Youth under the age of 25 represent almost half of the world’s population today. For financial institutions, they are undoubtedly the clients of tomorrow. Yet many financial institutions steer clear from viewing youth as customers because it is difficult to serve them in a profitable manner. Marketing to these individuals is expensive, young customers generally operate in very small monetary amounts, and parents are their most significant influencers. Instead, financial institutions tend to focus on the more lucrative adult population and the short-term gains that come with that market.
CGAP spoke to about a dozen financial service providers (FSPs) worldwide who are leading an effort to offer financial services- savings in particular - to youth. At first, we expected to hear many of them mention corporate social responsibility or other social elements as motivating factors. Instead we heard a variety of motivations, many related to business case factors. Of course, earning revenues and reducing costs were common goals, but FSPs were approaching these goals in different ways, serving different youth segments with different strategies and visions.
For financial service providers looking to offer savings products to young clients while still making a profit, there are factors at three levels that affect profitability: the market level, the institutional level, and the client-segment level.
The business case for youth savings is often the most compelling in markets that are highly competitive, such as Kenya, Colombia and Mongolia. In these markets, FSPs tend to target the same clients, which makes capturing future customers early critical because doing so can lead to a competitive edge. When markets are less competitive, FSPs may choose to address adult markets first as they are typically more profitable.
Regulatory factors can also influence decision-making around youth savings at the market level. For example, Kenya Post Office Savings Bank notes that despite significant demand from 16- and 17-year-olds to open an account without a parent’s signature, they cannot do so without a government ID document, which is issued at age 18. Nevertheless, Kenya Post has entered the market aggressively, as it operates in a competitive market where 43 percent of the population is younger than 15. Since launching their ‘SMATA Account’ in 2012, Postbank opened approximately 70,000 new savings accounts directed explicitly at adolescents.
One important consideration at the institutional level is the opportunity cost of entering the youth market when compared to other options. For example, in Colombia, Banco Caja Social didn't need to add staff or infrastructure to offer its youth products and was able to keep its marginal costs low. This made the decision to enter the youth market easier than it might otherwise have been without these elements in place.
A critical, and closely-linked factor that we identified is the patience of a financial service provider, measured by the time needed for a product to become financially sustainable. Not all FSPs have long-enough time frames to be able to make a long-term investment in youth. This long-term vision is critical, even more so for a younger target market. As a result, it can be a key influencer in an FSP’s strategy to engage in a specific sub-segment of youth.
Segmentation, or identifying specific categories of potential youth customers, is a key lever for optimizing the business case for youth savings. Serving younger clients helps to capture market share while serving older youth helps to achieve profitability faster. Some FSPs we spoke to need to show their boards and managers financial results rather quickly, and find that older, employed youth can offer a broader stream of revenues (including from loans or transfer services) than children.
Al Barid Bank in Morocco, for example, focuses its efforts on older youth (ages 18–25), a substantial and still largely untapped market in Morocco which includes approximately 5 million people. The bank uses this segment to support a business case. Though the bank also makes savings accounts available to children, these accounts have no special features, are not actively marketed, and don’t make a significant contribution to the bank’s bottom line. Al Barid Bank can target the older youth segment well because it can use existing distribution channels to reach this large group of people.The bank believes that these savings products work together to enhance financial education, help make youth more attractive as employees, and fuels the future growth of the bank by recruiting young customers.
Costs and revenues
Ultimately, the three levels described above drive costs and revenues for FSPs. Some costs can be leveraged across segments. For example, marketing campaigns aimed at young people or specialized staff that has an affinity with youth can serve children and young adults relatively well. However, other costs,such as specialized outreach in schools or universities, is segment-specific.
On the revenue side, cross-selling additional financial products can work for older youth, in particular university students, young workers and young entrepreneurs, who may use consumer loans. For younger school children, revenues are generally negligible. Youth savings products typically have no or low fees and minimum balances. Providers with short-term horizons generally steer clear of this group unless it helps build their relationships with parents.
Our aim is for this framework, explained in a CGAP Focus Note, to influence decision-making and develop a better understanding of youth savings over time. As more financial institutions begin to enter the youth savings market, it can be improved and augmented by data. Some institutions may stay away for now, if they are neither institutionally ready nor aligned in their goals with the main levers for entering the market. The business case is dynamic and will evolve as more FSPs operate in competitive markets with long-term visions looking at the young people of today as tomorrow’s customers.
Targeting the youth is probably the utmost approach for all MFIs and financial institutions. FSPs' ignorance and intentional/sheer negation of the youth leads to sluggish expansion of financial services in most parts of Sub-Saharan Africa. The Kenya Post Bank efforts are sincerely commendable. There is certainly a trade-off between short term gains and long-term gains. Investment in youths pays off after passage of many years in some cases it may be ten years while in some particularly for those in colleges it may be less say four to five years. In Tanzania few FSPs converse with students and the youths in general on this matter. Most FSPs approach youth savings through their parents which might not at the end of the day attract the youth on reaching the bankable age of 18. The National Microfinance Bank (NMB) has of late launched its Chap-Chap account which enables youths in secondary schools to open and operate their own accounts and is initiating agent banking operations in some schools. It is sincerely an interesting focus in a country like Tanzania where the youths are normally subjected to stringent conditions for opening a bank account.
The Tanzanian context is also marred with restrictive legislation which not only limits youths' access and use financial services except through mobile money service operators [one wonders whether the law is really silent or the mobile phone companies are just applying their muscle!]. Even the Cooperative law which is deemed better suited to attract the youths limits entry into the cooperative to 18 years except for cooperatives at school which are not financial cooperatives.There is thus a need to continue encouraging FSPs to attract the youth. For MFIs this could be part of their social performance measure.