Friday, 22 October 2010 16:59

Targeting Millennial Generation Key to Growth in Emerging Consumer Payments

By Liz Hartney

Hitachi Consulting, BAI Study Shows That Biggest Opportunity to Grow Emerging Consumer Payments Lies With the Under-35 Age Group

October 22 2010 - Financial institutions should be pursuing the Millennial Generation with gusto as they are the greatest consumers of electronic and emerging payments according to a new nationwide Consumer Payment Preferences Study conducted by Hitachi Consulting and the Bank Administration Institute (BAI). The research was sponsored by First Data Corp., FIS, MasterCard, PULSE, and U.S. Bancorp.

According to the study, the Millennial Generation (defined in the study as ages 18 to 34) is the segment which uses debit and alternative payment methods and channels in-stores on a par or higher than the 35-54 age segment and greater than those aged 55+. The study also reveals this group intends to increase their usage of all in-store payment products more than any other age group. Ease of use (35 percent), financial security (29 percent), security and safety (27 percent) and speed (20 percent) are the primary in-store buyer values for the Millennial Generation. Based on the findings, financial institutions should consider focusing their marketing programs and messages on the primary buyer values as a way to attract the Millennial Generation as well as focus on cross-sell efforts and retention in this segment as they generally have product/solutions needs that are more profitable to banks. Financial control, safety, and security are the primary in-store buyer values for the other age groups, which should be the focus of strategies and marketing programs designed to attract them as customers.

Other considerations for financial institutions to evaluate relative to their strategies and plans regarding the Millennial Generation include:

- Debit card ownership is highest among this group (80 percent), as is ownership of contactless payment devices (12 percent)

- Credit card ownership is the lowest among this age group at 56 percent

- Making small purchases under $5 (micropayments) on the Internet is highest among this group (56 percent) compared to those between the ages of 35 to 54 (46 percent) and those over 55 (23 percent)

The study also showed that consumers are not showing signs of adopting mobile payments. Despite coverage in the media and in advertisements, an astonishing 88 percent of consumers said they do not currently use mobile payments for in-store purchases nor do they plan to use them in the next two years. At the same time only 5 percent of consumers indicated they owned a mobile device capable of making an in-store purchase, with 46 percent of these owners coming from the Millennial Generation.

The reason for the reluctance stems from their concerns over potential safety and security issues that could result in fraud and theft. When developing strategies and plans aimed at targeting the use of mobile for payments, financial institutions should be prepared to invest in consumer education to overcome concerns over safety and security.

"We see a great deal in the media about mobile capabilities. However, our study shows that consumers are not yet there when it comes to using mobile devices for payments. Financial institutions will need to address security and fraud issues with their customers if they expect to see an increase in mobile device usage for making payments and in-store purchases," said Jim Neckopulos, Senior Vice President, National Financial Services Practice for Hitachi Consulting. "Our advice to institutions at this time is to address those concerns if they want to see an uptick in mobile usage in the near future.

"It's clear that mobile banking, though it is making its way into the public arena, may not be as far along as U.S. financial institutions may have thought at this point in time," Neckopulos said. "However, Hitachi Consulting can help financial institutions with their mobile banking plans, especially when it comes to developing strategies to identify and attract consumers who are more likely to desire mobile banking products."

The study also confirmed that debit cards continue to grow in preference and usage at the expense of credit cards, cash and checks. Since 2005, use of checks for making purchases declined from 11 percent of total in-store purchases to 5 percent in 2010. During the same period, use of cash for making purchases in-stores declined from 33 percent to 26 percent of total purchases.

The study shows that credit card customers value rewards more than debit card customers. Although 21 percent of debit customers receive rewards, 64 percent indicate that rewards are neither extremely nor very influential in their choice to use debit. In comparison, 45 percent of credit card customers indicate that rewards are extremely or very influential in their choice to use credit cards. With new regulations likely to cause pressure on interchange rates, rewards in their present form are not likely to be sustainable and could present an opportunity for issuers to shift volume from credit to debit.

Other debit stats:

- While debit card product ownership remained flat, credit card ownership fell from 71 percent in 2008 to 67 percent in 2010

- Debit cards continued to grow in terms of in-store usage (42 percent of transactions in 2010 versus 37 percent in 2008), while credit card usage showed a decline (from 22 to 19 percent) of in-store transactions

- Debit cards are perceived as better than credit cards in helping to manage a budget

"With the continued decline in check volume, financial institutions may want to explore opportunities to convert any remaining fixed costs related to check processing operations to variable ones and consider where it makes sense to outsource certain activities," Neckopulos said. "With the continued use of debit at the expense of credit, checks, and cash, financial institutions may want to focus their marketing messages on the safety, convenience, and budget control aspects of debit as a way to continue the trend."

Finally, the study reveals a noteworthy point in the growth of person-to-person (P2P) payments and, to a lesser extent, prepaid cards, primarily when it comes to purchases over the Internet. On the strength of activity from PayPal, the use of P2P payment options among those who made at least one online purchase grew from 49 percent of online purchases in 2008 to 62 percent in just two years, placing second only to credit cards as the predominant online payment option. This uptick should cause financial institutions to be concerned and look at ways to mitigate the potential for loss of business.

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