The challenges and opportunities for banks in Gen Z credit

• Key insight: Gen Z’s deposit shifts and nontraditional payments undermine traditional credit pathways.
• What’s at stake: Banks risk lost deposits and future lending revenue if they ignore Gen Z’s behavior.

• Supporting data: Gen Z and millennials account for roughly 60% of deposit displacement tracked since 2020.

  Source: Bullets generated by AI with editorial review

Recent industry reports indicate that Gen Z consumers need good credit scores but have trouble building them, a gap that is complicated by the high usage of non-traditional payment platforms among young people.
A Cornerstone Advisors report, sponsored by the credit data infrastructure platform Bloom Credit, found that Gen Zers and millennials ages 21 to 44 move deposits to investment accounts about three to four times per month and account for roughly 60% of the deposit displacement Cornerstone has tracked since 2020.

A recently released FICO report also revealed that Gen Z consumers had an average credit score decrease of three points from April 2024 to April 2025, the largest year-over-year score decrease for any age group since 2020.

These two factors present both a risk and an opportunity for banks. The FICO report noted that Gen Z consumers also have the most potential for score improvement, with a consistently larger percent of young borrowers gaining a 50-plus-point year-over-year score increase compared with the rest of the population.

Experian estimated in a 2022 report that roughly 57 million American adults, about 25%

of the adult population, have a subprime credit score. The report also estimated that about one in three Gen Zers have subprime credit scores.

Bloom Credit CEO Christian Widhalm told American Banker that many Gen Z financial services customers are highly aware of their credit score, or lack thereof, and want to build it.

Bloom Credit offers credit building tools to banks and credit unions. Other companies that offer similar software include Experian, Ocrolus, Plaid, Prism Data and Nova Credit. Earlier this year, Navy Federal Credit Union announced a partnership with Bloom to offer its members debt-free options for building credit scores using regular bill payments.

“People want a new way of establishing their creditworthiness that doesn’t require taking on debt,” Widhalm said. “They want credit for positive financial behavior they’re already demonstrating.”

More than half of surveyed consumers under the age of 44, specifically 46% of Gen Zers and 57% of millennials, have had a loan application declined sometime in the past five years according to the Cornerstone report. The report specifically surveyed Americans between the ages of 21 and 44 with near-prime (620 to 670), subprime (580 to 619) or nonexistent credit scores, a group that is inherently at a higher risk for loan rejections based on traditional credit risk assessments.

Widhalm said that as Gen Z consumers are turned away from credit products, they are turning to nontraditional options for everyday transactions.

“Members of Gen Z are using payment products like Cash App and Venmo instead of credit products,” Widhalm said. “Unless they’re using something like BNPL, but [with that] there’s no credit impact.”

In the Cornerstone report, 70% of surveyed respondents who were declined for a loan or a credit card said that if the financial institution that turned them down for credit had offered them a free service to help them build their credit, they would have used it.

Even as credit bureaus like Experian and providers like Bloom Credit incorporate cash-flow data into credit building tools, Widhalm acknowledges that traditional credit scoring is still an unavoidable element of financial reality for Gen Z customers seeking big-ticket items such as an apartment lease or an auto loan.

“The reality is that the credit score is still the primary way that all financial institutions and people that are assessing risk use to assess somebody for creditworthiness,” he said. “We’ve had decades of experience with risk professionals that have become very comfortable with the predictability of these credit scores, and they rank order very well.”

Widhalm said that having a thin-file credit history, typically a normal but temporary phase for younger borrowers, is an extended problem for Gen Z consumers due to an affordability crisis for purchases that traditionally lead to  a credit history.

“In most generations, there’s a period where people don’t have a lot of time on their report because they’re just too young to start taking out credit products and building credit history,” he said. “With this generation, they’re aware of the need to build credit, but it’s been delayed. If you look at when the normal period [of not having credit] is over, Gen Zers are not necessarily going and buying cars immediately out of college and they definitely aren’t actually going and buying homes at the same rate and starting families at the same rate that other generations were, due to affordability concerns.”

Bill Handel, general manager and chief economist at Raddon Research, told American Banker that he sees Gen Z in financial services defined by two ideas: experimentation and anxiety. 

“There’s a lot of anxiety about whether they’re making the right decisions simply because of what they’ve grown up in,” Handel said. “From a life perspective, they were basically babies when 9/11 hit, the 2008 financial crisis was very big for them, and obviously Covid was hugely impactful. They’re looking for somebody that they can trust in terms of the financial decisions they make. The second piece of the puzzle is that they’re very willing to experiment with a lot of different tools coming out, like Cash App for example.”

Raddon, the research arm of bank tech provider Fiserv, published a report last week that found 31% of surveyed students aged 8 to 18 use payment apps like Cash App or Venmo as a bank alternative. A TD Cowen report from April 2024 also found that about 40% of surveyed consumers aged 18 to 34 said they do or would use Cash App as their primary bank, making them the most likely age group to do so.

“If folks say, ‘My primary financial institution is this app that’s on my phone that is just a payments app to transfer money,’ that becomes a threat to financial institutions,” Widhalm said. “They’ve got Zelle and whatnot, but younger demographics are trying to figure out what’s easy for them and what their friends are using. That is what the threat is to [banks] if they don’t start to differentiate.”

Handel said that the generational shift in how Gen Z consumers approach credit is an expected shift, but one that is more of a threat to smaller banks and credit unions than it is to large banks.

“We don’t believe this is revolutionary,” he said. “This is more of an evolution in terms of how things will unfold. We do think that fintechs and online [banking] will have more of a presence and that will remain strong, but big banks will also remain in a pretty good position. The real challenge is for the community banks and the credit unions. They’re going to have to really work hard to present themselves effectively to this generation.”