The Business Case for Youth Financial Services

I just read this article on youth financial services by Ruth Dueck-Mbeba, very insightful! It first appeared on the Young Africa Works blog.

yaw-logo-webThere are an estimated 1.8 billion people in the world between the ages of 15 and 24, and most of them live in developing countries. Through the work of our partners, The MasterCard Foundation has learned that young people around the world are financially active, and that they can and do save. Through these programs, more than 820,000 young people to date have accessed savings services and nearly 130,000 have borrowed for education, emergencies or small businesses.

In the near future, these young people will be adults in need of financial services as they continue their education, start families, enter employment or start and grow their businesses. Offering youth formal financial services early in life, especially savings accounts, is likely to pay off for financial service providers (FSPs) as youth become adults who need other services, and who are comfortable in the formal financial services environment.

The formal financial sector offers the most scalable and sustainable solutions for providing access to finance to the most clients. However, few commercial financial service providers target young people as a unique customer segment. The challenge that many banks and financial service providers (FSPs) face, is to weigh the strategic trade-offs  of starting with low-balances and often inactive savings accounts held by young people – which will not be profitable for a very long period – with more lucrative, short-term opportunities, particularly in dynamic markets. How do FSPs address short-term with long-term opportunities and trade-offs?

In partnership with The MasterCard Foundation, YouthSave was created to answer a number of questions about youth savings accounts for young people between the ages of 12 and 18 by conducting market research, developing unique products, piloting and rolling out products and documenting learning. YouthSave was established as a consortium of FSPs, research partners, and several organizations including Save the Children, the Center for Social Development, New America and Consultative Group to Assist the Poor (CGAP) CGAP’s role was to undertake analysis on the specific question: Is there a “business case” for youth savings accounts?

YouthSave wanted to know what combination of product and service characteristics and marketing strategies can lead to profitability, sustainability and commercial adoption of youth savings accounts among financial institutions. CGAP produced a Business Case Framework for Youth Savings that lays out a structured way in which to think about building the business case. It considers the contextual, market and institutional factors that affect the decision to serve young people sustainably. The framework also considers the cost and revenue factors that affect the commercial “break-even point” of a specific youth savings product (this is the quantitative measure to determine if there is a viable, commercial means to provide a particular product or service). Because the framework can be customized to individual institutions’ context and interests, it can serve as a strategic tool for analyzing the profitability of offering youth savings.

The framework concludes that there is no single answer to whether there is a business case for youth savings across different contexts at different points in time. A more practical approach is to determine what drives value for FSPs offering savings products to youth. What factors at the market, institutional, and segment levels make youth financial services an attractive proposition? A sustainable business case for youth savings will rely on an institution’s ability to balance the costs and revenues of this product offering, and do that over the life cycle of the client, not just the short-term.

In the YouthSave partnership, analysis confirmed that there is no short- or medium-term profitability for serving young people with low-balance savings accounts using traditional branch-based banking models. Although the YouthSave project did not explore other technology-enabled models, we did learn valuable insights on how to build a business case for financial service providers regardless of the model. One key factor is time. It is important to understand how a financial services provider builds value for its future customers and how it creates life-time loyalty, under what market conditions and with which institutional capacities. The business case is also highly influenced by the enabling environment, such as national financial inclusion, education programs or the legal age to open a savings account, and the maturity and competitiveness of a market. More competitive markets often provide an opportunity for FSPs to target a niche customer segment, such as youth.

The Young Africa Works Summit will feature a break out session entitled “Increasing Economic Opportunities for Youth through Access to Finance: Building the Business Case.” This session will probe business case analyses from three FSPs participating in UNCDF’s YouthStart program, another partnership with The MasterCard Foundation. The YouthStart program tested youth financial service products with ten FSPs in eight countries in Sub-Saharan Africa.

The break out session will be offered twice during the Summit and provide the opportunity to hear directly from the FSPs, YouthStart and YouthSave colleagues on their learning and experiences. We encourage you to download the CGAP Business Case Framework for Youth Savings publication to learn more.