Online Banking’s Next Growth Spurt: Gen Y

Online banking still has legs, says Forrester Research. A new paper released by the firm, US Online Banking Forecast, 2009 To 2014, shows that although growth overall has slowed, the influx of people ages 18 to 29 (Generation Y) will account for 40 percent of online banking households by 2014.

From 2003 to 2005, online banking saw rapid growth in adoption with year-over-year spurts of up to 27 percent. Over the next several years, however, this slowed to about an 8 percent annual average. Between 2009 and 2014, growth will slow further to an annual growth rate of just 4 percent. During this time, Forrester expects the total number of U.S. households banking online to grow from 54 million to 66 million, driven by several trends.

The changing face of who it is that frequents the Internet will influence how banks position their online banking offerings. According to Forrester, in general, broadband penetration in the U.S. has increased by 132 percent since 2004, with time spent online by individuals reaching an average as high as 12 hours per week in 2008.

In addition, as Gen Y enters the workforce in larger numbers, Forrester expects this segment of the population will appreciate the convenience of consolidating their banking relationships. Until now, Gen Yers have primarily been users of individual student loans, credit cards, and biller-direct bill payments, the report says. However, by 2014, more than 80 percent of Gen Y households will bank online. This group will account for nearly two in five online banking households, presenting banks with an enormous opportunity to cross-sell and keep the online banking momentum going.

Also adding to the new online dynamic is a growing comfort among online consumers with the security of their financial information on the Web. They are now more than twice as likely as they were in 2003 to feel that their financial information is secure online.

Challenges do remain for online channel managers, according to Forrester. Even with evolving attitudes around security, this is still a concern. For example, Forrest claims multi-factor authentication, which was supposed to take security and privacy to the next level, has become a source of confusion as people forget their passwords and the answers to their "challenge questions." Having to reset this information has actually caused a surge in call center use, when the online channel was meant to avoid that very thing.

Another issue to face will be the demands of Gen Y. Forrester says this generation will bring with it heightened expectations for site functionality and ease of use, having grown up around slick iPhone apps and simple interfaces like that of Mint.com.

For banks to turn their users into active, profitable online bankers, Forrester recommends the following:

Coordinate account activation across channels;
Offer a prominent security guarantee;
Ensure that the first login is successful;
Target specific online features to appropriate account type