#4 Global Credit Crisis and Gen C – How will Gen C react?
December 12, 2008 by Jake Pearce
I have become so incensed by the confusion between Gen C and Gen Z that I have commissioned Bridge Ellis to find some really cool data to show the difference based on an international search of the deep web (beyond Google etc).
In the meantime, with all the banking fiascos going on globally – it’s worth asking how Gen C will react to the global credit crisis; will they still trust financial institutions – in particular, banks? Will they have a blip of confidence or a long term collective generational grudge?
So we’ll look at:
- Generational collective memories;
- Trust in the digital medium;
- Traditional bank’s views on peer-to-peer banking;
- Will banks be caught out by the digital revolution like the music industry was;and
- Peer-to-peer banking.
Generational collective memories
Howe and Strauss’ book called Millennialls Rising is a look at what makes Millennialls different from Boomers or Gen X. Unlike Gen C*, Millennialls are a demographic not a psychographic generation. Howe and Strauss argue that big ‘events’ unite generations with a kind of collective memory. So for Boomers – the whole culture of ‘sex,drugs and rock ‘n roll’ was unifying as was the assassination(s) of the Kennedys. For Gen X kids the Aids epidemic, the Challenger Space Shuttle disaster (in ’87) was a ‘unifying’ event.
So what’s interesting for Gen C, is that events literally get logged in the collective memory of the internet. Google is a collective diary that we’ve never had that before. And Gen C have a higher trust of the digital media and digital providers than other generations.
Trust in the digital medium
For example, Skype is the fastest growing new product in history. YouTube has been used by more people than CNN has ‘broadcast to.’ Now I know we could explore the ‘quality’ of interaction angle – rather my point is that at the core of the digital revolution – there is a hard core of trust due to the high level of interaction. It’s no accident that according to AC Nielsen’s 2007 Worldwide Trust in advertising survey, WOM (Word of Mouth) Networks (friends or online peer to peer) is at 78% as being ‘trusted’ which is way ahead of any other medium researched.
Banks argue that trust is critical and online is ‘only a channel’
Banks argue (I have been speaking to some) that they are unphased by the whole ‘on-line’ thing. They say it’s a medium (on-line) and they are dealing to it. Furthermore – based on an interview I conducted – a leading Australasian bank argues that trust is a critical thing in banking. He argues that banking needs higher levels of trust that most other categories. And they went further – arguing that at least for this bank (which has experience no financial meltdown in the last wee while) people will trust financial institutions that have a ‘clean’ bill of health’ even more than those that have been touched by economic nightmares.
In other words the banks that emerge relatively unscathed will be genuinely massive on the TRUST stakes. On the face of it, this is actually quite a convincing argument.
Will banks be caught out like the music industry was?
However we need to look at the flipside. As Simon Young and myself argued in our article on the future of the music industry that an industry like music which is very used to a fast pace of change got caught out by the impact of the digital world.
So the question is simply this, if born Gen C grows up having gone through one of the biggest banking crises in history will they hold the same general trust of financial institutions? It’s been shown that if you compare the Boomers trust in doctors with Gen X it drops of dramatically. In simple terms – the majority of us in the West don’t trust institutions as much as we used to. What happens to the finance industry if a whole Generation grow up and turn to institutions such as zopa: ‘Borrow money from people not banks.’
Peer-to-peer banking
The basic concept is thatmembers of the public sign up and say ‘I’ve got money to lend’ and the site connects them with people ‘who want to borrow money’. This is peer-to-peer banking. Zopa started in the UK and has now spread to the US, Italy and Japan in the last 3 years. Of course that doesn’t mean it’s profitable (it might be supported in the way Amazon was…) but it does seem to be very popular. Enough so that the founders have expanded from 1 to 4 countries in such a short timeframe. As for Prosper – it is America’s largest peer-to-peer bank, was started in 2006, has 830,000 members and has funded US$ 178 million in loans. Not bad huh?
So what do you think will happen?
The banks argument is – trust in banks is different from normal trust in brands becaus it’s about the serious stuff called money.
The alternative is exactly because banks say ‘trust us we know what we are doing,’ that Gen C reacts and say ‘we know a better way’ and they turn increasingly to peer to peer banking and the digital medium they trust implicitly.
So what do you think?
I’m going to talk with some more banks and invite them to put out their views (anonymously) or not here.
The more data we can get the better – we want educated opinion AND we want facts 
*Gen C has been dubbed ‘Digital Natives’. Gen C are a psychographic generation – essentially they are people who actively embrace digital networks (from social entertainment mediums (eg YouTube ) to social networking (eg Facebook) to fast networking (twitter.com) to storage mediums (flickr.com) to sharing data via mobile or other digital mediums. There are those who are ‘born Gen C’ (ie born into the medium) and those who are ‘adopted Gen C’ – ie those who maybe Boomers (1943-60), Silent Generation (1925-42) or X (1961-81) who love the advantages it provides.
Comments
6 Responses to “#4 Global Credit Crisis and Gen C – How will Gen C react?”
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Trust is what would stop me lending to a stranger or borrow from one. banks have the benefit of "trustwash" from the rugulators and now the government through guarantees etc. p2p isn’t moving yet because of this. Secondly because p2p doesnt distribute risk across many lending investors. Trust will be much easier to aquire by large banks in a heavily regulated market post the gfc. I wouldn’t even consider music to be remotely related. Borrowing 100s of thousands of dollars is just completely different ballgame to the permission/price model problems in the music industry.
Thanks so much for your passionate reply – it was so thought provoking to the extent we wanted to ask if you’d be interviewed for the piece we are developing for award winning magazine, idealog – as I understand it you believe that 1)the business model is risky due to the dependence on individual lenders 2) regulatory issues all of which will lead to 3) a lack of trust which leave the P2P lending model ultimately vulnerable and 4) the parallel with music is inappropriate (due to the low risk of $20 versus borrowing large amounts)
Let’s look at these points – we look forward to you putting us straight – these are the facts/views that seem to bubble up so far:
1. P2P banking appears to be a growing industry with all banks looking at how to exploit social media.
• $740 million US is funded through peer to peer banking currently
• $400 million has been managed by Virgin money
• CapCo estimates by 2010 P2P will be 10% of the loan market
• Most retail banks/financial institutions – including The Bank of Canada, ASB, ING are looking at how the social media phenonmenon will impact on their business
2. The regulatory issues – problems may come in this area but the money behind zopa.com is from corporate banking backgrounds
• Indeed they might, like any new industry it will have teething problems – I am completely in agreement
• However if you look at the people behind www. zopa.com – they are from a strong corporate financial background – merchant banks/HSBC and high street banks – so this issue is likely to be uppermost in their mind
3. Music is a valid contribution if one considers the distribution strategy
• Borrowing money is a very risky business – whereas spending $20 on line is a lower risk
• So in the beginning we would except it would be Gen C, digital natives who are used to these mediums and trust them to get into it first (as opposed to Gen X, Y, Z or Boomers)
• However it was not long ago that buying anything on line was unusual – and it was not long ago that large music companies were dismissing the on-line medium as fragmented and lacking trust
• The channel argument is very similar – music distribution used to be via retail and now is going on-line because it was easier and became trusted
• People are moving to easier formats for current banking (the rise of internet banking, the rise of mobile banking) so isn’t this the next step – you would argue not if trust is the issue
4. Trust is earned and GenC are into referral(s) which is the basis on which peer to peer banking works and grows
• As Neilsen showed globally – referral is the most trusted medium of communication and advice
• Referral leads to action 1in3 cases, whereas commercial messaging 2-3 in 30,000
• Since peer to peer banking is inherently about referral and referral is the most trusted form of advertising
• And GenC can spread referrals at an accelerated rate via the web/digital media
• At one time people were reluctant to use credit cards on the internet but they overcame that fear – there is a parallel here around trusting a new medium
• If the banks don’t ‘stuff up’ (which it is not in their interest to do) – that trust in P2P will grow due to it’s community/linked nature
• Ultimately it is individuals with their own reputations on the line – not a faceless bank.
We’d love to interview you and debate these points early. We are just collating more data and would love to hear your point of view on the above – when we have more data our view will naturally change – the thing is to get to the bottom of this thing one way or another!
I just wondered – do these online/peer banks have to jump through all the same regulatory hoops that ‘normal’ banks do. If so that will help lots with big ticket trust which is one of Marc’s points.
If the regulatory framework is all OK – then it’s just about online security and we all use online banking already without problem.
I really like the idea of rating people on a banking site – sort of who is a good lender and who is a good lendee idea. Very cool and thank you for talking about it – will be looking into to using it myself.
You make good points. Happy to chat further
Re 1) I think P2P will grow but will remain niche, the key reason this will be the case is that the younger more receptive demographic are net borrowers. Those that are net lenders have usually acquired their wealth through aggressive risk taking style such as career/entrepreneurial activity. This demographic tends to look for very high ROI north of 20% so it has the effect of knocking a lot of them out of the market. Lending causes what risk traders like me refer to as a low velocity of money situation. You invest your money and it’s locked away for a long time. You can turn over your investment multiple times a year to get velocity of money to increase your returns beyond normal returns. 2) The zopa model will work but I think it will need mods along the way. Key is the lender getting distributed risk. I.e. Lender lends to many people rather than P2P so risk gets distributed. Not dissimilar to the Kiva philanthropic model. $250 across 10 borrowers. So in essence its starts to become "bank like" or micro securitisation as i have been referring to it. Potentially a workable P2P model. 3) I think people holistically trust banks, i just think they don’t trust them to make too much money or chew up too much client time in service situations. Music Industry just feels way to different and I try to see your point but just cant connect them. There’s a few big concepts all quite different in my mind in your reasoning. 4) I can agree with much of this. The big issue will be frequency to get borrowing cred from lenders. Buying happens a lot so this works well but borrowing is low frequency high value and requires heavy documentation and legal consideration so it’s a very tricky model to implement completely online and get a frequency/repayment KPI to manufacture a cred ranking. bigger problems to solve than online accounting application we built 
Heh, thanks for the considered response! Very impressive.
Marc Lehman
Thanks so much for your informative fantastic reply – I really love the fact that you have raised new information and points that I was not aware of – especially points 1) and 2) Can I summarise my understanding of 1)? Essentially you are suggesting that the majority of lenders will demand a higher return than borrowers can afford? 2) Is an expansion of what you suggested earlier – which is that in the ‘true’ P2P model – there is lender and borrower. The problem comes if either of them goes broke – there is no risk spreading – thus destabilsing the business model? So what if the model became P2MP (many peers) – that is effectively the model banks use would you say – spreading risk. The interesting thing will be the values of lenders – will they be ‘community lending/micro lending’ in viewpoint or pinstripes?
I’d appreciate talking about this further with you and I have sent you an e-mail to that effect.
Kind Regards
Jake Pearce.
Dot on March
That’s a great web name by the way – do you have a gravatar? Thanks for the comment.
The regulatory question is one I want to get to the bottom of myself. If you look at zopa – they claim that from a lenders point of view they have the same rules as banks and a few more:
http://uk.zopa.com/ZopaWeb/
No doubt we’ll get to the bottom of this during the course of our investigation.
Jake Pearce