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What Generation Y Means for Finance

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Radically different from their predecessors, Generation Y represents a fast paced and self-confident segment of our society; their core demand is for flexibility, speed and cutting edge service. These desires, combined with values of entrepreneurialism and individualism, are creating a cocktail which is highly disruptive to the current financial system status quo. Rather than shrug their shoulders with indifference and powerlessness, young people today are taking it on themselves to transform finance and undermine traditional models of banking which are beginning to look increasingly out-dated.

The rise in uptake of e-commerce among young people is well documented, yet this upturn in online consumption has not been confined merely to the sphere of retail. Important changes have also been observed in the way Generation Y manage their financial decisions. An Australian survey found that more than half of them check their online money more than once a week, in contrast to less than 10 per cent of baby boomers; such research shows young people are more engaged with their finances than previous generations, and expect easy access. This has come alongside the shift within finance towards an entirely online infrastructure. TransferWise for instance has developed a platform for cheap currency transfers targeted at students and now businesses. The growth of peer-to-peer consumer lending platforms, such as Lending Club in the US, shows Generation Y feel increasingly comfortable entrusting their money to likeminded people they interact with online. Where Generation Y runs businesses there is a growing consensus that getting your working capital online (through platforms such as MarketInvoice) is preferable to a branch-based banking clerk.

But is this enough of a radical change for Generation Y? Centralised projects simply aimed at forcing banks to lend are doomed to fail, as banks are slow in providing the new level of service required. Their large branch operations and high cost base prevent them from making the structural changes needed to facilitate innovations fast enough. In Kenya over 25% of GDP flows through Vodafone-owned M-Pesa (launched in 2005) - a mobile telecoms financial eco-system which doesn't require banks. Barclays' mobile banking app (Pingit) was only launched in 2012, reaching Kenya in 2013, leaving the bank a staggering 8 years behind the curve. This new model is making banks increasingly less vital in the developing world and will have the same effect in the developed world over time. Alternative finance is already particularly importa¬nt amongst start-ups because the banks have fundamentally failed to assess risk/return in relation to intangible assets (such as software, intellectual property or culture) as opposed to physical assets (a house or piece of machinery).

The current financial system is also constrictive for SMEs (Small and Medium Enterprises), who are traditionally locked out of credit products available to larger firms, such as the bond market; but this is changing. In 2010 Hotel Chocolat sent a bond sale pitch to 100,000 of its most loyal customers, offering them £2,000 and £4,000 bonds. The bonds were unique offering a return paid in chocolate equating to 6-7% a year. Ultimately the move raised £4 million. Hotel Chocolat is not alone in making such moves. The idea was similarly pioneered by Will King with his "King of Shaves" shaving bond. Many other firms have followed suit, with John Lewis launching their partnership bond in 2011.

Recent Eurostat data has thrown up questions of Generation Y's involvement in SME finance. In a Europe wide survey of 16-24 year olds 6% claimed to have already started a business while over 40% said they would like to. The number of young people who will set up businesses would represent a substantial shift in SME demography. Such a generation of entrepreneurs will, at the very least, necessitate a revolution in the banking industry. The most successful entrepreneurs today don't have the time to spend 5 years building up a personal relationship with a bank - they want products on demand, that are fast, convenient, and navigable from a tablet or mobile.

If we are going to get out of our economic malaise, and provide jobs and opportunities to Generation Y then the information economy will be key. Signs are bright with internet firms in the UK growing fifty times as fast as the rest of the economy. Yet if we are to facilitate continued growth in start-ups and early stage businesses we need more financial innovation. Conventional banks and lenders are slow to react to new business models with new products - a function of the oligopolistic control they've wielded over the market. In order to maintain the impressive growth of the information economy, we must pioneer new models of alternative finance, which will respond flexibly to the demands of a new generation.