Global Money Week allows us to shine a spotlight on the importance of financial inclusion for children and youth. The YouthSave consortium recently released a synthesis report on its large scale research experiment into formal savings among youth in the developing world. Youth take up an increasingly greater portion of the total population in the global South, but largely remain financially excluded. The report provides a much-needed evidence base to further the thinking on the benefits of providing youth with savings. However, many financial institutions will discover that setting up a savings product for youth in the developing world is extremely costly.
For reasons such as low or unstable account balances, frequent transactions, and an affordable and incentivizing fees and rewards scheme, operational expenses are high for youth savings accounts in developing countries. The uncertain nature of youth savings makes these deposits ill-suited for on-lending and therefore deprives financial institutions of a primary source of revenues. For youth savings to be viable, financial institutions must take different approaches to scaling up youth savings products in a sustainable manner.
The potential of mobile banking
Mobile technology has been heralded as the future for financial inclusion of the poor. Indeed, mobile banking can particularly offer microfinance institutions (MFIs) some significant cost reductions. Personnel and travel are important cost drivers for an MFI, due to its relatively strong client interaction. However, one example from a mobile banking MFI pilot by PlaNet Finance in South-East Asia shows how the MFI managed to reduce its travel costs for connecting with its savings clients by 79 per cent. Another MFI in Kenya has almost doubled its field staff caseload levels as customers do not need to be visited as often. Also education expenses may be reduced if mobile technology is used as a complementary channel for providing youth financial education.
The costs of setting up a mobile banking system are becoming increasingly within reach for MFIs. In a new research paper from Child and Youth Finance International (CYFI) we demonstrate how the design and implementation costs are approximately equal to the annual running costs of one single bank branch.
Continued challenges and developing solutions
However, mobile banking cannot be viewed as a magic solution for financial inclusion and the enhancement of financial capability. A mobile banking pilot evaluation by BRAC in Bangladesh illustrates some of the challenges ahead. Clients found mobile banking sometimes difficult to use and not in line with their financial needs. Others did not always have trust in the agent, system infrastructure or network coverage. Then there were those who simply did not feel comfortable with technology. What is the use of setting up a cost-reducing mobile banking system if people are reluctant to use it?
This is where youth savings products come into the picture. Mobile phone penetration rates in developing countries among youth aged 15-24 are generally higher than among the 25+. Youth are usually keen to test new innovations and are still receptive to - and quick to take up - substantial education in financial literacy and product usage. Youth fully familiarized with mobile banking can act as a gateway to educating and building trust among the less tech-savvy generations.
However, there are a few caveats that could limit a large-scale uptake among youth. Regulatory SIM registration requirements are in some countries increasingly limiting the scope for those below the age of majority to legally acquire a SIM card. This adds another layer to the often already stringent regulatory environments that exists concerning youth access to financial services.
Yet even under a favourable regulatory environment, the uptake of youth savings products cannot be guaranteed and will instead largely depend on their perceived relevance and how comfortable and satisfied youth are with using them. As new consumer financial protection concerns emerge, MFIs will need to gain great awareness of the distinct needs and vulnerabilities youth face depending on factors such as age, gender, socio-economic status, level of education, patterns of income and expenditure, financial and household responsibility and phone ownership. Particularly the poorest and most vulnerable youth may, for instance, share one phone with several relatives or friends, which raises important digital privacy issues. CYFI has defined general Child and Youth-Friendly Banking Principles to guide financial institutions in a youth-centered product design, including mobile services.
Providing youth savings through mobile phones will remain expensive. Previous business case analyses have argued that – through cross-selling other, profitable financial products to the family members and peers of youth clients – MFIs could somehow manage to keep youth savings products financially sustainable. However, the true value of youth clients may lie elsewhere. If properly executed, youth can become champions of a revolutionary mobile banking system. It would be a triple win for youth, MFIs and adult customers. Mobile banking starts with youth and Global Money Week provides an excellent opportunity to promote this cause.