Reinventing Consumer Loans: How Mid-Size Banks and Credit Unions Can Win Millennial Borrowers

The so-called conventional wisdom about Millennials and financial services has been misguided when it comes to products like:

  • Credit cards. Back in 2013,  Motley Fool wrote: "Great news: Americans are giving up on one of the most ruthless destroyers of wealth the numerically challenged have ever known: credit cards. We're just much more interested in debit cards than credit cards these days. Reality: According to the Federal Reserve Board, consumers use of credit cards rose 10.2% between 2015 and 2016, as the growth in debit card use slowed. Even as this was happening in 2016, the press was running stories with titles like Millennials Really Don't Like Debt, Aren't Into Credit Cards and Why Millennials Hate Credit Cards.
  • Mortgages. The author of an article titled Millennials: The Mobile and the Stuck argued that the reasons why young people aren’t buying houses came down to two factors: “Rich, urban, college-educated, and supermobile Millennials have elected to trade their 30s for their 20s when it comes to buying a home. Meanwhile, poorer, less-educated, and stuck minorities have often traded homes and apartments for their childhood bedroom.” Reality: In May 2017, Fox Business reported: “After sitting on the sidelines for a decade, Millennials are buying homes en masse, promising to kick the already strong housing market into higher gear.”
  • Car loans. Millennial Magazine wrote: "With environmental concerns, automation, and the advent of ride sharing services, owning a car is not necessarily the rite of passage it used to be.” Reality: Nearly 80 percent of Millennials own cars and 75 percent of Millennials who don't own a car aspire to own one now, according to the 2017 Accel + Qualtrics Millennial Study.

Community-based Financial Institutions Aren't Winning Their Fair Share of Business

The overstated reports of the death of credit is good news for banks and credit unions of all sizes. But community-based institutions face a couple of challenges in capturing their fair share of the demand:

  1. Millennials bank with megabanks—not smaller FIs. Among Millennials in their 20s, 54% call a megabank their primary FI. Just 14% say a credit union holds their primary checking account, and only 7% bank with a community bank. Among Millennials 30 to 37 years old), the pattern is similar, with 59% banking with a megabank.
  2. Smaller FIs under-perform on cross-selling. Among Young Millennials who bank with a megabank, 42% opened a credit card with that FI in the past year. In contrast, just 31% of credit union members in that age group have a credit card from the credit union, and that percentage drops to a mere 4% among community bank customers. In addition, Megabanks have done a superior job of putting mortgages in the hands of their Old Millennial customers (who are more likely to have, and be in the market for, a mortgage) than credit unions and community banks, and have attracted a higher percentage of both Millennial segments to open home equity loans or lines of credit than other FIs.

 Percentage of Consumers Who Have Opened or Purchased Product with Primary FI

 Primary FI

Credit card

MortgageHome equity loan

Other personal loan

Young Millennial (1988-1996)Megabank




Large regional bank




Credit union




Community bank




Old Millennial (1980-1987)Megabank




Large regional bank




Credit union




Community bank




Source: Cornerstone Advisors survey of 2,015 US consumers, Q3 2017

Realities of Competitive Dynamics

To better compete with the large banks in the lending markets, community-based financial institutions need to find new strategies. While many believe that they have superior rates and service, the cross-sell numbers show that Millennials are often selecting the megabanks and large regional banks they already bank with for their borrowing needs.

I've talked to many community bank and credit union executives who believe that they compete on a superior lending experience. Two challenges with that:

  1. Speed doesn't matter on car loans. According to Millennials, speed of the application and the decision process is not that big a factor with auto loans—meaning that competing on “experience” is no ticket to success in this product area, and
  2. Reliance on vendors will always force mid-sized financial institutions to revert to the mean. At a recent conference, a credit union exec complained that when his credit union asked its core vendor for new features, it was told "Nobody else is asking for these features." So much for differentiation.

With the amount of money the megabanks have to invest in digital, and the advantages that fintech startups have by being primarily digital from the start, the opportunity for mid-size FIs to compete on "experience"--i.e., digital lending experiences-- is limited.

Competing on Product Innovation

If they can’t differentiate on price, and can’t compete on experience, what’s the alternative? Competing on product design. Three tactics to do that include:

  1. Providing flexible credit terms. In its report A Snapshot of Quality and Innovation Among Small-Dollar Credit Installment Lenders, CFSI identified “structuring loans to support repayment” as an important guideline for lenders to follow. One practice within this guideline—allowing flexibility in setting repayment schedules that match borrowers’ income schedules—was found in only a few of the lenders that CFSI reviewed, however, suggesting a gap for community-based FIs to fill.
  2. Offering access to future funds. Millennials’ borrowing needs aren’t one-shot deals. These consumers are entering, or are in the middle of, life stages that require multiple and on-going borrowing needs. Innovative loan products that recognize future borrowing needs can help community-based FIs gain share. Examples of this include LendUp and Kasasa.
  3. Bundling accounts. More than half of Millennials would open a checking account if that’s what they had to do to get a loan with flexible term and faster payback capabilities. Typically, customers seeking credit apply for individual products—e.g., loans or credit cards—separately. Wells Fargo said it would show customers their entire unsecured credit limit with Wells, allowing customers to choose how to allocate their credit limit among products.

For more ideas on data about competing on loan product innovation, download Cornerstone Advisors' Reinventing Consumer Loans: How Community-Based Financial Institutions Can Win the Millennial Lending Market here.