What Does the ‘Business Case’ for Youth Savings Really Mean?
"Providers designing and launching youth savings products are generally not making decisions based on complex financial models. This got me thinking about how we actually define the business case. Is it really about hard data or is it more about the strategic opportunities that CEOs of financial institutions see for pursuing young clients?"
The business case for youth savings is one of the most talked-about topics in the youth financial services space. There is tremendous interest from funders and youth practitioners to better understand whether youth savings can be a profitable product for financial service providers to offer. At CGAP, we are specifically looking at these questions within the YouthSave project, and I wanted to share some early thoughts.
The business case for youth savings has been widely interpreted to mean ‘the numbers’. I often get asked for hard data and research to show that youth savings can be a profitable product for institutions. Funnily enough, the people asking for these numbers are most often not financial service providers. Providers designing and launching youth savings products are generally not making decisions based on complex financial models. This got me thinking about how we actually define the business case. Is it really about hard data or is it more about the strategic opportunities that CEOs of financial institutions see for pursuing young clients?
The answer from preliminary conversations with senior management is that financial projections do not necessarily capture the larger strategic motivations for deciding to enter the youth market. For instance, in highly competitive local markets, financial institutions may want to find ways to acquire customers before their competitors do so. Alternatively, the institution could find that the average age of their customers is increasing. The institution would then like to find a way to bring younger customers into their bank. In both of these cases, offering a youth product makes strategic sense.
While the decisions to enter the market might be based on strategic motivations, the need for data still exists since institutions will need to prove profitability at some point. The ones that are successful in this space take a longer term view to profitability, looking beyond narrow product-specific metrics, and focusing instead on the customer lifetime profitability. They value customer loyalty and the opportunity to offer a suite of products over time above revenues generated from a single youth savings product considered in isolation.
Here is an interesting factoid: In developed countries, people are more likely to get divorced than to switch banks! If this experience holds up in developing countries, Subita, a 15 year old Nepalese girl, would stay with her bank when she buys her first house, sends her kids to school, and starts saving for her retirement – a valuable customer for the bank that gets her business. Research conducted by CGAP in 2010 on the business case for low-balance savings accounts adds further strength to the customer-lifetime profitability view. This research showed that while these accounts did not make money by themselves, they became profitable when the customers accessed other products over time.
These are some early thoughts, but there is a lot more rigorous research and interviews to be conducted to better understand the strategic rationale, as well as the on-the-ground experience, of providers offering youth savings products. Peeling the onion will offer new perspectives for other providers looking curiously at this space and wondering whether to step in. I encourage you to participate with your comments on what the ‘business case’ for youth savings could be.