How millennials are spending their money

Dr Andrew Charlton is the Director of AlphaBeta. The firm was commissioned by Afterpay to do a survey of millennials spending habits, their use of credits cards, their trust of banks and the like.

Now, as you can imagine, since Afterpay commissioned the report, it's pretty favourable to Afterpay but it's interesting and you should have a listen to it if you're interested in this area because they found out some stuff that's quite telling about how millennials are spending, the way that they're spending and their use of credits cards and banks.

Here's Dr Andrew Charlton, the Director of AlphaBeta talking about his survey of millennials spending habits.

Listen to the podcast or read the full transcript below:

Andrew, the research that you’ve done was commissioned by Afterpay Touch, the company.  Do you know why they commissioned it?  Was it for marketing purposes or was there stuff they wanted to know that they didn’t know already?

Afterpay engages with millions of Australian customers, many of whom are young Australians and so understanding the financial pressures on those young Australians is core to their business.

It seems to me the core thing that you’ve discovered is that the Millennials are turning off credit cards and to some extent, Afterpay replaces credit cards.  Was that a surprise to you?

Yeah, look, it was certainly a surprise the rate at which young people are turning away from credit cards.  Not only are young Australians much less likely than older Australians to have a credit card, they also have much smaller balances on their credit card even controlling for their lower incomes.  Credit cards was such a popular technology for the Baby Boomers and for Generation X and both those generations had had a love affair with credit cards that lasted for many decades.  But new technology has come along and Millennials seem to be turning away from credit cards and finding technologies that suit their needs better and maybe involve lower costs and lower risk.

The interesting thing is, to some extent, you’ve gone broader than that.  In some ways you’ve identified the reason that they’re kicking the credit card addiction is because they’re frugal or at least more frugal than their parents’ generation which is the opposite of the conventional wisdom about Millennials which is they’re spending too much on breakfast.

That’s right.  There’s definitely a perception out there that Millennials are somehow spendthrift or not careful with their money and the avocado on toast meme I think is probably the dominant representation of that.  What our report finds is actually quite different.  Yes, Millennials are different to their parents.  They have different spending pressures but that doesn’t necessarily mean they’re less careful with their money.  In fact, in many important ways they show financial behaviours that might suggest that they are in fact more careful.  Millennials are more likely to save than their parents’ generation.  They’re more likely to have a budget.  They’re less likely to use credit cards.  They’re a lot less likely to have a big balance on those credit cards.  They are more likely to use technology to check prices, do their research, manage their expenses.  Millennials are different to their parents but that doesn’t necessarily mean that they are less careful.  It might just mean that they’re misunderstood.

I’m sure they feel misunderstood.  But perhaps at this point it would be worth just understanding how you obtained this data?  What were your sources for it?

Sure.  We used a number of different sources that we bring together combining records from Afterpay.  An anonymised database of 140,000 Afterpay users.  We then conducted some research with Ipsos to survey some of the users and with their permission, connect their responses to that Afterpay survey.  Then we mixed in the information on Australia’s population and their household and some financial characteristics from the HILDA Survey, which is one of Australia’s largest and best-known survey that track individuals over time.

Was it based on interviews with people or just looking at the actual spending of them or a bit of both?

A bit of both.  As I said, it’s accessing Afterpay data on 140,000 customers linking that to survey data which does ask questions of people based on how they think about their financial management, what pressures they’re under, what priorities they have, their attitude to different financial products.  Then mixing that with the large survey, the HILDA data as well.

Just run us through some of the major findings that you came up with.

Sure, we found that Millennials are turning away from credit cards.  The proportion of young people with a credit card has fallen from 58% to 41% in just 14 years.  Millennials are actually 37% less likely to own a credit card than older Australians.  Millennials are in many ways, better savers than their parents.  They are more likely to have a household budget.  They are less likely to be spending money on alcohol and cigarettes and more likely to be spending their money on public transport and private health and education.  They use a lot of technology in the way that they manage their money.  They use budgeting apps, they track their expenses closely using online banking apps and other tools.

Their general approach is that they want to access, they want to use the tools available to them through the different forms of technology to find the lowest risk, cheapest way to manage their money and I guess that’s what we all want to do.

You also point out that the Millennials, the current generation of – what are they, 25 to 37-year-olds, or something like that – are under more financial pressure than previous generations.  I think we know about the affordability of housing and you point out that the current median price house is eight times income as opposed to three times, when I was a kid.  There’s that, but there’s other things as well that are causing Millennials more financial stress, right?

That’s right.  Millennials have 80% more education or HECS debt than previous generations at the same age.  As you say they’re facing much higher house prices.  The costs of public transport, health insurance, many other expenditure items in their lives have gone up.  So Millennials are responding to these pressures.  They are less likely to purchase a house at a young age, they’re adjusting their consumption based on these changes in relative prices and that’s pretty economical rational behaviour that you would expect from anyone.  That doesn’t necessarily mean that they’re not frugal or they don’t have sensible financial priorities.

The assumption has been that they’ve responded to these financial pressures in a way by saying, ‘oh well, doesn’t matter, I’m not going to buy a house, so I’ll just spend it on lifestyle’.  Have you found that to be true or not?

Well, it’s true to some extent.  Millennials do face a much higher cost of housing and house prices have gone up a lot.  They’ve definitely shifted their expenditure priorities into different areas.  Does that mean that they’re less frugal?  I don’t think it does.  I think it means they’re economically rational and when you think about things that go directly to how careful they are with their money, 36% of Millennials say they save regularly versus 28% of older Australians.  80% of Millennials say that they use a budget versus 67% of older Australians.  They’re less likely to be borrowing from a bank and they’re less likely to have a credit card.  There’s a sense in which some people latch onto some Millennial behaviour like they’re being less likely to buy a house and saying that’s evidence of irresponsibility or that’s evidence of Millennials being spendthrift.  But actually it’s them responding to a different set of financial pressures, a big change in relative prices and maybe they’re choosing to be careful in other ways and are readjusting their spending priorities based on those different pressures.

How does Afterpay fit into that?

Afterpay is one of the technologies that Millennials are turning to to help them manage their money.  I think Afterpay is one of the ways that Millennials are managing their expenses in a way that maybe reduces the risks and the costs of other approaches like credit cards.  I think that’s one of the reasons why so many young people are using Afterpay.

What about the costs of Afterpay?  Is that the key reason that they’re using it?

When we surveyed young people they talked about the costs of credit cards being a significant disincentive for them, whereas Afterpay, 93% of transactions incur absolutely no cost at all, it’s completely free to the user.  That’s a big difference and I think young people recognise that they can avoid interest costs and they can avoid many of the risks that are associated with credit cards.

One of the things you also focussed on is their trust of banks or distrust of banks which I imagine came out of the surveys rather than the data.  Tell us what you’ve found about how Millennials view banks?

I think probably no surprise, we found that Millennials distrust of banks is reasonably high.  The survey data showed that about a third of Millennials don’t trust banks and there’s been a big change in the level of trust in banks over the last year with 18% of Millennials saying they trust banks less and 13% saying they trust banks a lot less.  I think that’s tied into the experience that Millennials have had with credit cards and obviously ties into the recent findings of the Royal Commission.

I actually found it surprising, that particular data, you talked about 18% trust a little less, and 13% trust a lot less.  But actually, despite the Royal Commission, what is it, 68 or 69% - so almost 70% of Millennials despite the Royal Commission trust banks the same or more.  I find that amazing.

It’s true but it’s coming off a low base.  Only 8% of Millennials said that they trusted banks a great deal.  I think some of those Millennials’ trust levels didn’t have a long way to fall notwithstanding the Royal Commission.

Right.  Did you come away from doing this research more or less likely to invest in Afterpay?

Well I don’t invest in Afterpay or any of the other clients that we work with because we’re a research firm.  The focus of this research was about why young people are using new types of technologies rather than traditional types of technologies for their payments and financial management.  I think one of the key findings is young people are turning to lots of new payments technologies, banking apps, expense management, investing applications and they want to use those technologies to better manage their finances.  In many ways, that’s a good thing.  That’s evidence that young people are using the tools available to them to keep a close track on their money and maximise their financial outcomes.

Okay, you don’t invest in Afterpay, fair enough.  What about banks?  Are you an investor at all, do you invest in banks?  Are you selling your banks now having done this research?

Look because I’m a researcher into these types of services I don’t invest in these firms as a matter of principle.  But look, there’s clearly a lot of changes out there and Millennials are very different.  I think that’s one of the main messages of our research and banks will need to change and are changing in order to respond to those differences and there’ll be lots of new firms that are also responding to these different pressures and different needs that Millennials have.

Yeah, great to talk to you, Andrew.  Thanks.

Thanks very much, Alan, cheers.

That was Dr Andrew Charlton, the Principal of AlphaBeta, research firm.