The market for financial products that teach kids about budgeting, saving and spending has opened up massively. So, how does KYC for these types of digital financial services work? Let’s take a look…
Size of the playing field
The market for children’s financial products is huge and growing fast. It makes sense when, according to Ofcom research, in 2020, 55% of all children aged 5-15 had their own smartphone and 61% their own tablet. The evolution to the first stages of financial independence through a digital financial product makes sense.
Giving young people access to controlled amounts of money for spending and saving via their phone or a card can be a great way to learn about budgeting, saving and financial management.
Fintica estimates a potential market value of more than $50 billion worldwide for products aimed at children and teenagers. This takes into account retail tech for kids and the market includes a range of apps such as those for financial education, digital pocket money, trading and money-for-chores.
There’s been a rise in the popularity of subscription-based financial products for children. Most of these services allow parents or guardians to set spending limits and some receiving limits. And with this comes the question of KYC compliance. Who is due diligence performed on? When does KYC happen? And how is risk monitored?
Some of the players
But first the players…
One key player in this space is Rooster, which allows cards to be issued to children over the age of eight. The money can be stored in different “pots” – Spend, Save and Give – and the money in the Spend pot can be used on the card. This means parents and guardians can predetermine how much money the child spends on the card. For added security, with Rooster, the card generates a new CVV code every time a payment is made.
One of the biggest competitors, GoHenry, allows parents to control up to four child accounts from one app, complete with prepaid and customizable Visa debit cards. The parent or guardian loads funds onto their side of the account, which can then be used to generate a regular allowance to the child or children or it can be used to make one-off payments.
HyperJar says it is the UK’s first 100% free money app with prepaid card for kids aged six to 17. So far it has no monthly subscription costs and no fees for transferring money. It also issues a free prepaid, glow-in-the-dark debit card and no fees when paying in other currencies (though currently children can’t withdraw money from an ATM using this card). HyperJar allows parents to setup the account and add children thereafter.
Gimi helps parents and children keep on top of allowances and chores via a virtual piggy bank, with defined rewards for specific tasks – similar to GoHenry – and it also supplies financial education in the form of earning, saving and spending lessons along the way.
Old game, new rules
There might be a proliferation of financial products that can be managed from a phone and accessed via a card, but traditional banking has always offered accounts to children. Who can remember the famous Natwest pigs from the 1980s?
In the case of a good old bank account, a child becomes a part of the compliance process. Currently, a child has to be at least 11 years old to open their own bank account and some bank accounts for children have a higher minimum age.
Usually, a parent or guardian will need to be present to set up a bank account for a child – unless that child is aged 16 or above. Some banks offer separate accounts for teenagers with extra features that aren’t present on a younger child’s account.
To set up a bank account for a child in the UK, you usually need to provide two identification documents, such as a name ID (passport or birth certificate) and address ID (these can be in the parent’s name if the child lives with the adult).
This is a necessary part of Know Your Customer (KYC) to ensure no money laundering is taking place through a tax-free account. In fact, the FT reports a rise in children being recruited as “money mules”, with fraudsters encouraging them to open new accounts for cash. This sort of crime has risen during the pandemic.
KYC is a standard part of any financial management. It allows banks and financial services firms to verify customers and their risk profiles and to identify PEPs (politically exposed person), and sanctions, which ultimately could lead to off-boarding.
However, for many of the newer, digital financial products, KYC isn’t carried out on the child at all i.e. the person receiving or using the prepaid card, instead KYC is carried out on the parent or guardian who is subscribing to the product and funding the card.
The subscriber i.e. the parent or guardian, is the person who goes through a due diligence process. This involves checking their ID and address details to verify they are legitimate. In most instances, the risks are considered to be low and the KYC is relatively straightforward.
Pitching a curveball
But, what happens when the subscriber’s child grows up or reaches 18? Does that individual then need to go through KYC? The answer is, probably not.
With many of the new digital financial products for children, the account is allowed to carry on as long as the subscription is paid, regardless of whether the child is now an adult. The child could – for instance – be a student and still need access to the bank of mum and dad.
It could be argued, however, that there is a risk posed at this point to the financial institution. Potentially they have a fully grown adult receiving funds via an app or prepaid card without them having gone through a KYC process. There isn’t a legal requirement for KYC to take place, and because it’s assumed they are a child or dependent the perceived risk is low.
There is a possibility this opens an avenue for money laundering, particularly if children have become adults with the natural passage of time. It’s perhaps time to consider a stage in the KYC process that accounts for this and to do additional risk monitoring. Adding this step would put in place processes and decision checkpoints to ensure ongoing reviews that may help avoid risk and identify any suspicious activity taking place on an account.
Everyone’s a winner
RegTech solutions, like PassFort’s, can automate and manage any kind of KYC process. The platform can be configured to onboard and monitor risk for any product or customer, whether kids, adults or something in between.
The software can also build flags into an automated compliance process to, for instance, highlight when a child turns 18. Or re-run checks to perform ongoing monitoring of risk levels against a customer profile.
That way whether you are a high street bank or a digital provider, you can be more sure that the adorable, conker-collecting kid you thought you knew at 11 hasn’t transformed into a criminal mastermind at age 18.
If you would like to talk to PassFort about automating a KYC process for your product, please get in touch anytime – they’ll meet you at the swings, you can contact them on the Batphone or just email – whatever.