Since these consumers generally have low loan and deposit balances, they provide little revenue opportunity on the margins. 

If banks and credit unions can’t get income from these “Fee Driven” consumers, why bother serving them at all?

For some institutions, that path is exactly the one they are taking.  Free checking has dwindled, as requirements for direct deposit or transaction activity have become more commonplace.  Some branches formerly serving lower-income areas have been shuttered.  Tightened credit putting more emphasis on income has priced out these consumers.

But there is a lot more here than meets the eye.  While generations never change (Once a Millennial, always a Millennial), demographic segments change over time. 

The bulk of the Fee Driven segment falls into the generation known popularly as Millennials.  As these consumers are starting their careers and adult lives, their potential income will outpace the static snapshot shown here.  People marry, progress in their careers, form households, and generally advance upwardly, even in 2010s America. 

Studying the data of two large community-based financial institutions, we can identify how Fee Driven households have transitioned into other segments over time. The figure below shows how these households have migrated over a 10-year period.

Figure: Ten-Year Migration of Fee Driven Households over Time

Only about a third of consumers who were Fee Driven in 2006 are still Fee Driven today, and only slightly more than half (54 percent) are still in a Mass Market segment.

What this means is that investing in the Fee Driven as a segment might make sense for a financial institution looking to build loyalty, primary status, and balances over time.  While many institutions seek out Millennials, their focus is often on those Millennials who are higher income (the Credit Driven), as opposed to the lower-income Millennials in the Mass Market.  Our research indicates that upward mobility makes Fee Driven Millennials a worthy target as well.

Our latest paper “Life After Overdraft” goes into detail about how to serve these consumers efficiently and effectively, driving both expense control and revenue generation so that when they become the Middle Market and Upscale of tomorrow, you are ready for them.