BLOG POST by Neil BansalIS TEENAGE BANKING THE PATH TO GREATER FINANCIAL LITERACY?
So how would you rate your financial literacy? If someone asked “True or false: buying a single company’s stock usually provides a safer return than a stock mutual fund”, how would you respond? If you incorrectly answered ‘true’ and neglected how diversification lowers your risk versus a single stock, don’t feel too bad. In a comprehensive 2018 survey by the regulatory organization FINRA, less than half of Americans (43%) correctly answered this question ‘false’. Even fewer (26%) correctly knew that bond prices fall when interest rates rise. The results of six fundamental questions across economics and personal finance provide a dismal view of financial literacy and a slow but clear decline over time (the survey is repeated every three years). We shouldn’t be surprised by such results. In the same survey only 20% of respondents mentioned participating in any financial education in school or the workplace, yet there is a disturbing gap between self-perceptions and actual financial behaviors and feelings. In the survey when asked “I am good at dealing with day-to-day financial matters, such as checking accounts, credit and debit cards, and tracking expenses”, an incredible 77% rated themselves positively with a 5, 6 or 7 on a scale from 1-“disagree” to 7-“strongly agree”. Within this 77%, almost half gave themselves the highest self-score of a 7 yet nearly a third of this group admitted to costly credit card behaviors such as only paying the minimum balance, paying late fees or even using the card for cash advances! Other surveys show similar results and get into the emotional toll it is taking on younger consumers. A 2019 Business Insider/Morning Consult poll showed that more than half of all millennials and Gen X respondents were stressed “some” or “a lot” about their credit card, personal loan or student loan debts.
Clearly there is a massive and urgent need to tackle financial literacy and to instill strong habits and knowledge much earlier given 4 million children turn 13 each year and another 4 million graduate to adulthood annually. Historically US banks have not effectively focused on kids and teenagers which has led to the largest unbanked youth population in the world. In the US rules vary within states and individual banks with most requiring parent/guardian co-ownership for anyone under 18. For those with such accounts they have been basic with minimal educational content around saving, spending and budgeting.
This is rapidly changing with companies racing ahead to innovate in this space. One such company is Awsm Bank, a startup currently raising seed funding that has just launched in the US with a focus on empowering teenagers to make sound financial decisions. In my interview with co-founder and Chief Technology Officer Alibek Junisbayev, he explained the long journey to launch since forming the company in 2017. Awsm provides teens with banking experience by emulating financial products, situations and problems teens may encounter later in their adult life and lets them learn from their mistakes in a safe, parent-controlled environment. In the Awsm model, teenagers are given a chance to experience what it feels like to have credit card debt (they get $100 credit cards sponsored by their parents) and they can also experience what it’s like to have a mortgage (paying parents 72 installments for an Xbox indeed feels like a mortgage!). The goal here is to teach teens financial literacy by putting them in situations where they must make financial decisions and live through the consequences: “I’ve got an extra $10. Should I pay my credit card bill, should I pay my mortgage, should I save up or should I buy a big bag of Skittles?”
The team needed to build a core banking system from scratch in order to build those teen-banking products not otherwise available in traditional, off-the-shelf systems. Alibek emphasized the bank’s focus on engaging educational content. “No teen in their right mind will go to Khan Academy to spend an hour on financial education,” noting that his team has created 100+ video courses that are digestible by and designed for those with attention spans of the TikTok and Snapchat generation. Translating this knowledge into financial decisions is at the heart of the Awsm experience and it’s meant to simulate real life. Per Alibek, “Joy and pain are both important to experience. If you get a strong grade in your high school class or complete a task on time you can be instantly rewarded. But if you don’t pay your bill on time your credit score will go down and you will feel the pain. You need to learn this early. And giving kids handouts in a form of allowance is not necessarily going to instill good money habits and prepare teens for real life.”
The emphasis on early learning and connectivity to parents is an advantageous business model. According to a YouGov Plc survey, the average adult used the same primary checking account for more than 14 years and even the less loyal millennial group (24 to 39 year olds) used the same checking account for more than 9 years. It’s a gateway to other banking products and services once teenagers hit 18 and the role of parents economically may well continue. Pew Research Center recently found that 52% of 18-29 year olds in the U.S. are living with their parents – highest since the Great Depression and exacerbated by Covid-19.
Awsm will be facing an increasingly crowded field in the youth banking space. There are many incumbent firms such as Greenlight that recently reached a $1.2 billion valuation along with gohenry and Osper. UK Fintech Revolut with 12 million customers and aspirations to hit 100 million in 5 years has launched a Junior account for children 7-18. US FinTech Step is entering with its “banking for teens” product and has raised $22.5 million, as well as Current with $20 million. French startup Kard empowers teens with its own bank account but takes a more hands-off approach on spending with fewer parental controls. From Spain comes Mitto that focuses more on sustainability. Traditional banks are also getting more involved. CapitalOne has a MONEY teen checking account with no fees or minimums but lags in the more innovative controls and engagement of the startup models. Other companies are on the sidelines for now like challenger bank N26 that actually started as a pocket money card for teens before pivoting to the adult market for greater monetization.
It remains to be seen how these businesses move the needle on financial literacy. Alibek cites University of Michigan data that parents are increasingly focused on educating their kids to make smart financial decisions given most students don’t learn it through school or even later in the workplace. There can also be financial payoffs as well in having a good credit score at 18. Lower car insurance or the ability to rent an apartment. The awareness to start a 401(k) through their first employer and build an investment portfolio – one that is well-diversified and not concentrated in a single stock, of course.
Note: The author does not have a financial interest or affiliation with Awsm Bank. If you wish to learn more about them and/or explore a potential investment or partnership, you can contact Alibek directly at firstname.lastname@example.org.