Sweet 16 parties, bar and bat mitzvahs and quinceañeras are examples of how different cultures celebrate young people coming of age. The payments industry might want to break out the hats and tooters to celebrate the arrival of the next generation of consumers; they're coming of age, and they've got money to spend.
They're called Generation Y, also known as millennials. Sources consulted for this article estimated Gen Y's population to be as high as 93 million and as low as 60 million. There is also a lack of consensus on the birth dates that define GenY: 1997 to 2002 and 1978 to 1989 are just two parameters used.
In 2005, The U.S. Census Bureau estimated Gen Y's population to be 73.5 million individuals comprising 26 percent of the U.S. population; it estimated the Gen X and baby boomer populations to be 49.1 million and 76.7 million, respectively.
However, as of July 2008, the bureau pegged the Gen X and baby boom populations at 57.8 million and 79.8 million, respectively, while Gen Y shrank to just over 68.3 million.
Nevertheless, given their size and buying power, it's not hard to see why Gen Yers are targeted - or should be targeted - by financial institutions. The catch is: Those in Gen Y spend money differently than older generations.
As consumers, Gen Y can be a tricky bunch to figure out. It is essential, therefore, that ISOs and merchant level salespeople (MLSs) understand Gen Y's buying habits and payment preferences. Such knowledge may translate into profits now and even more so in the future - when Gen Y consumers mature.
In population size and consumer influence, Gen Yers rival baby boomers today. But, at the core, the generations have significant differences. A few characteristics of Gen Y:
Remember, many in Gen Y are barely out of high school. Their behavior and interaction with technology will likely solidify as they move into adulthood. There is little chance they will adopt the payment habits of their elders.
According to a Javelin Strategy & Research report entitled Gen Y Payments, Behaviors, and Attitudes: Customer Service and Targeted Rewards Attract Lucrative Young Adult Segment, as older generations die off and lose their economic vitality, Gen Y promises to get bigger and bigger, in more ways than one.
"Payments executives must sharpen their focus on Gen Y now, as Xers and boomers will experience population declines over the next 10 years," the report said.
Gen Y spending power, even before they have hit their peak income earning ages, is higher than previous generations at the same ages. The total income of Gen Y workers will surpass that of boomers by 2017. They differ from preceding generations in other ways, too.
"Gen Yers are more optimistic in their spending," said Dr. Kit Yarrow, Consumer Psychologist at Golden Gate University. "Until now, they've never experienced [an economic] downturn, and they were indulged to a degree by their parents. They don't expect to have to lower their standard of living, so they have a tendency to indulge themselves with small luxuries more frequently than older generations."
Ashley Grayson, Vice President of Business Development at Criteria LLC, a strategy and intelligence gathering organization, agrees. Generally, Gen Y keep low the portion of their weekly or monthly cash flow pre-committed to fundamentals (rent, phone bills, minimum credit payments and so forth) so they have "money available for whims," Grayson said. "It's hard to say that they would want to minimize any one category because, for some, a great apartment or expensive car might be the whimsy."
As the boomer population thins out and more boomers retire (and reduce spending as they deal with limited incomes), Gen Y's economic power will increase. How they spend their money needs to be studied, so that the payments industry can design financial tools that will appeal to this tech savvy and multiwired generation.
Researchers - and marketers - are starting to take notice. Many of the dominant research firms, including Javelin, JupiterResearch LLC, Yankelovich Inc. and Celent LLC, have sponsored studies to determine how these teens and young adults think, spend and pay.
"The echo-boom, in credit card demand, will require card features tailored to younger adults' lifestyle needs, and marketing efforts that embrace emerging social media," said an April 2007 Jupiter study, Payment Preferences Online: Managing the Generation Gap Between Younger and Mature Adults. "Longer-term, their habits will support increasing experimentation with P-to-P [person-to-person] payments and the broader deployment of innovations, including mobile payment services," the study said.
According to Teens and Personal Finance 2008, a report issued by the Allstate Foundation's Junior Achievement program, 10.4 percent of teens indicated they use credit cards - a percentage that increases as they get older. Among teens ages 13 to 14, only 4.8 percent report using credit cards. But that percentage rises to 8.4 percent for teens ages 15 to 16. For the 18-and-older crowd, credit card use rises to 21.5 percent.
Overall, the amount teens spend using credit is modest; what's telling is the fact that they use credit cards at all. A significant percentage of Gen Yers have incorporated credit cards into their financial lives, often long before holding down their first jobs, in stark contrast to previous generations.
Thirty-eight percent of teens charge less than $50 a month on cards; 28.2 percent charge $51 to $100 a month; 33.7 percent charge more than $100 a month; and 67.6 percent pay their monthly charges in full each month.
Rising gas prices may contribute to the increase in average monthly charges for teens, since gasoline is the number one item charged, with 68.6 percent of teens using credit to pay for gas; clothing is the second most common item charged.
According to the Teens and Personal Finance 2008 Report, 10.4 percent of teens use credit, but 32.9 percent have checking accounts tied to debit cards.
But for many in Gen Y, debit card usage is the gateway to using credit cards (as compared to their parents who likely had credit cards before debit cards).
A First Annapolis Consulting Inc. study found that 95 percent of Gen Y regularly make purchases online. But, in spite of their familiarity with alternative payment tools (like PayPal), credit cards are Gen Y's most popular choice for payment (65 percent), followed by debit cards at 22 percent. Ease of use and convenience were the most important drivers in the selection of payment options, followed by security and rewards features.
These findings aren't alarmingly different than data for previous generations, but a closer look shows that Gen Y is far more likely to use debit cards than boomers or even Gen X. Jupiter's study said mature adults (ages 35 and up) overwhelmingly prefer credit cards to debit cards when making Internet transactions. Mature adults, as defined by Jupiter, entered the workforce at a time when credit cards dominated electronic payments, and this fact is reflected in their online payment preferences.
Conversely, Jupiter found younger adults, ages 18 to 24, express nearly equal preference for credit and debit, with 51 percent preferring credit to 50 percent for debit (a combination of signature and PIN debit).
In fact, most Gen Yers are bypassing paper checks altogether when they open their first bank accounts, relying instead on debit cards.
Jupiter concluded that Gen Y will retain the inclination to use debit over credit for lower-value, everyday transactions, even as they move into their peak earning years and their access to credit cards increases.
However, as Gen Y matures, they will increase spending, which Jupiter said would "spur an echo-boom in credit card applications as younger adults mature and move up the consumer-spending food chain."
So, the coming of age of Gen Y may be what finally kills the paper check.
Gen Y have been using plastic for purchases since grade school - gift cards and even allowances loaded on prepaid cards are becoming increasingly common.
Many in Gen Y view cash as bulky and inconvenient - 25 percent of them use payment cards for most of their purchases under $5 and don't typically carry cash at all, according to How America Spends, a survey conducted by Yankelovich and Visa Inc. in 2007.
The survey found that Gen Y is twice as willing as their parents to pay electronically for purchases under $5. Additionally, 76 percent of consumers age 18 to 25 never leave home without payment cards. One-third of the Gen Y survey respondents said they rarely carry cash and wish they could use payment cards to purchase more small-ticket items.
Javelin said 57 percent of those in Gen Y use one or fewer credit cards, compared to 39 percent of the overall consumer population.
This is partially explained by Gen Y's lack of employment, but it may also be a result of their affinity for reward programs. Two-thirds of Gen Y consumers indicate rewards as among the most important factors when selecting credit cards.
And the reward they seem to prefer is redeemable catalog points for credit card purchases (compared to other types of rewards like airline miles or cash back programs). Among those owning reward cards, 55 percent of Gen Y, 52 percent of Gen X, 34 percent of baby boomers and 40 percent of consumers overall are earning catalog points.
New variations on reward programs appear every day. In July 2008, edõ Interactive released the prepaid facecard with a "Prewards" program. If cardholders opt in, they are e-mailed or text-messaged, letting them know they've received Prewards, electronic coupons which can be redeemed by using cards by specific dates at specific merchants.
"Prewards is an edõ-trademarked technology that allows retailers to connect with facecard users," said Ed Braswell, President and CEO of edõ Interactive.
"Select retailers load cash deposits on cards if cardholders make purchases at retailers' stores - essentially discounts that can only be redeemed at those merchant locations. When combined with edõCash, a program in which retailers give rewards to loyal patrons, the marketing technologies promote closer relationships between retailers and consumers," he said. Unlike rewards, fees do not matter as much to Gen Y. Since they grew up with debit cards, they are accustomed to paying activation and other fees. "Generation Y is more accepting of surcharges for card transactions, with a lower percentage likely to change payment method when facing a surcharge, creating risks for traditional payments providers and opportunities for particular merchants and emergent alternative payment providers," said Bruce Cundiff, author of Generation Y Payments Behaviors and Attitudes.
"This is the first generation to essentially grow up with mobile," said Beth Robertson, Senior Manager at First Annapolis.
"Most Gen Yers already use their phone in multiple ways (more commonly than those in other generations) - texting, photos, Web access, games, music, etc. Mobile payments are a logical add-on to this tendency."
Although cell phones are ubiquitous among Gen Yers, some researchers say Gen Y's demand for contactless cell phone payments may not be as great as it would first appear.
Javelin's survey, for example, had conflicting data. It showed that less than 25 percent of Gen Y would be likely to use contactless, and 55 percent of those would prefer traditional cards.
The report also stated that "a significantly higher number of Gen Y would prefer the contactless device be embedded in an MP3 or PDA than in a standard credit card, but this does not represent a significant enough percentage to drive the evolution to other devices."
However, Javelin's research also showed that "if offered a checking account with a contactless debit, more Gen Y consumers would consider switching institutions for the technology than consumers overall."
This may reflect a chasm between Gen Y consumers and financial institutions: Members of this generation display a general lack of knowledge of financial services products; traditional FIs exhibit a general lack of knowledge of social networking and other electronic forms of communication that those in Gen Y employ every day.
"Gen Yers believe everything should have every feature, so all payments should be possible. But they aren't feature counters, so businesses can't make a sales pitch of features that the Gen Y believe are the natural way of things," Grayson said.
"The feedback we get from our members is that they love the peer-to-peer payment vehicle for gifting to each other and as a form of repayment when they owe a friend money," Braswell said.
"We believe that mobile solutions and social network connectivity are important to integrate the prepaid experience," he said. "Looking at Prewards, account balance, gifting notification from their online account and mobile phone is huge."
Parents are also starting to preload allowances on their childrens' facecards.
Baby boomers' parents - the so-called silent generation - read newspapers while the boomers watched TV. Employing those two modes of communication, advertisers could reach consumers relatively easily.
But a recent poll by the online political community MeriTalk found that 88 percent of Gen Y respondents said they would get their presidential election information online over the next four years, rather than TV or radio.
According to Celent's 2007 report entitled The Millennials, Financial Services, and the Web, 71 percent of Gen Y discover financial services online - compared to only 21 percent who actually visit brick-and-mortar banks.
Through Web sites, online marketers can reach Gen Y via millions of potential advertising locations compared to, at most, a few hundred ad spots in national and regional newspapers, for instance.
Members of Gen Y are used to visual overload. They process information quickly. And social networking technologies have led Gen Y to expect interactivity in marketing.
Traditional forms of advertising are not only ineffective with Gen Y, they can sometimes backfire.
Marketing attempts Gen Yers consider laughable or condescending may soon be ridiculed in blogs and on YouTube.
"Targeted messaging is important," Braswell said. "As is marrying the right technology components to make the product relevant to our members."
"[Gen Y] wants to feel a part of the equation," Yarrow said. "They don't want to feel like they're being sold; they are very sensitive to being manipulated or spoken down to. Smart marketers approach communicating with Gen Y in a very honest and collaborative way."
Collaboration is the key word for a generation that came of age in the Web 2.0 era. Social networking has a surprising impact on purchases, with Gen Yers posting cell phone photos of clothing or cars they want to purchase and soliciting opinions from friends.
To reach this demographic, edõ Interactive patterned facecard users' online profiles after MySpace Inc.'s popular social networking pages.
Facecard profiles allow friends and family to add money to cards online. The profiles even remind others of upcoming occasions like birthdays or graduations.
Members of Gen Y spend and save money differently than their elders.
Consequently, they expect different features in financial products. And the ways they use electronic payment tools will soon rock the processing world. Savvy ISOs and MLSs who understand how and why Gen Yers spend money now will capitalize on the coming revolution.
And rest assured, this revolution will be electronified.
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