Solving the millennial savings 'crisis'
30 Jul 2018
How the structural headwinds buffering fintechs helping millennials with their savings, and the magnitude of the problems they face, aren't quite what they seem
While apps are managing to at least engage millennials around their finances (not the easiest task), they are ultimately dependent on the savings appetite of a group that likely on average simply do not have enough money to save or invest at meaningful levels.
This is seemingly due to costs of living being squeezed by relentlessly rising costs of living, notably rent. With these pressures it’s difficult for the younger generation to commit to squirreling cash away in investments when they have more urgent expenditures to prioritise.
Against this backdrop, we can see some new market entrants are attempting to solve what may well be a significant problem for the UK: the retirement savings gap. There’s no shortage of data telling us that UK citizens at current rates may have as little as £6,000 a year for their retirement, by the time it comes around; £23,000 is touted as the figure needed for a ‘comfortable’ retirement. With 7.8 million millennials entirely lacking any kind of long-term savings product, the situation seems dire.
With millenial savings becoming such a defined problem, it should be simple for fintechs to offer targeted solutions. However, getting millennials to take any interest in retirement planning is an enormous ask. It might be 40 years before they feel the benefit, and in any case, a new app has to get past the five existing apps that occupy around 80% of mobile screen time before even beginning to address the problem.
There’s no shortage of data telling us that UK citizens at current rates may have as little as £6,000 a year for their retirementMoreover, is retiring at 60 with an annual income of £25k still a relevant aspiration? By 2050, the demographic profile of the population may well render that goal obsolete, and the gig economy is providing older people with new ways to supplement their incomes. By the age of 65, today’s millennials might find themselves putting in a couple of days a week at Uber, or renting their rooms on Airbnb, and enjoying semi-retirement in much better health than preceding generations.
The upside to these generational shifts is that any fintech focused on savings and investment could build an attractive business model if greater focus is put toward the short to medium term transaction at the end of the savings tunnel. If a fintech ensures that millennials reach a high priority goal more quickly, you’ll win them; make the transaction linked to the goal simpler, frictionless and ideally cheaper, then you’ll keep them.
For instance, fintechs aiming to help young people get on the property ladder faster should perhaps focus more on improving the still archaic experience of buying a home at the end of the saving period, monetising the facilitation of mortgages and other relevant products and services (insurance, legal, surveying, etc.) in the process.
The savings element is better served as a loss leader in order to own the customer relationship as early as possible.The savings element is better served as a loss leader in order to own the customer relationship as early as possible. In my view, this would have a greater chance of success than a model that is reliant on charging wafer thin margins on assets under management that may not be meaningful for at least 20 years.
What millennials genuinely care about, and what they’re actually prepared or able to save on a monthly basis, just won’t support those margins over the long term, especially as competition increases. Competition will also drive up the already lofty customer acquisition costs in this space, a figure which is heavily under-estimated by most fintechs, making the model even more difficult to sustain. This perhaps will play into the hands of incumbents, supported by deep pockets, looking to launch and grow self-service, mobile-first products.
The message is simple. Millennials are increasingly living for today and will find it near impossible to view savings in the same vein as previous generations. Fintechs looking to fight this may have quite the battle on their hands.
The opinions and views expressed in the above article are for general information purposes, they should not be construed as recommendations or advice for any individual nor should any action be taken on account of the information presented. The views and opinions have been provided by Andi Kazeroonian of Investec Bank plc and are subject to change.
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