Millennials and Gen Z are already prized markets for challenger banks. But competition is heating up in an increasingly crowded arena, so fintechs and investors are looking for even younger customers — including children who just started getting an allowance.
"There's this big fight for top-of-wallet, but we've also forgotten about the kids who have no wallet," Taylor Burton, co-founder of Till, a new challenger bank geared to children, told Protocol. "We're not just trying to put a kid's face on a debit card similar to putting a name on the back of a backpack. We're focusing on respecting these young people as the financial actors they are."
There are roughly 60 million kids under the age of 15 in the U.S., according to United Nations estimates. The American Institute of CPAs reported in 2019 that two-thirds of kids get an allowance averaging $30 a week. That's mostly spent, not saved.
Investors are backing this search for kids' cash. Till just raised $5 million. Greenlight, which launched in 2017, raised $260 million in an April round from investors led by Andreessen Horowitz, almost doubling its valuation from $1.2 billion to $2.3 billion. The same day Greenlight announced its fundraising, a new player, Step, which just launched its site in October, said it secured $100 million. The company, which has 1.5 million users, also named NBA star Steph Curry as one of its new investors.
"We're just at this point in the cycle where there's so much liquidity and people have gone after the same customer segment that it's just not profitable," Charlie Javice, founder and CEO of Frank, a student financial education company, told Protocol. "Students and young people are sexy and it's in vogue. ... [But] you have to go younger."
Companies like Greenlight, Step and Till are "even targeting those allowance-based [kids], which is definitely very early," she said.
Going early is a smart strategy given that "one of the greatest forces in financial services is inertia," and consumers tend to stick with the bank or financial institution they signed up with initially, said Tim Ranzetta, co-founder of Next Gen Personal Finance, a nonprofit that seeks to expand personal finance education among middle- and high-school students in the U.S. These startups believe that "if we can capture them early, we can grow with them," he said.
Step CEO CJ MacDonald opened his first bank account with Wells Fargo when he was 14 years old. "That is still my main account today," he told Protocol, noting that a typical bank account in the U.S. remains in use for about 17 years.
Joanna Drake, managing partner at Magnify Ventures, another Till investor, said these startups are targeting an enormous market that "obviously gets refreshed every year," she told Protocol. Burton estimated that the market covers roughly 50 million young people in the U.S., representing $400 billion in spending power.
Follow the money
Most of the startups offer digital banking accounts tied to debit cards. Parents open the accounts with their kids and use apps to disburse allowances as well as track and even set limits on the way their children are spending the money.
"You could say, 'Here's $20 for Dave and Busters,' or 'Here's $10 for Starbucks,'" Tim Sheehan, CEO of Greenlight, said. Greenlight also has a tool that even allows parents to reward kids for doing their chores and for children to monitor their savings.
Ranzetta of Next Gen Personal Finance said the startups are helping fill an important need in the U.S., where young people typically lack basic forms of personal finance education. Roughly 80% of the 15 million high school graduates each year never had a chance to take formal personal finance courses, he said.
Sheehan started Greenlight because he wanted an easier way to give his kids cash for field trips instead of doing last-minute runs to an ATM or having them borrow from friends. He said giving children an early taste of what it's like to save, spend and even invest is helping them become more financially literate. "When the kids are young, you want to teach them that money doesn't grow on trees," Sheehan told Protocol.
Investors see the opportunity in that journey. Peggy Mangot, a Till investor, said there has also been a "greater appetite" in the venture capital community for business models "that start with low dollar value and grow over time." That strategy is gaining traction at a time when it's also becoming harder to find and win new banking customers.
"The cost of acquisition for traditional customers is just so insane today," Javice said. "It all comes down to unit economics, how cheaply you can acquire a customer. Because at the end of the day, the products are not differentiated. A bank account is a bank account. A feature is a feature."
Step, Greenlight and Till declined to disclose their cost of acquiring customers, which Javice said typically ranges from $50 to $400 per customer in banking, with $200 as the average in retail banking. But Burton, the Till co-founder, said his startup's cost is closer to the low end of that range.
Greenlight, which has 3 million users, is considered one of the trailblazers in this market. But investors were initially skeptical of Greenlight because the startup charges families a monthly fee of $4.99, said Adam Shapiro, partner and co-founder of investment firm Klaros Group. Investors "didn't believe that people would pay fees," he told Protocol.
But parents were willing to pay, driving Greenlight's growth and turning the spotlight on digital banking for children. "The fact that people were willing to pay for that sort of has spurred a lot of growth in the sector," Shapiro said.
Now, new players, including Step and Till, are trying a different strategy by doing away with membership fees and relying mainly on interchange fees from debit cards.
"Good luck with that," said Shapiro, who doubts the strategy would work. Teens don't spend enough to generate enough interchange, the fee paid by merchants every time the debit card is used. The fee, which is roughly 21 cents plus 0.5% of the transaction value, is split between the card-issuing bank and the fintech startup.
MacDonald of Step disagrees, arguing that teens "spend billions of dollars a year." Since launching six months ago, Step has been adding up to 10,000 accounts a day and now has a million and half users, the company said, also noting that nearly 90% of its teen users say Step is their first bank account.
Javice of Frank said the startups that offer no-fee banking accounts are clearly hoping to eventually "upsell credit products or different fee-based products." Till's game plan is to eventually "introduce" a young client "to an adult institution" offering other products such as student and auto loans, Burton said: "We'll make an origination fee on that interaction."
Because they are targeting children, these startups must navigate regulations meant to protect minors, especially the rules under the Children's Online Privacy Protection Act. State laws on deposit accounts for minors vary considerably. How these startups evolve their business models will likely also draw scrutiny.
Ranzetta said regulators and advocates are likely to focus on "dark patterns," and whether these startups are "encouraging the right behaviors."
Javice said there will likely be a focus on how they add new products or change the way they make money. "I don't think no-fee bank accounts can go wrong, but if they sneakily start adding in features that have fees or subscriptions that are auto-renew or charge interest rates that are kind of hidden, that's when things go wrong."
"You just have to have a heightened level of awareness that this is not a nonprofit," she said. "They will make money off of you at some point."
