Banks Built for Paychecks Meet the Cash Flow Generation

For decades, banks have structured their products around the traditional paycheck. However, a recent report by PYMNTS Intelligence suggests that as the nature of work changes, simply holding a checking account may no longer suffice. The report, titled "Cash Flow Generation: How Millennials Are Changing the Future of Commerce," indicates that many millennials now earn income through unconventional means, such as contracts, gig work, or commissions.

This shift has led to a new category of workers known as the "Labor Economy," which makes up roughly half of employed millennials.

Unlike traditional salaried workers who receive a consistent paycheck each month, Labor Economy millennials experience more fluctuating income. For example, a 35-year-old millennial might earn $7,000 every month, while another might have income ranging from $2,500 to $4,000. This variability in income creates different financial needs compared to those with stable salaries.

PYMNTS Intelligence estimates that Labor Economy millennials earn an average of $25,500 annually, compared to $87,500 for salaried millennials. Consequently, Labor Economy millennials are more than twice as likely to have a subprime credit score and carry credit card balances equal to about 30% of their annual income, whereas salaried millennials carry only 8%.

Moreover, the financial habits of Labor Economy millennials also differ significantly. Nearly 40% of them carry monthly credit card balances, compared to 18% of salaried millennials. Additionally, 39% of Labor Economy millennials engage in revolving their credit card balances, as opposed to 18% of their salaried counterparts. These behaviors are driven by the need to manage cash flow more effectively in the face of irregular income streams.

Many millennials have little to no savings, with over one-third having less than $1,000 in readily available savings and 13% having no savings at all.

The report highlights that for customers with irregular income, even minor timing discrepancies can lead to overdrafts or missed payments, despite having the same earning capacity. This phenomenon underscores the need for banks to rethink their approach to customer segmentation. Instead of categorizing customers primarily based on age, income bracket, or credit score, banks could consider distinguishing between customers with stable, moderately variable, and highly variable income patterns.

By doing so, financial institutions can better understand and address the unique cash flow management needs of millennials, ultimately redesigning products to suit their evolving financial realities.