Fintech for kids – Generation Alpha and beyond
The democratization of financial services is rapidly changing the way consumers think and act about their finances. However, the push for financial inclusion shouldn’t be an end in itself. As financial products become easily available to a wide range of the population, financial education (or financial literacy) is crucial to make responsible financial choices.
Yet current statistics about financial literacy among adults portrait a shocking picture. From the 2014 S&P Global FinLit Survey, two-thirds of the global population is financially illiterate. And, only 28% of accounting-owning adults are financially literate.
Financial inclusion comes from education. The need for financial education starts from early childhood. Children as young as 3 years old can grasp the basic idea of money, and by 7 their money habits are already set. Basically, the weight of delivering financial education rests on the individual (and their family).
This market is clearly underserved. Financial education is usually not a complete, standalone product but just a feature. When looking at kids & teens financial education, it is usually bundled with banking services. Challenger banks offer it as a free or low-cost extension so that people do that for their children, but more and more players are emerging focused exclusively on the segment.
Incentivizing financial education from an early age can set up kids and teens for financial resilience in the future. We mapped 40+ startups and scaleups working towards helping to shore up the financial knowledge of kids and teens.
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These companies have raised $478M, across 20 rounds in 2021, up from less than $30M in 2018. From digital wallets to setting up the first bank account, these companies offer a wide range of solutions aimed at young consumers to interact and learn about money. They usually offer prepaid debit cards and/or virtual cards for payments as well as other features such as chore tracking, automatic allowances and savings goals.
Many of these apps are free. How do they monetize?
Let’s remember that even adult-focused challenger banks are struggling to turn a profit. According to recent research by BCG, only 5% of the global digital challenger banks are profitable (13 of out 249). They also are mostly based in Asia. Recently, Nubank turned a profit for the first time in Brazil while it heads towards a historic public listing, but still, a profitable challenger bank is rarer than a unicorn.
In the US, the most common route to monetization in the fintech for the kids & teens market is through absorbing interchange fees. However, at an average of 1.2% in the US (split between the card-issuer bank and the fintech startup) and with a customer acquisition cost ranging from $50 to $200, one would need a $5000-$25000 spending to “break-even”, without even considering discounted cash flows and operational costs. Some might spend that much, but most do not. In Europe, this is potentially even harder, due to interchange fees being capped at 0.2% for debit cards, 6 times less than in the US.
In the US some players, like Step and Till, have started to try different strategies beyond interchange fees. For instance, Till aims to earn revenue by partnering with merchants to offer rewards to users. It also plans to earn referral fees by referring the teens to other financial institutions when they get older and have different needs. However, the sustainability of these strategies is yet to be demonstrated.
The leading US startup in the field, Greenlight instead charges families subscriptions starting at $4.99/month. Also, the leading UK one GoHenry does the same, charging £2.99/month. They however had the first-mover advantage and most newcomers have to be bolder to grow their market share.
But what about legacy banks and adult-focused challenger banks?
Legacy players & adult challenger banks
Legacy banks for the most part seem not to care about these younger generations of customers, even if some have free offerings for youngers such as Wells Fargo’s Greenhouse app. Younger clients tend to generate very little revenue, they are digitally native and use different channels. Traditional players struggle to keep up, while startups in the field attract an audience on TikTok.
They have been however quite active in investing and even acquiring some of these players. Greenlight is backed by JPMorgan and Wells Fargo, Step Mobile by Stripe, GoHenry by Citi Ventures and Natwest has recently acquired RoosterMoney.
Adult-focused challenger banks such as Revolut, Current and Starling Bank offer extensions for the parents’ accounts. For instance, Revolut Junior is now integrating Apple Pay in the UK and Eu and will expand it to the US, Singapore and Australia.
Overall, what all the players rely on is one of the most in finance: inertia. Consumers tend to stick with the bank or financial institution they already have. Switching is often cumbersome and let’s be honest, none like dealing with banks. Therefore as customers grow up they will have more income, savings and make more transactions and whoever gets them first has a good chance of retaining them for years.
Square and Amazon jump on the opportunity
In November 2021, Square’s Cash App broadened its reach by making its payments app available to younger teens between the ages of 13 and 17. The big advantage here? Square users can continue using the app ageing up, with no need to switch.
Will Paypal, with its Venmo, and other players make a similar move?
Similarly, Amazon announced a collaboration with Greenlight. Under this partnership, Amazon Kids+ families can sign up for a free, 1-year subscription to the standard Greenlight Plan.
For further reading on the topic, we recommend Brighteye Ventures’ overview of the financial education market.
We plan to cover the “Financing education” topic in the future, if you’re keen to collaborate with us, feel free to contact Carla or Lorenzo.
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