a16z Podcast: Fintech for Gen Z and Millennials

Millennials and Gen Z have been hard-hit by the one-two punch of the 2008 and 2020 financial crises. That experience has radically shaped their approach to finances and their mindset around credit and debt. This episode explores how fintech founders are now designing products tailored to the financial challenges of younger consumers, from managing and avoiding student loans to building credit to saving and budgeting apps.

Historically, students have largely been overlooked by traditional banks. Due to a combination of economic forces, predatory lending practices, and uninformed decisions, millennials have more outstanding student loans—and owe more money—than any prior generation. According to a poll released this week by the data intelligence company Morning Consult, just 46 percent of millennials believe their student debt was worth attending college.

Amira Yahyaoui wants to change that. She’s the founder and CEO of Mos, a platform that allows students to apply for every government college financial aid program with a single application. In this episode, Amira joins host Lauren Murrow and a16z fintech partners Anish Acharya and Seema Amble to discuss how fintech can cut through bureaucracy, downsize student debt, and optimize—and ultimately automate—consumers’ financial futures from an early age.

Transcript:

Amira Yahyaoui: We decided to tackle the problem of paying for college and, more importantly, accessing higher education. So we think that money should not be the reason you decide to go or not. We want to make it free and we want to make it accessible. And we’re hacking the system to make it that way.

Lauren Murrow: In that financial aid is such a maze and such an obvious pain point, why haven’t others come in and tried to compete on that front?

Amira: Helping students go to college without debt is not a new idea. But honestly, the major reason is no one really wanted to build it. Most of those who build solutions either went to college with scholarships, or were able to pay for it, or didn’t go. And when you didn’t feel the pain, it’s hard to want to solve it.

So a lot of noisy people in Silicon Valley, they will tell you, “Okay, the college degree is not necessary.” But then you look at their LinkedIn profile and they all went to Stanford. So a thing that you see, especially in Silicon Valley, is that those who are anti-college think if you can afford it, you go, but the rest of the population doesn’t need it. But that’s a big misunderstanding of why people go to college and why people need an education.

The second thing is millennial fintech was a lot about lending. And that was, at the time, how companies like SoFi and others were created. Which is: loan providers are horrible, so we are going to be better loan providers. And millennials really loved it. But today, if you talk to Gen Z, it’s like, “Why should I pay that much? Why should I screw up my future with a $150,000 loan?”

Seema Amble: I think what we also see is that students and parents alike don’t really know how complicated the process of finding funding is until they actually get to that point, navigating the FAFSA process, as well as the private loan process. People don’t know where to turn, what to apply for, even the difference between a federal loan and a private loan. And that process is unnecessarily complicated, if we’re trying to get people educated.

Amira: Absolutely. The number one reason why people don’t access their rights in the world is bureaucracy. You have to spend your day on government websites with 1998 designs and no API and PDFs on horrible bureaucratic stuff.

Lauren: We talked about how companies like SoFi targeted students with lending. But traditionally, why haven’t banks courted students in the past? Why haven’t they specifically designed tools for this demographic?

Anish Acharya: I think that they did for a little while. You know, I signed up for a credit card in university and I got a T-shirt. And I think there was a lot of that credit card marketing happening in college campuses. And that, of course, was outlawed under Dodd Frank, because what they realized was, hey, your “free T-shirt” actually costs like $500 in credit card interest. And once that went away, banks really didn’t have a way to make money off of students. And because they’ve traditionally been so short-term oriented, they pulled out of the market altogether.

Seema: And I think the other point, too, is they’re losing that touch point on the student side. So, before, the banks were getting subsidized by the government to provide student loans. And that got removed; in 2010, the federal family educational loan program ended. And so we’ve seen the government providing an increasing share of the student loan market.

Lauren: How big is this market? Amira, do you have a sense of scale?

Amira: So the U.S. government gives around $1 trillion dollars a year of aid. But in the student financial aid part alone, the total amount is $135 billion. And these $135 billion dollars are cut into very small checks—just an infinite number of applications.

Anish: I feel like the magic of this country is that it’s so loosely coordinated that all of the best ideas just sort of, through market forces, percolate to the top. But anytime you have to do something that’s highly coordinated—like, let’s find one way to access all of these programs—it’s enormously challenging. And look, the same things happened with COVID, right? The countries that were able to create an enormously coordinated response have been really successful. And the countries that are intentionally very fragmented have been less successful.

Amira: Absolutely. And if you think about financial aid, it’s the same thing. Why does a student need to spend every weekend filing forms and entering their name 15 times? Assuming that someone should deserve the right to have a higher education should not depend on how good you are at filling out stupid forms. And that’s the absurdity of it.

Lauren: I think part of it is changing of consumer expectations. This generation has embraced mobile banking and fintech in a way that previous generations did not. And they grew up in the wake of the last financial crisis, so perhaps they don’t have the same unwavering trust in institutions as their parents did. They’re often more leery of debt and credit, as we see younger consumers preferring debit to credit cards. And they grew up with the internet. So all this seems to set the stage for the rise of fintech serving this particular market.

Amira: How do you expect the most educated, the most intelligent, but also the most cynical generation to just trust without facts? There is an incredible, beautiful change in consumer behavior, which is probably the biggest bullshit detector of all consumers. So if you are trying to trick the user in some flow or some ad, that just doesn’t work anymore.

Seema: I think you’re touching on a really important point, which is trust and transparency, which we’re seeing not only in student lending startups, but in the new generation of consumer fintech startups overall. Millennials and Gen Z really need to believe that financial institutions are on their side and trying to help them navigate this, rather than all the gotchas and fees and fines to make money off of you.

Anish: I think another interesting point is we live in a generally high-trust society, where people are willing to try new things. If you go to many other countries in the world—India is one that Seema and I have studied, for example—it’s not a high-trust society, which is why you see these massive conglomerates. They do like 25 different things: they make cars and sell cement and they offer financing. If you look at how trust is changing, though, trust is actually eroding in institutions and legacy providers of financial services. And trust in software and technology startups is really increasing. So I think it’s the best time to be building a company like this.

Lauren: What are the specific consumer expectations that we’re seeing out of the younger generation? And how do you see fintech companies addressing that in product?

Anish: I think that the old model of “hey, here’s a free t-shirt if you take my credit card,” you know, banks’ focus on owning a transaction is going out the window. I’m glad that Amira brought up SoFi because I think that while they did a lot of interesting things, they brought the old mentality of treating every opportunity to interact with students as a transaction. And, there’s only so far you can get in arbitraging the loan APRs that are being given to students that went to Harvard and Stanford. And I think that we’ve seen the results of that. [SoFi] built a big company but has struggled to build additional financial services because giving someone a better loan is great, but probably not enough to have a lifelong relationship with them.

So I think that the expectation now is to have a deeper, more meaningful relationship. And look, I think consumers understand that companies have to make money, which is why models like subscriptions or even just charging consumers directly make a ton more sense. Consumers are actually smart, smarter than maybe we’ve given them credit for in the past. So I think there’s a higher expectation for the longevity of the relationship. There’s a higher expectation of value that’s delivered. But there’s also a higher willingness to pay, all of which is really good news for startups.

Seema: I also think if you build trust early on with the student that can go a long way. The process of paying for college, navigating FAFSA and scholarships and grants was not always seen as a business. The whole student loan process was really seen as being more on the not-for-profit side, rather the profit side. And to Anish’s point earlier, personal loans and credit cards for students were really just thought of as something that a big top 10 bank would end up offering on campus or a local credit union would offer. And now fintech has the opportunity to weave something that was traditionally not-for-profit, and create a real product around it, and improve the students’ experience, not just from a financial perspective.

And that really presents an interesting proposition in the sense that if you help students find money to pay for college, you can probably build a longer relationship with them over time and offer more financial services. But you’ve unlocked something that they would have an incredible amount of pain getting to themselves.

Amira: And I think there is also a behavior that is very different, which is that usually companies try to win more than their users, right? And Mos is the opposite actually. The user wins more than the company And that is a different way of thinking. And I think that is also what is hard to understand for a bank that just wants to win more than you.

I mean, I’ve been with bankers in the room when I explain what I do and I remember one banker who looked at me and said, “Economically, it doesn’t make sense.” And I’m like, it actually makes total sense! The bank of the future will be a bank that is able to transform $1,000 dollars in to $5,000 dollars, because a 1.2% gain is not interesting for this generation.

Anish: It’s also interesting because banks’ whole business has always been two things: taking deposits and making loans. So even if you assume that they were able to do this it would just be very unusual for them to do it because it’s not their business.

Seema: Because their mindset is: how do I create a transactional account or a financial product and sell it to you, rather than, how do we actually build a tool, or a product, or a service, that is actually solving the pain point first? Rather than being around the dollars and cents.

Lauren: And now, of course, there’s a slew of fintech companies that are specifically targeting students. They’re tackling student debt, how to manage it, and more recently, how to avoid it. We’re seeing more around savings, particularly saving for tuition. There’s budgeting apps targeted to students, helping them establish credit early. And then of course, there’s lending apps with terms specifically tailored to students.

So one point I want go back to is the importance of building that customer relationship early. I think more fintech companies are recognizing that. And so we’re seeing companies like Greenlight or GoHenry or Step that are encouraging kids and high schoolers to start saving early. Can we talk a bit about that trend?

Anish: I think that navigating the long-term relationship is a real thing. You don’t ever want students or individuals to feel like they’re in the kiddie pool of financial services. And when you graduate from college, a lot of things in your life change, you want to start being an adult. And I think you have to design the product, as well as the brand, to be one that actually can have that longevity. You don’t want it to feel like, hey, this is a constraint my parents put on me, versus, hey, this is something that’s actually going to enable me for the future.

Amira: I actually think that if you are thinking about keeping a long-term relationship, starting too early is not the solution. I think you should start the first year of adulthood.

Seema: And I think getting people early means just getting them at the critical juncture, which is, when people are applying for college they’re taking that critical step of managing their own financial independence. And so I think this is a really interesting time to build trust when they relied on probably their parents, and they’re taking control of that.

Lauren: And the data backs that up, that a little less than half of college students report having any credit cards, and among those, about 60 percent got their first card when they were around 18 or younger, which suggests that many of them are starting their credit card experiences around the same time that they transition into higher education. But we’re also seeing increased parental dependence. As of July, 52 percent of 18 to 29-year-olds were living at home with their parents, according to the Pew Research Center. That’s a rate higher than the Great Depression. In addition, 6 in 10 adults are relying on financial help from their parents. How does that impact the theory that companies should be trying to reach out to these consumers and capture them at this transition moment when, in fact, many of them are perhaps not reaching that transition moment at the same point that past generations did?

Seema: I think one thing to point out here is that, even if you applied for all the federal loans and scholarships available to you, there’s a good chance that you won’t get the full amount and there’ll still be a gap. And you’ll have to fund that gap, usually through a private loan. Usually you go through a bank, for example, to get it. But that requires a cosigner. Like, who’s the cosigner going to be on that loan? Probably your parents. And so you end up falling back on your parents if you can, in many situations. And the cost of living is going up. And so I think that’s part of the reason that you see them still reliant on their parents.

Anish: In many other countries, kids depend on their parents for a longer period of time. So I think that if it leads to a better long-term financial outlook for the individuals, then it’s not necessarily a bad thing.

Amira: What I think is going to happen is that they will be more responsible financially, just because financial decisions are not made alone. Actually the fact that a lot of those young adults now live with their parents I think will be very interesting in terms of how their financials will go in the future. I think Gen Z is going to surprise many, many, many people with how little credit they will be using in the future. I think they’ve seen their parents crushed by debt. They are super aware about the consumerism and all of that.

Anish: While I think that you’re right, there may be less of a functional need to get credit, I do think that it’s an important sort of emotional and psychological milestone to start to establish that credit. So look, while I think they may take less credit, I still think that they’ll probably participate in the system by establishing credit, at least in a lightweight way.

Seema: And I think establishing credit isn’t just about: okay, now I have a credit score that’s in the prime segment, and now I can take on more debt. It’s also preserving optionality, which I think isn’t something that you totally understand when you’re 18. So, you know, you need to build a credit score if you one day want to buy a home—and maybe Gen Z doesn’t—but you have that optionality to do so. Or for an auto loan or any of these big purchases that a lot of times when you’re 18, you’re not really thinking about.

And we’re seeing, on the product side, a number of products that that are helping students think about how to build credit. Because I think that’s not something that students think about. Things like: the account I’ve had opened the longest is actually what’s driving my credit score. And how do you build a good credit score? And so these are all things that you have to learn, which is an opportunity for fintech.

Lauren: I like that you brought up that idea of financial responsibility. There are many fintech companies that are designing budgeting apps specifically with students in mind, which are offering and things like ways to track their spending or setting goals and challenges, and sometimes peer comparisons on spending habits that are anonymized. So it’s interesting to see for those that perhaps don’t have that parental backstop, there are also companies that are seeking to tackle this idea of financial responsibility, and saving, and credit, in a way that appeals to a younger demographic.

Anish: It’s funny, we’ve talked a lot about this. I think to some extent, yes, budgeting is important, but it feels like the much bigger lever is ensuring that students are getting access to every single dollar of financial aid that’s available to them. I think we should actually focus on bigger ways and bigger moves to actually assist these people.

Lauren: If the existing budgeting apps are insufficient and you want to think bigger, where are those areas that you see opportunity?

Anish: I’ll give you one point that’s really piqued my interest. Just as 20 years ago, blogger and other technologies made every individual into a publisher, perhaps what’s happening today is that every individual’s becoming an investor. And look, I think that the next generation is much more savvy and is going to participate in investing at a higher rate. And I think instead of talking about controlling costs, let’s talk about increasing “revenue.” And there are a lot of ways to do that that I think are interesting.

Seema: Yeah, I think there’s still a lot more to be done on the employment side.

Lauren: That’s a great point, Seema, in that rising college seniors are now facing the worst job market in modern history.

Seema: Traditionally, that was like, oh, I’m going to go work at a library or the coffee shop. Now, we’ve seen an explosion of online tutoring, for example, in COVID. I think we’ve seen a lot of platforms pop up, but I don’t know if they’ve necessarily connected with students specifically. To Anish’s point, it’s a lot around: how do you increase the amount of revenue for the student, in addition to the loans, so that they can become more entrepreneurial?

I think you’re also seeing a change in how education is being offered, especially in COVID, where kids aren’t able to actually go to school in many cases. But it’ll be interesting to see what traditional education looks like, and also the necessity to pay for traditional education versus am I going to go through a coding boot camp or what we would traditionally call vocational training, but really skills based. And I think alongside of that, we’re also seeing things like ISAs pop up. An ISA is an income sharing agreement. Essentially, the student borrows money from the institution to fund their education. In exchange, they pay a percentage of their salary over time after graduation. And it’s up to a certain cap, so if you end up making a lot of money it doesn’t scale with it.

Anish: I think the important point here, though, is it’s a false dichotomy to say, hey, either you deserve to go to college or you don’t and you should go to coding boot camp. I think consumer choice has to be the number one consideration. And I do think there’ll be a barbelling that happens, which is there’ll be a bunch of students that want the brand or the experience of going to a Stanford, Harvard, and they’ll do that. There’ll be a bunch of students who want either the life experience of going to a small liberal arts college or perhaps the sort of vocational training of going to something that’s much more coding boot camp oriented. And I think the schools in the middle are going to be the ones that struggle, because consumer preference is going to clarify around choosing those options.

Amira: I agree. I think we are in the Stone Age of disrupting colleges. No student who has a choice between Stanford and another solution will pick the other solution. We’re very, very, very far from that.

Lauren: I think a big part of that we have to acknowledge is, particularly this year, the widening gap between income levels and tuition costs, as many tuition rates remain the same. It’s not just a dichotomy of “I want the experience of college” or “I don’t want to be on Zoom.” I think there are also very real financial considerations that these companies are taking to task.

Student debt in the U.S. now totals more than $1.6 trillion. And 7 in 10 college seniors are graduating with debt. So I do think that Gen Z, in particular, views their parents and, to some extent, millennials as a cautionary tale.

Amira: Also, in the future I think they will be pretty critical of companies that are just selling debt all the time to them in a pushy way, and making it super easy, and making it super accessible.

Anish: Yeah, I think there’s also an interesting example of a principal agent problem here, which is the government has income-based repayment plans for student loans, but the channel for activating them is through servicers of student loans. And, you know, servicers of student loans don’t really have an incentive to move people on to plans like this. So even when the government has the best of intentions, their channel to their “customer,” their citizen, is very inefficiently delivering the information.

Amira: Yeah, absolutely. I mean, getting student loans through the government is the least bad solution, right? But the solution is to get an education without paying out of pocket and, most importantly, without taking loans. Before considering any loan, even the best loan possible, they need to look at all the other solutions they can use to pay for college. And there is a ton of free money out there.

Lauren: So if we’re building more tools for this increasingly savvy, increasingly digital generation of consumers, what should founders consider when they’re designing financial products for them?

Anish: A transparent business model. Being clear about how you’re making money and making sure that your incentives are aligned with your customer in the short and long term.

Seema: I think one company that’s done a good job of connecting with younger generation has been Cash App, not only on transparency around the fees, but on the marketing side. Both in terms of product—so they offer things like fractional stocks, new products that are on the market and not available necessarily other ways—but then they do the $Cashtag and the Cash drop on Twitter. And it’s an inherently social experience in a way that other financial products just haven’t been able to reach young consumers.

Amira: I would also add it has to really work, not marginally work. If you are building a product that is 5 percent better than what others have built, you’ll get nobody. There are so many copies of every single app out there, especially in fintech. Just the number of new banks—they all look the same. You will not make somebody switch for 10 percent better. With this generation, you really need to build something that is worth the attention span and as I said, the bullshit detector. We only sell to students and we need to build the product that they want to buy.

Lauren: As more fintech startups design with this mobile-first consumer with high expectations in mind, do you think this will have a long-term impact on traditional financial services? We’re seeing a bit of that already.

Anish: Not really. Of course we should have more digitization. Yes, of course we should have more innovation. The challenge for banks is not that they lack talent, it’s the things that would be most “innovative” or create the most utility for their customers are things that are unfortunately bad for their short term revenue. So I think there’s a huge structural disincentive for them to compete directly. And I think what happens as a result is that banks end up being further commoditized, where they are just loan providers who are indistinguishable, and companies like Mos end up being the intermediary and owning all the economics of helping students navigate refi, etc.

Seema: And, and owning the customer relationship.

Anish: 100 percent.

Lauren: So all of this indicates this revived urgency, if we haven’t already seen it, for companies that help the younger generation manage their finances, save earlier, avoid and pay down debt, build credit, afford real estate, all this. When we’re talking about designing for Gen Z, or for students, where do you still see opportunity? What’s next?

Amira: I believe that the banks of the future will not look at all like the backs of today. Having your money on even a very well-designed app and basically earning some perks here and there, it’s not worth it.

Lauren: What is your vision for that bank of the future? What will it look like?

Amira: The bank of the future will not only manage your money or help you save, but it makes your money multiply. You come in, you’re a student, and your bank just applies you to everything to fill out your account so that you can pay for college. So I really think that those services should be part of whatever is like your money management solution.

Seema: And I think that involves also bringing together a lot of your accounts. We’re investors in Tally, which helps you manage your credit card debt. But being able to manage all your debt across sources, or even your income streams. Wealthfront just launched a product, as well, on the investment side. But this concept of automation of your personal finances is very much still in its nascency.

Amira: Another one is about accessing the job market. Today, colleges help you for your first job. And in the future every person will have 20 jobs during their lifespan. How you get trained for all of them is going to be something interesting.

Seema: And I think a lot of that starts when, people are students or even probably even younger, in high school. But this idea of not just taking one job, but you’re glomming together a variety of, you know, a tutoring job, a passion economy project, from an early age.

Anish: Also, just no longer having just one job for life. That’s over, you know? And people are going have multiple jobs in their career and maybe multiple jobs at the same time, and they won’t necessarily have to congregate in the same city centers. The way that we work and the way that we make money is going to change dramatically.

Seema: I spoke on the employment side, but then also on the education side. Even if four-year education may continue in certain ways, I think people will add on their own forms of education. And so looking for ways to pay for education is going to have to adapt. It’ll generally just be more modular.

Anish: I agree. The other thing that I think is interesting is, how has leverage changed over human history? The most historical model of exerting leverage was through labor—having a lot of people working for you. The second was through capital, which is “the rich get richer.” And I think the new model for leverage is software. You know, perhaps in the last generation, you could only own an investment property if you had achieved a certain degree of wealth. But now with the fractionalization of things like investing in real estate, almost anyone can participate in the economics of an investment property. So I’m really bullish on software making things that were previously only available to people that had a lot of capital available to all people. And that’s why I think the mentality of hustle culture and “everyone’s a founder” and all of that is a hugely positive thing and very trend-aligned with what’s happening in technology.

Lauren: Thank you all for joining us on The a16z Podcast.

Anish: Thank you, Amira. Thank you, Seema.

Seema: It was great to join you guys.

Amira: Thank you so much.

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