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FICO's latest consumer research on why people switch banks found that Millennials (25-34 years-old), a group at the peak of financial services usage, are 2 to 3 times more likely to close all accounts with their primary financial institution than people in other age groups.
The same demographic said they are twice as likely to close all accounts and switch banks this year than they were last year. This could drive a high amount of customer churn, as this age group holds 6.27 financial products on average, compared to 5.79 for the entire US adult population.
Joshua Schnoll, senior director for FICO, said, "The increased volatility in this 25-34 year-old age group can be a costly exercise for incumbent banks, due to the increased marketing and operational costs required to win new customers, especially if they are only replacing the ones that have left. Banks will need to address Millennials' sensitivities to bank fees and a desire for convenience in order to arrest churn and build loyalty."
When it came to reasons for switching, 45 percent of Millennials aged 25-34 cited high fees as a key reason for leaving their bank. For younger Millennials aged 18-24, the number was also high at 36 percent.
A negative experience when they missed a payment was the second biggest reason for 25-34 year-olds to switch banks. Inconvenient branch locations and too few ATMs were tied for third. In addition to these reasons, younger Millennials said they switched banks because they had a negative fraud-related experience.
"Looking specifically at the issue of fees, banks need systems that employ intelligence to the way these are applied," said Schnoll. "Today, smart institutions are already building models that look at the long-term profitability, attrition risk and historical fee waiver requests on an account, and then make an analytics-driven decision to proactively waive a fee, provide reactive fee refund offers or not refund fees at all.
"More broadly, the same approach can be taken to pricing and cross-sell offers as a way to manage attrition. Making the correct decisions depends on banks leveraging existing transaction and customer-level data models to anticipate lifecycle changes or possible switching."
Are digital banks a threat to traditional banks?
While large national banks are by far the predominant primary financial institutions for US consumers, the survey revealed that 16 percent of 25-34 year-olds are considering opening an everyday banking product with an online-only bank in the next year. In the survey, only 2 percent of respondents said they currently hold such an account.
"Digital-only banks clearly have an opportunity," said Schnoll. "They have a lower cost structure, get the mobile-first strategy that appeals to many Millennials and could capitalize on their greater likelihood to switch providers."
Some established banks have already acquired digital-only banks (BBVA acquired Simple a few years ago), while others are investing heavily in better digital products. Earlier this month, JP Morgan Chase, Wells Fargo, Bank of America and other large banks announced enhancements to clearXchange, which will now offer real-time, person-to-person payments on the platform.
"Implementing a mobile-first, speed-first strategy is one way some national banks are looking to retain customers," said Schnoll. "This is a clear effort to help them compete with the likes of PayPal's Venmo."
FICO conducted an online survey of about 1,000 US consumers over the age of 17, in October and November 2015. Data was weighted by age and region to reflect U.S. Census data.
FICO (NYSE: FICO) powers decisions that help people and businesses around the world prosper. Founded in 1956 and based in Silicon Valley, the company is a pioneer in the use of predictive analytics and data science to improve operational decisions. FICO holds more than 165 US and foreign patents on technologies that increase profitability, customer satisfaction and growth for businesses in financial services, telecommunications, health care, retail and many other industries. Using FICO solutions, businesses in more than 100 countries do everything from protecting 2.6 billion payment cards from fraud, to helping people get credit, to ensuring that millions of airplanes and rental cars are in the right place at the right time.
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