Fintech companies are providing consumer debt solutions for millennials.
The biggest dream for Canadian millennials is to live debt-free.
According to a new report by CIBC, for 55 percent of millennials, paying off their debt is at the top of their priority list. Such demand for a secure financial future is creating a significant market for financial technology platforms that can help this generation– now 27 percent of the total Canadian population–make their dreams come true.
Rising consumer debt among young people
Millennials are struggling to make stagnant wages cover higher rents and mortgage costs alongside mounting student debt, leaving little left for everyday purchases. “The average paycheck only has the same purchasing power it did 40 years ago,” a Pew Research report found. “Almost two-thirds of millennials say they’re living paycheck to paycheck and only 38 [percent] feel financially stable, according to Schwab’s 2019 Modern Wealth report,” said Megan Leonhardt, CNBC Make It senior financial writer.
The financial strain is causing more and more young people to cover their day-to-day living expenses with credit card purchases. Results from a recent survey conducted by credit rating agency TransUnion found that Canadian debt has risen by 4.3 percent over the last year to reach C$1.88 trillion. Millennials accounted for the biggest chunk of that debt, up 12.3 percent to C$515.9 billion, with a majority of that debt coming from credit card charges rather than mortgages, auto loans or student loans.
“When you think about this age group, one of the things they’re looking at is … how do I just manage? They’re not thinking long term … They’ve never seen a high-interest environment,” said Matt Fabian, Director of Research and Industry Analysis at TransUnion Canada.
The same problem is materializing in the United States, according to a report by Northwestern Mutual, where millennials have incurred an average of US$27,900 in personal debt, excluding mortgages, with the largest source of that debt coming from credit card charges.
Consequences of unchecked consumer debt
Modern life for most in a capitalist economy just isn’t feasible without taking on debt. When you are raised in a consumer culture and start out your adult life with student debt, taking on more debt to live your best life doesn’t seem like the end of the world. However, those high-interest credit card purchases can quickly snowball into an overwhelming avalanche of consumer debt that can cripple the financial security of millennials for years to come.
“A high debt load can wreak havoc on credit scores which can have long-term consequences. A poor credit score can make it harder to secure other financial products including loans, especially at better terms and lower interest rates,” Mike Marrandino, President and CEO of Marble Financial (CSE:MRBL,OTCQB:MRBLF), told Investing News Network. “This can limit an individual’s ability to obtain a mortgage, buy a car or even start a small business.”
These roadblocks can also have dire consequences for the future economy overall, including less tax revenue, a depressed housing market and a strain on public entitlement programs, as pointed out in a recent paper by Deloitte.
Fintech solutions for financial literacy and debt management
Fortunately, there are many ways for today’s young people to get a handle on mounting debt. “It might start with loan consolidation and a budget, then move to a longer-term plan that includes guardrails to help people stay on track,” said Emily Holbrook, senior director of planning at Northwestern Mutual. “The most important part is to take action. It’s often those first few steps that can be the hardest and most important.”
Financial technology companies are developing solutions that could help this generation take decisive action in managing their debt and meeting their financial goals. For tech-savvy millennials and their younger Gen-Z counterparts, fintech companies are an attractive option. “This demographic really understands what technology can do. They expect to manage their money from their phones … it needs to be really simple and accessible,” said Michael Allen, portfolio manager at privately-held Wealthsimple. The digital investment management company that launched a zero-commission trading platform in March 2019, offering investment products and advice. The majority (80 percent) of the platform’s users are younger than 45.
In Canada, financial technology usage is increasing at a faster pace than anticipated. Between 2017 and 2019, adoption rates rose from 18 percent in 2017 to 50 percent in 2019, according to the Ernst & Young Global Fintech Adoption Index.
In response to this accelerated rate of adoption, even the large financial institutions are beginning to offer online financial literacy tools for their customers. However, most of the big banks are moving too slowly when it comes to incorporating fintech solutions for debt management into their business models, which offers opportunities for fintech companies to fill a growing market need.
Marble Financial provides a financial credit rebuilding platform for Canadians undergoing the consumer proposal process, also known as soft bankruptcy. In 2018, over 125,000 Canadians filed for consumer-insolvency and 56 percent of them filed a consumer proposal.
Marble’s fintech platform helps consumers rebuild credit with budgeting tools that track monthly spending versus pre-established budgets, provide reminders and notifications to manage upcoming payments, allow for free credit score monitoring and provide online loan applications for a consumer proposal discharge loan. Marble’s Fast Track loan provides up to $15,000 with interest rates between 18.99 percent and 24.99 percent. Since 2016, the company has funded over $10 million in consumer proposal discharge loans, helping Canadians rebuild their credit in less than half the time of a traditional consumer proposal.
“Consumer lending remains one of the highest revenue and margin opportunities for fintechs globally,” said Greg Feller, President and CFO of Mogo Finance Technology (TSX:MOGO). As of July 2019, Mogo Finance has provided services to more than 800,000 members. The fintech company offers free credit score monitoring, identity fraud protection solutions, prepaid Visa cards, a digital mortgage solution and personal loans.
Millennials make up Canada’s biggest demographic. Today, tech-savvy young people have turned to consumer credit to make their way in one of the toughest economic environments in modern-day history. Online platforms that provide this generation with the tools necessary to meet their financial goals are offering opportunities for investors in the growing fintech sector.
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