Banks are intensely focused on managing internal compliance requirements and external regulatory demands. Buffeted by the still largely unknown impact of Dodd-Frank and the earnings drain resulting from the Durbin Amendment, many bankers are more internally focused than ever. When I commented to one senior exec that many bankers appear almost paranoid about compliance and regulatory issues, he corrected me, saying, “We are paranoid!”

Another reason for something approaching appropriate paranoia may involve the changes that have already occurred within the bank industry’s customer set. Despite this major event, most banks are doing very little in response.

The fundamental demographics that have fueled the banking industry’s growth for the past 40 or more years have changed; again, they are not changing; they have already changed. The demographic facts are telling. Census Bureau data shows that Baby Boomers, defined roughly as comprised of those born from 1946-1965, now total about 26% of the population. Gen X (Born 1966-1980) totals almost 20% while Gen Y (1981-2000) is now the largest group at almost 28%. Gen X and Gen Y are close to a majority of the population. Yet banks continue to focus most of their attention on Boomers even though their importance to the banking industry is in inevitable decline.

The U.S. banking industry grew up with the Baby Boomers. The industry’s assets increased as Boomers purchased cars and homes and upgraded both and many other goods time after time. But now the Boomers, appropriately, are borrowing less. One banker told me that his Boomer small business owners do not want to expand, as they decide to reduce their personal risk. A real estate lender noted that ten years ago most of his Boomer customers gave personal guarantees; now, few do so, choosing to borrow at a lower loan/value percentage rather than put their personal fortune at stake. On the investment side, Boomers have become increasingly risk adverse, many simply hoping to conserve what they have rather than pursue outsized returns.

What of Gen X and Gen Y businesses? To some extent they need to be divided into the have and have-nots. Many banks explicitly avoid companies that have been in operation for four years or less; many Gen Y companies fall into that have-not category. In addition, many Gen X and Yers are victims of the recession and the current slow growth environment. Many lack the equity that banks want to see before making a loan commitment. Therefore, banks, except for deposits and other fee business, basically ignore many “weak” or immature Gen X/Y businesses. The industry is failing to meet the borrowing needs of this customer set, likely alienating them for the future.

As for the strongest Gen X and Gen Y companies, they view their banks very differently than Boomers. Several bankers recently commented to me that these groups are more transactional in nature. They grew up with extraordinary access to information and often approach a bank with the results of their comparative shopping in hand. Of greater concern, in many cases they fail to value a bank relationship, or they define what a bank relationship is differently from Boomers.
On the investment side, they have been inundated by ads from firms like Schwab and Vanguard that dismiss the value of the investment advice that many banks offer.

Years ago, consultants would take bank clients on a tour of branches located on Park Avenue. Those tours allowed bankers to observe various levels of service and physical plant. Visitors could even see that some of the branches were run down, sending a negative message about how bank management viewed its retail customers. While that physical tour still offers great value, today bankers should also visit competitive websites. Doing so shows that Gen X and Y are often an afterthought to bankers, even though they represent the majority of customers. The sites may push mobile banking or some other technology based -capability, but almost none address the specific needs of Gen X and Y, instead lumping them in with others.

The major reason for most banks overlooking Gen X and Gen Y centers on the fact that Boomers run most banks and most lines of business. Younger staff may encourage management to focus on the latest technology gizmo and develop an approach to social media, but bankers are avoiding the hard work that involves addressing these questions and more:

• Which customers within Gen X and Gen Y should the bank focus on?

• How can the bank build a relationship on the customer’s terms?

• What are the economic implications to the bank of Boomers and their higher margin business disappearing?

The demographic change is one issue that banks really do ignore at their peril. It is not a problem five or ten years from now. It is a problem today and whether or not that problem is turned into an opportunity is for bank management to determine.

FYI, I just started a new Linked In discussion group, Banking Generation X and Y. Please add your comments, as we try to create an information hub on this topic.