The Millennial Generation Will Redefine and Drive the Future of Financial Services

Millennials - The future of financial services

There is a demographic trend happening today that no one is really talking about. It is a trend that will ensure a major tailwind for online lending platforms and a potential headwind for traditional banks. The millennial generation (those born between 1982 and 2004) is the largest generation in history and we don’t like doing business the way our parents’ generation did. We like speed and efficiency when it comes to using products and services.

Above all else, millennials are open to a new way of doing things. We will be among the fastest group to adopt nontraditional banking services. This includes services like mobile wallets, alternative payments services and yes, peer to peer lending. It is no wonder that niche peer to peer lenders like SoFi, LendLayer and Upstart are focusing on my generation.

Upstart goes beyond simple data points like FICO score and years of credit. They take into consideration schools, academic performance and standardized test scores. For millennials with a thinner credit file, accessing credit is only available with this type of underwriting.

Looking to learn software development? LendLayer focuses solely on financing students who are looking to just that. They offer loans starting at 6.49% with no payments for 6 months. LendLayer, like Upstart, is looking at hire-ability rather than solely just someones financial situation.

In the case of SoFi, who are primarily involved in student debt refinancing, it is an immense opportunity if executed properly. Student loan debt is over $1 trillion and two-thirds of American students are graduating with some level of debt. Not surprisingly, SoFi was the fastest marketplace lender to reach $1 billion in originations (30 months).

We are a unique demographic. Some of us exit college with high tech salaries and mounds of student debt. Some make paying down student loans a priority, but others want to jump into marriage or home ownership. Banks simply haven’t adapted to be able to serve such a variety of customers like that.

To the benefit of online and marketplace lenders, millennials like efficiency and already want to do everything online. Peer to peer lending is a perfect match. Having to go to a bank branch for any reason should someday be a thing of the past.

As a millennial myself, peer to peer lending represents much more to me than earning a solid return on my investments. I believe peer to peer lending is just the way Americans should get loans. Many people my age are on the other side equation, needing to borrow money for a multitude of reasons. In a survey from August 2014, millennials were ten times more likely to consider peer to peer lending than baby boomers, and twice more likely than Generation X. Adoption will only continue increase as millennials enter their prime earning years. More statistics from this study can be found here.

Even in my young age, I’ve dealt with plenty of banks. I’ve secured 3 mortgages in about 4 years, starting not long after the financial crisis. To be honest, I had it pretty easy. I started building my credit early at 18, had a solid paying job and zero debt to my name when I bought my first house. This is certainly not true for everyone in my generation. My experience with banks however, didn’t come without frustration. Throughout the tedious processes, I couldn’t help but think there must be an easier, more efficient way. Besides the immense amount of paperwork, there were surprise fees and in one case, the bank told me at closing that they approved me simply from income; making the hours I spent gathering investment statements and past tax records completely wasted.

When I went to buy my latest rental property not too long ago, I looked into a peer to peer loan. I was excited to find out that SoFi was soon going to be offering mortgages in Wisconsin. However, they didn’t offer loans on investment properties. Still, they offer more flexible terms than I have ever seen in my search for the best local bank.

Just as the baby boomers transformed society and business so too will millennials. We are very comfortable doing business online and want companies to provide an efficient, seamless experience whether it be buying a fridge or applying for a loan. Those companies who insist on doing business the 20th century way will fall by the wayside and new leaders will take their place. Could Lending Club and Prosper be the financial giants of the 21st century? It is certainly possible and it is the millennials who will decide.

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Greg
Mar. 5, 2015 2:41 pm

Prosper recently purchased a health lending company for $21 million. If anybody thinks peer to peer lending is some kind of fad, or going away. It is a phenomenon that is only going to continue to grow.

Kevin Shane
Mar. 6, 2015 12:17 pm

Great write-up, Ryan. One comment I’d like to add regarding customer acquisition cost for the borrower… It’s been a big topic as of late. Right now, it seems that the CAC for banks can be between $500-1000, and between $200-500 for the marketplace lending platforms. I think this number will continue to decrease as more millennials and younger generations become the entire market. Competition will of course be a factor, but access to these customers will only get easier/cheaper, as most will be online.

Ryan Lichtenwald
Ryan Lichtenwald
Mar. 6, 2015 1:51 pm
Reply to  Kevin Shane

Absolutely, you bring up a great point. When I bring up p2p lending to my peers, many still have no idea what I’m talking about. I do not think that will be the case in a few years time. Getting a loan online will be second nature and many leads will come from word of mouth.

Tim D.
Tim D.
Mar. 12, 2015 2:45 am

Hi Ryan/Peter,
Thanks for your posts..been following for a while. I’ve been trying to understand the business model of some of these lenders — and while LC/Prosper etc are fairly straightforward (origination fees), SoFi’s still seems to be a bit mysterious.
I saw they generated $40M revenue in 2014, and originated perhaps $1B of loans. But how is this possible? What I know:
They charge .75% mgmt fees (on their equity, say $200M) + 0.5% service fees, that == at most $6.5M in revenue.
They have $X00m in warehouse lines + bank commitments, and have securitized ~$800M.
Does the rest of it come from some interest rate spread(how?)? or booked gains on securitizations? like if you sell a 5% coupon bond at market rate of 4.5%, you sell at a price of 104… booking 4% on 800M will get you close to $40M.
Would be great if you can shed some light…or ask them and do a blog post on it!

Peter Renton
Admin
Peter Renton(@peter)
Mar. 12, 2015 9:33 am
Reply to  Tim D.

Hi Tim,

You raise some good questions. And yes, I believe that SoFi makes money in many of the ways you suggest there. But I don’t know definitively and I think it would be good to find out. So, we will add a blog post about SoFi on to out list.