The Complex Teenage Financial Supply Chain
Banks that treat teenagers like young adults miss key challenges that differentiate the teen market from adults. But it may be too late for even challenger banks: Teens are hooked on payment apps.
Photo by Eliott Reyna on Unsplash
Lots of you are new subscribers — for which I’m very grateful - so I thought I would re-introduce myself. I’m an independent analyst & consultant & former Gartner analyst. I’ve worked in and covered the banking industry for over 2 decades. I write about digital banking in this newsletter - not to confirm what you know (and you are plenty smart!) but to give you a fresh perspective & analysis on the transformation that is —and isn’t happening - in the industry. For example, the first issue applied Rick Wilson’s latest book about US politics to digital banking transformation. Read the rest here.
I write this newsletter for people and companies who are trying to differentiate their banking software in an increasingly competitive market. That could be people who work at software companies currently developing banking software or people at vendors that want to move vertically into the banking market. It’s also for bankers and investors who want to know more about digital banking transformation strategies & the technologies that power them.
In my previous newsletter about teen challenger banks, I outlined the 4 reasons banks should not create banks for teenagers and covered the first reason:
1. Traditional demographic. The pursuit of the same old demographics in a digital world will not yield either disruptive products nor the results – customer acquisition - the bank seeks. – teenagers are a traditional demographic. Instead, digital banking solutions and bankers must adopt a Hidden Tribes framework to identify new customers and products/services.
2. Financial supply chain for teenagers (and children more generally) - The premise of a challenger bank for teens faces a different supply chain challenges than do other banks that target adult customers.
3. Teenage brains. Teenagers are not younger adults. Their brains are still developing.
4. Teenagers grow up.
In this issue, I cover the second reason: financial supply chain challenges
Financial Supply Chain Challenges for Teenagers
What do I mean by the term “financial supply chain for teenagers?” The financial supply chain in the context of teenagers and banking are all the pieces and parts required to acquire & onboard the customer: opening, funding and using a bank account.
The financial supply chain for adults and banking is different than that for teenagers, but it still has challenges. If I, as an adult, want to open a new bank account, all I need is the appropriate identification and some money to fund the account. I don’t have to ask anyone for permission. So, acquiring adult customers might be easy enough – just get them to open an account, right? Even with adult customer, attracting customers to open accounts is one thing. But getting that new adult customer to switch banks (maybe), or to use the new account – by linking a direct deposit to the account, paying bills and applying for additional products like a car loan or mortgage – is another.
The challenges in the financial supply chain of money – whether cash or electronic – are different and more complex for teenagers than that for adult customers. Here are some of the reasons why:
Parents are involved. It’s not enough to be cool app that all the kids want to download. Challenger banks for teens also have to convince the parents to open the account for the teenager too. In some countries, regulations require at least one parent or guardian to open the account with a teen who under the country’s age of majority (often 18). In some cases, the parent must also have an account at the same bank.
Variety of funding sources. Adults typically have one or two regular and dependable sources, such as an employer or government source, to make regular deposits that fund a bank account. The supply chain for teen money can have many sources including parents who provide allowances, gift sources (grandparents, friends, relatives), part-time jobs, and the government.
Teenagers don’t need a bank to send and receive money. This applies to anyone, of any age, of course, but if teenagers think digital first, why would they seek out a bank versus an app that their friends use – whether it’s Venmo or PayPal or Apple Pay or something else?
The reason why I believe it is difficult to overcome these supply chain challenges is that it seems almost to be a law of nature for teenagers to like what their parents do not and for parents to be skeptical of what their teens find to be cool. For example, do you really understand why your teen loves Snapchat when they can share photos via Instagram? So, yes, challenger bank apps appeal to teenagers. They have a better “customer experience.”
Challenger banks for teens also have to do two things:
Persuade the teen’s parent that their “old” bank is not sufficient for their teenager while at the same time being attractive to teenagers, that the challenger bank is as secure as the bank they (parents) already trust.
Attract all the teenager’s funding sources to the challenger bank. Teenagers often rely on parents or relatives for the majority of their funds – whether it is an allowance (or some other regular payment) or gifts from a grandparent or other relative or even friends. Some teenagers receive government benefits such as Social Security Survivor benefits in the US, until they are 18. Depending on the specific country, these funds are paid to a parent or guardian – not to the teen. Other teenagers have a part-time (or even full-time) job that provides funds. The mix of these funding sources depends not only on a wide variety of variables such as whether the parents give allowances, whether the teen is in school or employed, but also on other variables such as family, ethnic and national traditions. Many of these funding sources are not as reliable as those for adults (notwithstanding plant closures, pandemics, layoffs, etc.). For example, a teenager may quit a job to go on a summer vacation or to focus on school. A parent may withhold an allowance due to her own financial challenges or a punishment.
It may be too late: Teenagers are already hooked on payment apps
These challenges do not let traditional banks and credit unions off the hook. All of these challenges apply to traditional banks who want teenage customers. For these banks, the challenge is slightly different: teenagers have the tendency to look down on their parents’ style, way of doing things, and if you’re doing your job, the way you use your mobile phone. You have to convince teenagers that you can address these challenges.
Though your bank might think that challenger banks for teens won’t succeed, all banks look to younger (and younger) consumers as prospective customers now. For one thing, teens have money at their disposal. That means they will use payments services.
If banks give up in the face of all the challenges now, and leave the payments services on the table to the fintechs and challenger banks, you risk losing teen customers for a long time. While they may not choose a challenger bank, they will use banking services somewhere through embedded banking services or a payment fintechs. Payment fintechs, like Square, are adding banking transactions, products and services. These services will be key as they address the “aging out” of teen banking services.
Takeaways:
Here are a few actions banks and banking vendors can take to address these challenges and support teenagers:
Create a clear teen customer acquisition and onboarding strategy. To have any chance of overcoming these challenges, it is more important than ever that bankers to have a clear customer acquisition and onboarding strategy for teenagers (and thanks to Ted Brown CEO and founder of Digital Onboarding for clarifying this even more recently). It must be a strategy that specifically accounts for these challengers. Digital banking solutions, too, must also be flexible enough to enable banks to deploy these strategies.
Assume that every teenage customer may have a different set of needs. Yes, this goes back to what I wrote about hidden tribes of teenagers. But in addition to identifying hidden tribes, vendors and banks must be ready to handle all the permutations of funding sources, account opening and onboarding options. Just as you cannot make assumptions that apply to all teenagers, you can’t assume that all teenagers have a part time job or 2 parents living together in the same household. For banks, this will be a way to update your existing account opening and onboarding processes to make them responsive to all customer needs.
Solve problems that target the needs of the key points in the teenager financial supply chain. For example, FamZoo has been connecting children, chores, parents and money for many years now.
Expand your payments ecosystem to include existing P2P payment apps. Make it easy, easy for teenagers easy – not easy for a bank product manager easy – to adopt BEFORE they even need or use your mobile banking app.
Digital banking vendors must enable the bank to grow its partner ecosystem to include P2P fintechs. The fintechs that are important will depend on the location of the bank and the ever-changing roster of “what’s cool” to use. What a 17-year-old thinks is cool will likely be different than what a 14-year-old thinks is cool.
Don’t forget grandma and grandpa. Don’t forget both ends of the financial supply chain. For example, how easy is it for grandparents (who may not be your customers) to send payments to their grandchildren?
Increase transparency into the supply chain. For example, have you made access rules transparent to teenagers – they are used to instant access and probably don’t expect not to be able to use funds for several days until a payment clears. What is payment clearing anyway?
Banks that treat teenagers like young adults will miss key challenges that differentiate the broad market of teenagers from adults. While hidden tribes are important, ignoring these challenges – whether a vendor or bank – will underscore not just that you don’t “get teens” but that you don’t get adults either.
Finally, ignoring the importance of payments for teenagers may have even more dire consequences.
Me, Elsewhere
Think like a Challenger: How banks and credit unions can compete and win - I recently moderated this conversation on challenger banks with Bryan Clagett of Moven and Ted Brown of Digital Onboarding. And, yes, I talked about challenger banks for teenagers.
Does it Fit Me? The Next Step in Digital Banking Transformation
Digital banking transformation’s surprising secret for success in Entersekt’s ebook New Directions in Authentication
Yes, the 2 pieces were written for clients and they may ask you for information before you can download them. If you’re interested in collaborating with me, contact me at stessa@pivotassets.co.