Every generation has been given its headline clichés. Hard-working Baby Boomers repaid their mortgages early, Generation X graduated from MTV to the World Wide Web, while Millennials lived with their parents for a long time and ate avocado on toast.
Yet no generation has faced closer analysis than Generation Z - and for good reason. On Valentines Day this year, The Times published research painting a portrait of the younger generation that was far from rosy. The report showed how Gen Z’s world has been shaped by the pandemic crisis, economic decline and global conflict. It also looked at the isolating influence of social media, and the fact that almost a third of those questioned are troubled by their mental health. Unsurprisingly, many also confessed to being worried about their financial future.
These sentiments resonate with findings from our own report, Reshaping Lending: What It Takes to Engage Gen Z Borrowers, released last year. Based on a survey of 1,924 Gen Z consumers aged 16 to 27, we discovered that the desire for financial independence is increasingly undermined by harsh economic realities such as high interest rates, inflation, and stagnant wages.
Alienated & frustrated
This poses a challenge for lenders. How can they help a generation that feels alienated by the market and frustrated by lending options?
For instance, a survey last year showed that 78% of 18-34 year olds have had a loan application rejected. As a result, many are turning to alternative sources of borrowing; our own research found that the UK’s fastest growing financial institution continues to be the Bank of Mum & Dad, from whom 40% of Gen Z have borrowed from.
The other conundrum for lenders is how to adapt to a generation that has very different expectations of service and user experience. As the first generation raised in a fully digital world, Gen Z is much more likely to expect personalisation, choice and seamless user experiences in all aspects of their lives, including financial services.
As a result, many Gen Z are frustrated by the traditional approaches to credit scoring that fail to account for new financial behaviours.
Ryan Brinkhurst, the CEO of a fintech called Beautifi, wrote a column for Forbes last year discussing the problems that he had securing his first mortgage because he simply didn’t fit the algorithms.
Brinkhurst’s view is that today’s lenders need to build a fuller picture of Gen Z borrowers, who are far more comfortable with concepts such as Open Banking. “New machine-learning tools enable cash flow underwriting – a more dynamic way to understand a borrower’s banking history,” he wrote. “Lenders can get a 365-day view with meaningful trend analysis, not just the snapshot that traditional credit scores deliver.”
Read more insights into what it takes to engage Gen Z borrowers in our latest report.
Policy and market innovation
Government intervention also plays a crucial role in addressing these challenges. A House of Lords report from last year proposed policies aimed at easing mortgage access for Gen Z through measures like planning deregulation and targeted support for deposits. Additionally, the Financial Conduct Authority (FCA) is exploring ways to simplify mortgage lending regulations to facilitate loan qualification for younger borrowers.
Encouragingly, some lenders are already innovating in response to these challenges. For example, Skipton's ‘Track Record’ mortgage allows renters with strong payment histories to secure mortgages without needing a deposit. Similarly, Yorkshire Building Society's 99% mortgage scheme aims to lower barriers to homeownership.
While these innovative schemes offer promising solutions, they underscore the critical need for comprehensive borrower education. Gen Z borrowers, often first-time homebuyers, may not fully grasp the long-term implications of products like 99% mortgages or deposit-free options. Lenders, therefore, have a duty of care to ensure that young borrowers understand the potential risks and considerations associated with such products. This includes educating them about scenarios such as negative equity risks in case of falling house prices, or potential challenges in remortgaging after initial periods.
Where innovation is needed
For lenders, the challenge of engaging Gen Z borrowers goes beyond merely adapting existing products and services; it requires a fundamental rethinking of lending practices to reflect the unique needs and expectations of this generation.
Accessibility
Conventional credit scoring systems rely heavily on historical data, often excluding younger borrowers who may not fit these rigid criteria. Many Gen Z work freelance or have irregular income patterns, making it essential for lenders to adopt more inclusive approaches.
By leveraging Open Banking and cash flow underwriting, lenders can create a dynamic picture of a borrower’s financial health that reflects real-time income and expenditure trends.
Flexibility
Flexibility is equally important. Gen Z’s cautious approach to debt means they are less likely to embrace rigid loan structures.
Lenders could explore ways to offer customisable repayment options that adapt to borrowers’ circumstances, such as allowing adjustments in payment schedules based on changes in income.
User Experience (UX)
UX plays a significant role for this digital-first generation. Gen Z expects seamless, intuitive interactions across all aspects of their lives, including financial services.
Lenders must prioritise digital solutions that are mobile-friendly and easy to navigate while ensuring access to human support when needed.
Education
Education is another area where lenders can make a meaningful impact. Financial literacy remains a barrier for many young people navigating borrowing for the first time.
By providing accessible resources tailored to Gen Z’s needs and via platforms that they engage with, lenders can empower Gen Z borrowers to make informed decisions about their finances. Involving parents in these conversations can also be beneficial, given the reliance many young people place on family support.
Social responsibility
Finally, lenders should embrace ethical practices that align with Gen Z’s values. This generation is attuned to issues like sustainability and social responsibility and expects brands—including financial institutions—to reflect these priorities.
Offering green finance products or demonstrating transparency in lending practices can help build stronger relationships with younger customers.
Innovation in these areas isn’t just about regulatory compliance; it’s about creating a lending ecosystem that works for everyone.
By addressing barriers that alienate many Gen Z borrowers and focusing on solutions that reflect their realities, lenders can support better outcomes for this generation while securing their loyalty as lifelong customers.
For more insights into Gen Z borrower habits and preferences, read our report: Reshaping lending: What it takes to engage Gen Z borrowers.
