How do differing customer profiles affect the credit market?

The UK has an aging population – this decade alone has seen a 72% increase in ‘centenarians’ compared to the last and by 2040 nearly one in seven Britons will be over 75*.

Almost a third of people born today can expect to live to 100, but at the same time the population is witnessing growth of a younger ‘Millennial’ generation. So, how can the credit market adapt and serve these two very different groups in the coming years?

New-school lending for old-school customers

People are now regularly living into their 80s and 90s. This creates a challenge for credit providers who traditionally lend only to retirement age – so, what should they do?

Mortgages for those up to 75 years-of-age have recently been introduced by some lenders, but this is likely to be the first of many changes as confidence in lending to this previously untapped part of the market is beginning to grow.

The near future could see more specialised products aimed at the ageing population. In fact, of all the customer groups in the economy, the senior cohort could well see the biggest changes in the coming years.

Tailoring for older customers

As the population ages, and retirement age is pushed back, people are likely to change their working habits.

Flexible and part-time working could become more widely adopted by those of traditional retirement age – providing an income without working in quite the same way as in previous years. This is particularly pertinent in the north of the UK, as research shows pensioners in northern counties are more strained financially than those in the southern suburbs.

Millenials and ageing population infographicGiven this scenario, credit providers should assess how this extended, but changed, working life could affect someone’s levels of risk and affordability.

A recent survey commissioned by Experian looked at how the ageing population perceives their finances.

Over half of those interviewed – aged 55 and over – said they were comfortable with their financial situation – however, over two-thirds of them are still in employment (with 62% working more than 30 hours per week).

Of this same group, one in five stated they had more than £100k in savings – with nearly a third having started saving for retirement from when they first started working.

The research shows a prosperous foundation for retirement but one where income streams are maintained beyond typical pension age – as more than half remain employed in some form.

Hail, the Millennial – the ‘foodies’, the ‘selfie generation’ the ‘always on’ – the ‘digital natives’.

At the other end of the age spectrum are the Millennials. This group makes up a quarter of the UK population and is expected to hit 17 million by 2019**.

Millennials are different to their elders. More than half of them have less than 50% of their wages left after paying their bills and fewer than 10% currently have more than £10k set aside in savings.

Despite the likely financial challenge these figures suggest, nearly half of Millennials feel optimistic about their financial future.

It’s hard to judge Millennials by today’s standards, of course, as by the time they start to retire; the economy could have changed markedly.

Undoubtedly, those changes will bring challenges and opportunity for them and their financial providers. The recent cut in interest rates to a new record low –is likely to be followed by an increase, the first many Millennials will have ever faced. Moreover, an ever more unaffordable housing market along with the unknown effect of Brexit on jobs, will all contribute to this change.

Yet despite their seemingly uncertain financial future, Millennials have the advantage of a possible lending period of nearly 40 years, over which they could borrow and settle loans and mortgages.

As the lay of the land could be very different in 40 years, organisations should consider how to build credit models that are flexible to changes over time, fluctuating personal circumstances, and that can adapt risk and policy rules accordingly.

The Ageing Population vs. the Millennial

These different customer groups each present a unique set of challenges for financial service providers, banks, and building societies that, in light of recent events, need to be reviewed closely.

In addition organisations should consider the economic changes that could impact each group too. Brexit, for example, is likely to affect older and younger consumers in very different ways, so attention will be due when assessing the affordability and risk that each group represents.

Given the unknowns presented by Brexit, lenders will be particularly challenged to develop strategies for different customer segments.

It’s interesting to note that while Millennials will rightly be referred to as ‘the future customer’, the ageing population could also make claim on that phrase. They’ll be future customers as well, just needing different services provided in different ways.

Demographic vs. economic

To add a further complicating dimension, an aging population isn’t the only likely change businesses will see in their customers. In the next decade, job creation will play a crucial role in how incomes evolve and, consequently, what levels of affordability and risk can be offered on credit.

In the last five years, the economy has seen a surge toward lower paid service jobs. If that trend continues, we could see the general consumers of tomorrow become less prosperous than those of the last ten years.

Changing job profiles of this kind could have a lasting impact on the career options of Millennials and even beyond this generation into the one that follows it – the so-called Generation Z (or Centennials as they are becoming known).

So what?

Customers towards the higher end of the affluence scale are likely to be better protected from pressure on wages by redeeming returns on savings and investments.

Similarly, pensioners will benefit from the triple lock built into their state pensions as inflation will most likely outstrip wage growth.

Millennials are in need of more robust education around finance – and reaffirming the government’s shift to individuals being accountable for their retirement is a current initiative – however the impact of what this looks like will be largely unknown as Millennials in particular aren’t privy to the financial strain retirement could have – as they have never experienced it.

Similarly, pensioners will benefit from the triple lock built into savings as inflation will most likely outstrip wage growth.

Organisations have a responsibility here. They are in a prime position to ensure financial inclusivity and support for this younger generation. How so? Because they’re seen as credible sources and trustworthy brands by all age groups.

Of course, their role isn’t purely educative. Regardless of the age of the customer, when they’re making financial assessments and formulating a credit risk strategy, organisations will need to factor the current economic climate into their determinations.

There are rewards out there for organisations keen to weigh demographic considerations against the economic climate – the trick will be knowing which factors will be critical in their decision-making.

They’ll have to ask themselves difficult questions on where inflation must go before it impacts savings and pensions – and, equally, they might have to ask what a 2% interest rate rise could do to the savings potential of those suffering a squeeze on their disposable income.

For everyone, the future just got a lot more complicated.

*According to a report by the Resolution foundation thinktank
**http://www.thisisinkling.com/inklingreports/2016/1/21/inkling-report-no-1-uk-millennials

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