Kids banking apps are certainly one of the fastest growing and most challenging fintech sub-sectors and product areas. How do you create a financial product for a 6-year-old who might not even know how to do simple maths yet? Applying an age-appropriate and playful design might be the quick answer. But, creating the visuals and functionalities is just the first piece of the puzzle. Next come compliance and meeting the Know Your Customer (KYC) requirements every financial provider needs to follow. And the question of when and how KYC should be performed.
Before we dive deep into the problem of implementing KYC in kids banking apps, let’s do a quick look at the overall state of the market category.
According to research by Ofcom, in 2020, 55% of all children aged 5-15 had their own smartphone and 61% their own tablet. So, the rapid emergence of digital financial products for the youngest segment of the population was a logical evolution. From providing a convenient way for parents to manage pocket money to helping children develop essential budgeting habits and skills, kids banking apps could not only serve as a practical money-management tool but also as a powerful financial literacy enabler.
Already, 61% of children in the UK between the ages of 10 and 15 use an app to manage their pocket money a survey by Finder.com has revealed. 64% of them are also keen to learn how to manage their money via an app from their account provider. In addition, over the last 5 years, Google search interest in the term “kids debit card” has grown 227%, with an increase of 42% between 2020 and 2021 alone. And the interest in children banking is only expected to grow.
Commenting on the results of Finder’s survey, Mark Brant, CEO of pocket money app nimbl, has noted “The future is cashless: many parents are recognising the value of inducting children to the world of digital money from an early stage, so we’re starting to see pocket money becoming increasingly digital. Both parents and children now expect digital pocket money apps and accounts to offer children the freedom to learn about their finances responsibly”.
A recent survey by the kid’s financial app, Greenlight, in collaboration with the National Financial Educators Council, has unveiled a similar trend in the US: “93% of teens believe they need financial knowledge and skills to achieve their life goals, and 97% of parents agree”.
Investment sentiment seems to also reflect the overall hype in the sector, with Greenlight, Step and Current collectively closing $580m at the beginning of 2021 alone. Although the exact size of the market is yet to be defined, Fintica has estimated a potential market value of more than $50bn worldwide for products aimed at children and teenagers which includes the tech for kids segment.
So far, the fintech research provider WhiteSight has identified more than 50 neo banks providing products and services targeted at an audience below the age of 18, with 40 of them focusing solely on the children and teen segments. In terms of region, Europe seems to be leading the way with nearly 50% of all child banking start-ups based in the old continent. Amongst the leading providers are Gimi (Sweden), HyperJar (UK), Go Henry (UK), PixPay (France), Current (US), and Greenlight (US).
Following the massive growth in the sector over the past couple of years, the kids banking sector is attracting more and more attention from both challengers and traditional financial players alike. On one side, we see challengers like GoHenry who have gone all in and focused solely on the kids banking category. On the other, we find well-established players and incumbents like Revolut and Nat West in the UK who have entered the space by developing their own kids banking offering (e.g., Revolut Junior) or by acquiring another fintech solution (e.g., Nat West Rooster).
Developing an effective financial product itself is already a challenging task, so creating a financial product for a kid who is yet to learn the real value of money requires some master design skills and art. In addition to considering and catering for kids’ unique user needs, perceptions and aspirations, designers will also have to look at compliance and KYC from a whole new perspective. In the following section, we’ve reviewed the two major KYC issues related to creating child banking products.
Typically to open a bank account, a customer will have to go through a KYC process that involves completing a number of security steps and checks like:
But in the case of opening a children bank account, the KYC examination will have to be carried out on the parent or guardian who is creating and funding the account rather than the child. At the time of opening the account, this might not seem like a problem. However, the issue might arise when the account holder’s child grows up or reaches the age of 18. The key question then is whether that grown-up user will have to go through KYC assessment too.
The quick adoption of kids banking apps has opened up a new opportunity for fraudsters to target the vulnerable youth user segment and recruit them for the so-called “money muling”. Europol defines a money mule as “a person who receives money from a third party in their bank account and transfers it to another one or takes it out in cash and gives it to someone else, obtaining a commission for it.”
A study by the Credit Industry Fraud Avoidance System (Cifas) found over 7,000 under-21s were knowingly or unknowingly taking part in money laundering in 2021 which is up 78% from the previous year.
Money muling is particularly hard to identify because the current way of detection puts the whole responsibility on the parents, expecting that the account user will notice any illicit activity and report it. Hence, navigating the increased risk of money laundering or “muling” is presenting yet another compliance challenge for providers in the sector.
According to Alex Richter, Head at PassFort, continuously monitoring risk and doing regular checks for suspicious activity can significantly help fight the use of kids banking products for money muling, with data automation technologies playing an integral role in the process.
In addition to adding an extra layer of compliance automation and data integration, kids banking providers can further look into implementing some UX design best practices to minimise any KYC-related constraints and issues. These include:
A very good example here is the UK-based money management app, HyperJar. In the image below, you can see that HyperJar requests only one key piece of information per screen and explicitly explains why certain personal information is being requested. To speed up the onboarding process, legal terms are also presented as links for users to click on as they desire. To make the onboarding even more efficient, the major configuration stages of the account (e.g., KYC verification, money deposit, card order) are not included in the initial sign-up process. Instead, they are optional and the user can opt to configure the account later.
To conclude, KYC is proving to be one of the major challenges for creating an effective kid’s banking product. Figuring out when KYC should be performed and adding an extra layer of security to protect youngsters from becoming money-laundering victims are just a couple of the issues providers should deal with. However, adopting advanced compliance automation solutions along with applying some key UX design principles can help significantly minimise the major KYC-related constraints and risks.