Child Savings Accounts: Fad or Phenomenon at the Bottom of the Pyramid?

In the United States and many developed nations, banks offering savings to children as a means of social and economic inclusion and empowerment may seem tired tradition of the thrift era that has long passed. Gone are the days of widespread school banking programs once so common in the US. And in the very few developed nations where efforts to provide children social and/or economic opportunity through financial inclusion exist, they typically come in the form of social policy (UK's Child Trust Fund, Singapore's Baby Bonus, USA's ASPIRE Act). In developing nations, however, we're witnessing a wholly different phenomenon: financial institutions are, out of their own volition and with no push from the government, choosing to target the child market segment.

This week, East Africa Business Week newspaper published an interview with Stephen Mkweli, managing director of PostBank Uganda, to discuss the focus annual meeting of the Association of Savings Banks of East Africa (ABSEA) - Child Savings. Mr. Mkweli spends his interview extolling the virtues and benefits of child savings and inculcating a culture of savings among children at an early age. He states that, "The benefits of savings include the fact that the customer is assured of a brighter future since he/she can...own future by planning for it. It instills the discipline of financial planning ahead of time...and also increases the deposit base of the institutions and therefore avails the money for government to borrow for its developmental programmes." ABSEA banks plan to capture this special market segment by holding contests, offering piggybanks, and working with networks to expand the reach of the accounts.

By our account, ABSEA is not alone in its efforts to expand access to savings accounts for children. In 2007, the Global Assets Project researched dozens of financial institutions and non-profits who are offering specialized savings accounts targeted toward financially excluded and/or economically disadvantaged children (we call them Child Savings, Accounts, or CSAs). But with the likelihood of small and inconsistent deposits from such a population, the question remains: why?

In our recently released white paper, "Child Savings Accounts: Global Trends in Design and Practice," we review various reasons why different institutions are choosing to offer CSAs, as well as a variety of common features chosen in designing such products. While there is great variation in design based on the institutions purpose for offering the accounts, among the financial institutions we interviewed for this paper, there are some common threads for establishing a business case for CSAs. First, in the rush to "bank" the bottom of the pyramid, the child segment is seen as an important market niche. Not only is this a largely untapped market, but if retained, these children will likely become long-term clients of the financial institutions. Second, the financial competence they gain by early exposure to and habit of using savings services will make them more savvy users of the banks other products. The child's savings account may be a loss for the bank today, but does it mean greater market share and a more lucrative relationship with the client tomorrow?

To be sure, there are numerous other purposes beyond making a profit that institutions (though not necessarily commercial banks) give for offering such accounts, including economic opportunity, poverty reduction and social inclusion. And interestingly enough, Fred Ssewamala's research on specialized and targeted savings accounts toward poor and vulnerable children in Uganda has shown significant improvements in health and education outcomes, particularly in relation to an improved future orientation. The children with accounts have an outlook on life that children without savings don't (and likely can't) share. But this is a special kind of products, with features that most any bank could not reasonably offer without outside support or government subsidy.

So, whether this interest in child savings in developing countries is simply part of the gold rush to capture the bottom of the pyramid or is a sincere effort to provide, earlier in life, financial inclusion and opportunity to the excluded and vulnerable around the world, I watch this trend with interest and a cautious optimism. If they can get the product right, CSAs could be a new phenomenon in poverty reduction thru financial services. We need serious inquiry to find out if this is the case.

[More information on Child Savings Accounts and/or the research of Fred Ssewamala can be found on the Global Assets Project website]