Smells like teen banking
More than a quarter of the world’s population is under the age of eighteen, but only a fraction of them have a sound understanding of core financial concepts and access to tailored financial services. While the young are increasingly digital-native and participating in economic activity at an earlier age, how do we ensure they do so in an informed way and have the tools to foster entrepreneurship and financial inclusion?
When asked about the meaning of Nirvana’s trademark song, the lead singer explained it was an « exploration of meaning and meaninglessness ». Usually the same applies to many youngsters discovering first-hand how the world of finance and money works. While lots of it is being passed on through education — if any education — most of it relies on experimenting, feedback from peers and mostly, exposing oneself to new risks.
Vulnerable groups in society account for a large share of financial exclusion. For 15-year-old students in developed economies, only one in ten performs at the highest financial literacy level. Meaning that around 25% are still unable to make even simple decisions on everyday spending, according to the freshest 2020 OECD results.
What’s more, although 50% of students hold bank accounts and benefit from a variety of financial services, only one in three have the necessary skills to interpret and evaluate a bank statement.
In the absence of targeted programs, youth is ill prepared to face important decisions and plan for the financial future.
Kids, listen to your parents
Young people often learn about money informally through socialization: observing and listening to their caregivers, influential adults, and peers. That’s about it. They are not repetitively introduced to more formal instruction on money matters, such as through classes or specific trainings.
Academics have been warning about the risks that financial services can (over-)expose young people to, such as predatory practices, savings and investing strategies, credit use and interest rates. In short, in the absence of targeted programs they are ill prepared to face important decisions about borrowing, saving, investing, and planning for their financial futures.
What other researchers found in early adolescents’ financial behavior is that they tend to focus on saving, and they typically save the most relative to other youth age cohorts.
Nevertheless, they need to be given the right tools to transition from understanding the importance of focusing on short-term goals (buying clothes, saving their earnings, or paying back a friend) to get to long-term financial goals (putting money aside for college, car or home ownership).
Especially when we know that roughly one billion youth in low-income countries are currently transitioning to adulthood and engaging in various forms of education and employment along the way.
To avoid a widespread of financially illiterate adults, they need to prepare for the school of life. Helping teens take their first steps toward managing their own money, making them realize what it means to have a checking account in their name, how to use their debit card responsibly or keep track of their spending behavior.
So, who helps them with accessing these easy-to-use features? Not to worry — there also is a market for that.
Teenagers are by no means unbanked or turning away from financial services, instead, they feel abandoned.
New kids on the block
Despite an overall decrease in the use of physical cash, teenagers in particular are still heavily — and unwillingly — burdened with cash. Naturally, because most of the money they earn — doing chores, running errands or getting pocket money — is being paid out with bills and coins (in the US that’s $41 billion a year).
And they hate it.
Because teenagers also want to spend their money on things that require a payment card, like online retailers or unlocking another level of Candy Crush. And because a growing number of young adults (8x more than in 2009) are starting their own business and participate in the gig economy.
Teenagers are by no means unbanked in a traditional way or turning away from financial services, instead, they feel abandoned because of the lack of tailored — and safe — services, falling within a new category: the ‘pre-banked’.
There is no age to make money? Yes, that’s right.
Though there isn’t a lot of compelling market analysis and research on this topic, both incumbents and new entrants have ramped up their offering over the past years to meet the needs of this very particular demographic.
High street banks have been offering current accounts starting at age 11, though parents usually open saving accounts for their children way before. But it’s not always been smooth sailing, as evidenced by RBS’s recent shutter.
Even neo-banks have found ways to diversify their revenue streams by introducing digital-only kids’ wallets and cards, allowing them access to their cash without worrying that they’ll lose it or spend it on something they shouldn’t.
For some that is not enough, they want the real deal. 73% of millennials say they would be more excited about a new financial offering from a big- or fintech than from their own bank, confirming the youth segment remains untapped for some — even for digital-first providers.
Niche fintech providers have risen to set up specific debit cards with store-level controls, launching digital banking products designed for kids aged 10–18, or reinventing customer experience by putting everything at the tap of a mobile screen.
The math is simple: offer services to the kids, maintain the client relationship as they grow old, and bet on their future financial needs (and wealth) to cross-sell additional services over time.
Financial services addressing the necessity of the young need to come in pair with tailored policy measures.
OK Boomer, it’s time for Gen Z
While the growing offer answers a nascent demand, the question of whether this is a healthy development allows a debate.
Financial services addressing the necessity of the young need to come in pair with tailored policy measures to reduce risks and increase inclusion opportunities. Risks can be manifold — ways to mitigate them as well.
· Oversight & controls — Reviewing onboarding procedures that include the active participation of parents, their consent and account for (spending) controls.
· Screening — Considering adapted KYC-instruments for consumers below the age of legal majority (40% of the 1.1 billion people worldwide who lack proper identification documents are under the age of 18).
· Abusive use — Strengthening the infrastructure to reduce exposure to scams and fraud for the young (in the UK younger people were found to be disproportionately the targets of online financial fraud).
· Misconceptions — Rethinking the way financial concepts and services are worded and explained to young consumers in a way that empowers them to make informed financial decisions.
These considerations need to be designed in tandem with policymakers.
In Nigeria and Tanzania, a study revealed how financial institutions neglected to think through how to help young customers transition from teen to student, and later adult accounts. For a solution to succeed in achieving its potential for social and financial impact, providers must have effective migration strategies in place at each new stage of their customers’ life.
Another policy analysis found that the earlier financial providers can guide teenagers in their understanding of financial matters, the higher asset accumulation and net worth at age 25 they are suspected to achieve. Beyond financial stability, early adoption of good practices and literacy strongly influences important decisions about study plans and define social-economic status.
Kid you not
Luckily, the problem of youth financial literacy has caught the attention of many public and private institutions in recent years.
The OECD has managed to push economies to review their policies, over 175 countries participate in the annual Global Money Week to build awareness around financial concepts, the World Bank’s CGAP supports private and public initiatives to advance youth inclusion levels, and the financial services industry develops its offering to cater for the young.
However, the business models for youth financial services are barely profitable, as young adults are perceived as low-value/high-risk customers. Key barriers to the financial inclusion and literacy of youth also include limiting social norms and legal and regulatory restrictions.
There is a critical role for policymakers and providers to play in supporting the needed evidence building and testing to effectively tackle these issues and act on results. Foundational skills — such as self-efficacy, numeracy, and executive function — need to be coupled with core concepts in order to help construct strong financial literacy levels with youth.
Only then, will youth gain the necessary training, education and products to build their skills and enter adulthood with the right level of knowledge of and access to financial services.
