Microfinance Voices - Youth and Money: Planting the Seed for Success

Originally posted in Microfinance Voices.

As a growing population in the developing world, youth are a promising market for financial services. Practitioners believe fully engaging with this population could produce major inroads towards achieving financial inclusion, and advancements such as mobile-banking can help lead the way. Early pilots and research show promise in long-term potential and opportunities, however the youth space remains uncharted territory. In this Microfinance Voices, experts weigh in on the potential benefits of reaching out to the youth market, as well as the obstacles that currently impede market growth.

Youth-focused financial services gain visibility yet remain a work in progress. As financial access expands across the developing world, youth and adolescents have become a promising new sub-sector of the market for financial services. This emerging interest is related both to the demographic realities of the developing world - by 2050 it is expected that people aged 10-24 will account for 45% of the population – as well as the promise of advancements such as mobile-banking. However, despite these projections, a 2009 survey found that only 4.2 million youth are currently accessing financial services.

As a largely untapped market, youth financial services (YFS) are attracting growing attention from academics, NGOs, donors, practitioners, and governments. For example, international networks, such as Women’s World Banking are assisting to roll out savings products tailored to youth in Mongolia. Cross-cutting partnerships, such as the YouthSave Consortium funded by The Mastercard Foundation, are studying how to deliver savings services on a sustainable basis to low-income youth in Colombia, Ghana, Kenya, and Nepal.

Why Focus on Youth?

The potential benefits of YFS are many, and early pilots and research show promise in long-term potential and opportunities. Bhagwan Chowdhry, of UCLA’s Anderson School of Management and founder of Financial Access at Birth (FAB), explained during a recent interview that providing savings accounts at birth gives youth both formal identification and “a chance to be a part of the formal financial access system,” and effectively includes them in the system from an early age.

Another reason to focus on youth is that in many developing countries, people enter the workforce and become heads of households at young ages, and access to financial products will help them manage their earnings and provide for their families.

The opposite argument may also hold true: that access to financial services, especially to savings, can help young people (especially girls) in some cultural contexts defer marriage and prepare for better-paying work. Inez Murray stressed Women’s World Banking’s particular interest in the empowerment of women and girls in a recent interview. Evidence Murray cited ranged from Kenya to Pakistan, where a program targeted at girls got them setting life goals and developing budgets. Michael Sherraden, of Washington University’s Center for Social Development, also supports the empowerment agenda. “Young people who know they have a future may make different choices" such as continuing school, he said during a recent interview.

However, because the youth space remains uncharted territory, these benefits are primarily theoretical and relatively untested. Yet, the rationale behind them is compelling and deserves further study.

“Look at the Lifetime Value”: Building a Business Case

Despite the promise of YFS, it remains difficult in reality to make the short-term business case for youth accounts. Like the microfinance industry as a whole, youth access initiatives confront the hard realities of low-balance, high-transaction-cost accounts.

However, as Murray counters, commercial banks that enter the youth space have a long-term advantage by “positioning the bank in the minds of the customer and cultivating relationships and looking at lifetime value.” Murray urges providers to look at the lifetime value of a customer when weighing whether to cultivate the youth market. Discussing Hatton National Bank in Sri Lanka, which has about 500,000 young people involved in a savings program, Murray said “even in their case, where they do have the scale and have excellent embedded capability, they do not look at the accounts as profitable. Their value is in positioning the bank in the minds of the customer and cultivating relationships.”

The need for crosscutting partnerships goes far deeper than government financing. While governments may be able to cover initial costs or fund financial education, Sherraden says “not that many governments would be successful in running a savings program directly.”

For feasible models of youth financial services to emerge, innovators must leverage government and donor resources, on-the-ground NGO and MFI networks, well-designed financial products, and low-cost delivery mechanisms like mobile technology. At least one potential role of government might be to make an investment in the form of an initial deposit to a child’s account, though the viability of this model remains untested. But to Chowdhry, this is akin to any other investment in infrastructure: “I think it’s like building roads; I think it’s like building Internet.”

“We are Looking at Medium- and Long-Term Profits”: Planting the Seed for Success

Among the youth-focused financial services programs that are already operational, providers stress that a long-term time horizon is key. Mongolia’s XacBank implements one of the most successful programs in this area. Their Future Millionaire program, along with the Aspire product, target youth and have been significantly bolstered by financial education at local schools and by the use of mobile delivery platforms. XacBank executives explained in an interview that grants from the international community to cover upfront costs played a significant role in enabling them to launch these youth-focused products.

Still, XacBank says that “with operating costs, in the short term, (youth products) are not a profitable venture for us. We are looking at medium- and long-term profits which will eventually pay back costs we have invested in the beginning. This has already happened for Future Millionaire. Right now, about 30% of all XacBank’s time deposits come from students. We hope to have similar results with (the Aspire product, focused at 14-18 year-old-girls).”

Moving Forward: Key Questions

While the role of donors, multilaterals, and governments in youth access programs remains undefined, experts must determine whether their support is best leveraged through funding, technical assistance, or whether it is necessary at all. In the event that banks see long term value in providing youth services, they may be willing to shoulder the short-term costs without relying on this type of external support.

As the youth financial access field expands, financial institutions in the space may want to look to a broader array of products beyond savings. As customers grow older, XacBank offers loans for livelihoods or continuing education. These services may form an important part of the financial portfolio for certain youth segments.

These tentative lessons are still largely based on localized experiences. As financial services begin to penetrate the youth market on a larger scale, the following questions about financial viability, policy environment, and product design must be addressed: - On the provider side, how can financial institutions cut costs in innovative ways and more effectively encourage uptake, market products, and enhance penetration? - For policymakers, what role will produce the greatest return on investment? How can policy structure the regulatory environment so as to enable youth access while mitigating potential risks? - How can product designers most effectively structure youth accounts to balance long-term security with short-term liquidity? Is financial education a necessary component of any package of services? If so, who should fund it?

Although progress in the youth space depends on finding answers to these questions, the payoff can be big, and as Sherraden says “I am quite interested in a world where every child has some resources to begin to shape and build his or her life.”