Generation Z is the first generation to grow up totally immersed in a digital environment. For instance, they have never known a world without cell phones. The younger members may not even remember a time before mobile banking. The youngest of them was born around 1997, and most have never experienced a world without smartphones. Sociologists are referring to Generation Z as the first "digital natives." And as consumers, they are already a force to be reckoned with. This has profound effects on the way retailers and many service providers are doing business - and Generation Z is already changing the consumer credit industry forever.
Let's set the stage: Generation Z members have significant discretionary income. Nearly half of Zoomers ages 18-23 have a parent or guardian providing housing costs, and four in ten are still on their parents' health insurance, according to a recent survey from NerdWallet.com. But 4 in 10 Zoomers are also anxious about money. It's no wonder: They grew up watching their parents deal with the fallout of two major recessions and market crashes within the last 15 years.
Zoomers are also concerned about debt. Their older members have the highest level of student debt in American history. Over 27% have student loan debt, and 30% of them owe money on credit cards. They also tend to prefer using debit cards to credit cards - especially when setting up automatically-recurring transactions.
Additionally, nearly half of adult Zoomers - 48% - have never written a check. 44% of them have never applied for a credit card. And 25% have never even visited a physical bank location. Instead, these younger Americans grew up using Venmo and PayPal and they're increasingly rejecting traditional bank credit products, including credit cards. Having come of age in economically tumultuous times, between the mortgage crisis and the COVID pandemic, Zoomers have seen their parents and other loved ones struggle with debt.
Instead, younger consumers are increasingly turning to a more recent fintech innovation: Buy Now Pay Later (BNPL).
The 'Buy Now, Pay Later' Phenomenon
Like credit cards, BNPL vendors allow consumers to make purchases and spread their payments out over time. Unlike credit cards, however, BNPL vendors typically charge little or no interest and charge little or no fees to the consumer. Instead, the merchant pays all the fees.
Here's how a BNPL transaction works: a customer would like to make an online purchase but doesn't want to pay the item's full price right away. The vendor's website provides a BNPL button that ropes in a vendor where the customer applies directly to the provider for the credit without leaving the merchant's website.
Unlike applying for a new consumer credit account, there's no hard credit check - and no impact on the customer's credit report. Instead, Zilch's system leverages Open Banking technology and artificial intelligence to estimate what each customer can afford.
If approved, the customer pays 25% of the total purchase price upfront. Zilch pays the merchant the rest and debits the customer's bank account in four separate payments, initiated over the next six weeks.
"Zilch ensures customers never over-borrow," says Zilch founder and South African expat Philip Belamant. Between the soft credit checks and the Open Banking technology, we get a pretty accurate view of what our customers can afford. Defaults are very rare.
Open Banking and AI technology are so successful that Zilch and many other BNPL vendors are able to charge little or nothing to the consumer for the transaction. Instead, the merchant making the sale pays all the transaction fees. They'd pay similar fees to take a credit card anyway, says Belamant, and they get the sale right away.
"Our underwriting approach is different from banks," says Belamant. "With credit cards, when a customer misses a payment, the bank blames and penalizes the customer. They hit them with fees. They jack up their interest rates. They force the customer into a deeper hole. With us, our approach is this: If a customer misses a payment, that's our fault, not the customers. We make it easy for the customer to catch up, and we try to use the experience to improve our underwriting.
While credit cards aren't going away any time soon, third-party financing companies and BNPL firms are combining to take a substantial chunk out of credit card issuer revenues. A recent Deloitte report found that "more payment choices, along with changing consumer preferences, are threatening the long-term viability of the credit card business model."
Business is booming. Zilch's customer base has been growing at more than 125,000 per month - primarily driven by COVID pressures, as Gen Z customers look for digital-friendly ways to improve their cash flow. One survey found that more than a third of U.S. consumers between ages 18 and 54 have used BNPL at least once.
In recent months, BNPL vendors have been expanding their reach from online purchases to in-store transactions, as well as, handling applications, approvals, and payments via their mobile devices. In the past, customers had to use multiple BNPL vendors because they were restricted to whatever BNPL service their merchant had partnered with. But Zilch is the first BNPL vendor to go 'over the top' and allow customers to use their Zilch account services anywhere MasterCard is accepted.
Not only does this simplify the transaction process, but it also dramatically streamlines the customer's personal finances, argues Belamant. Instead of keeping track of multiple BNPL debits from their bank account from several different vendors, Zilch allows them to put everything under one roof. Customers can easily log on to their accounts via the mobile app and see all the planned bank account debits at a glance.
At this time, new accounts are typically limited to modest-sized purchases, typically totaling just a few hundred dollars, depending on their bank account history. However, as customers prove themselves, they can qualify for higher and higher spending limits.
Most importantly, BNPL keeps things simple: Typically, there are no late fees, no over-limit fees, and no interest charges. However, this isn't universally true. Every BNPL company has a different model and fee schedule.
The BNPL phenomenon is expected to keep gaining momentum. While only a small fraction of customers have used BNPL vendors as of the end of 2020, customers are increasingly demanding BNPL or other credit options at the point of sale. One survey found that more than half of Generation Z Adults surveyed say they have used BNPL multiple times since the beginning of the Pandemic shutdowns.
According to PYMNTS.com, nearly half of all consumers - 48% - say they would not shop at merchants that do not offer some way to finance purchases at the point of sale.
