The race is on for community banks to successfully attract younger adults as customers.

Banks are beginning to fully grasp that millennials — generally considered those born between the early 1980s and the early 2000s — have different preferences when it comes to financial products than previous generations, industry observers said.

Big banks had this epiphany earlier, but small banks have some advantages over them — such as better postcrisis reputations — that will appeal to younger customers.

Still, small banks have some shortfalls to correct. It's imperative that they improve their technology offerings and ensure that their branding and marketing strike the right tone, industry observers said.

"All banks need to be thinking about this because millennials are going to be a major factor in banking," said Kevin Tynan, senior vice president of marketing at Liberty Bank for Savings in Chicago. "All banks should be rethinking their programs, their services and their products to make sure they are attractive to a generation that uses their smartphones for everything. We really need to understand the lifestyle and needs of millennials."

Some banks make the mistake of ignoring millennials — also known as Generation Y — because these customers are still relatively young, are burdened by student loan debt and lack financial resources and are therefore seen as unprofitable, said Joe Sullivan, the chief executive of the consulting firm Market Insights.

But that attitude is problematic. If community banks ignore these customers now, then they "won't have a bank on their radar screen when they need to buy a house," he said. At the same time, other nonbank competitors are heavily targeting this group.

Banks also often incorrectly assume these young customer have uniform financial needs, an attitude that can lead them to missing out on revenue opportunities, said Mark Schwanhausser, the director of omnichannel financial services at Javelin Strategy & Research. He usually breaks millennials into two groups — those between the ages of 18 to 24 who are just starting out and those from roughly 25 to 34 who are more established in their careers and are beginning to have more complex financial needs.

"We see plenty of opportunities and a lot of competition for the Gen Y customers that should make bankers salivate," Schwanhausser said.

Millennials tend to use more primary banking products than old customers and carry a higher minimum balance in their checking accounts than baby boomers or Generation X (the one between baby boomers and millennials), according to a survey from Fiserv. They are more likely to use a credit card, debit card and mobile banking and have a car loan, according to Fiserv's data. Yet savings accounts were found to be equally popular among millennials and Gen Xers.

"They are coming out of college, and we are seeing they have certain financial needs," said Steve Shaw, vice president of strategic marketing for the digital channels and electronic payments division at the vendor Fiserv. "They want to find an institution that has all of the things they are looking for, and it's that relationship they want to build."

Many already offer the right products and services but fail to properly market them to younger customers. More than any other generation, millennials have "self-brand connections" where they internalize the brand and closely tie it to their self-image, said Glen Fossella, a technology industry executive. For example, they may buy an iPhone because it makes them seem cooler or smarter than those who purchase an Android.

That means community banks need to find ways to connect with millennials on this psychological level, Fossella said. That may mean focusing on the character of their local marketplace and incorporating that into marketing. Community banks also have the opportunity to capitalize on negative feelings younger customers have about large financial institutions.

"There are certain things that millennials are attracted to within a local community," Fossella said. "If a small institution can integrate those into its plans, it has an opportunity to connect with millennials and develop that self-branding."

This is part of the approach that the $828 million-asset Liberty Bank has taken in trying to attract younger customers, Tynan said. After completing focus groups and looking at other research, the bank developed a plan to better cater its services to younger customers, including a new Simple Debit Plus Visa account. That account largely focuses on providing access to technology, such as billpay, e-statements and person-to-person money transfers, while eliminating paper checks.

To better connect with millennials, the debit card associated with the account can be customized to feature an iconic image, such as the Pickwick Theatre, from the neighborhoods where Liberty branches are located.

"They are looking for authenticity in everything, not just in banking," Tynan said. "We wanted to develop an account that was easy to use and would capitalize on the fact that we are a community institution."

Millennials view branch employees as trusted financial experts to answer questions, something else community banks can capitalize on, said Matthew Eschmann, a senior research associate at the advisory firm Corporate Insight. Some banks, such as Wells Fargo, have already launched services where customers, including millennials, can get advice on budgeting and setting financial goals. Liberty is beginning to offer seminars on topics such as how to manage debt and building credit, Tynan said.

"At first this seems against what you would expect because millennials are used to doing everything online," Eschmann said. "But when it comes to their finances, it is too important. They are wary of making incorrect financial decisions."

Millennials value a sense of control and convenience in their banking relationships, and this is where technology can play a major factor, Sullivan said. Overall millennials are using mobile banking services to a greater degree than older generations, experts said. But community banks often buy their online and mobile services from an outside provider, which limits their ability to customize, Schwanhausser said.

Still community banks should try to keep up with technological offerings, even if they usually are not the first ones to launch a service, experts said. And big banks could get bogged down with legacy systems, while community banks tend to have later versions of technology that possess fewer bugs and are more flexible.

Community banks should concentrate on providing services their customers actually want and not worry about the latest fad, Shaw said. Ensuring that there is a great customer experience across all services is also crucial.

"Does technology play a role? It is the role," Sullivan said. "I don't think there is an excited urgency on technology. Most community banks have a mobile product, but they don't recognize fully the revenue opportunity there. Really our whole world is going toward mobile."

Jackie Stewart is a community banking reporter for American Banker.

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