Will PSD2 and Open Banking impact the Under 18/Youth Banking market?
A consumer survey in 2014 by the UK’s Competition and Markets Authority (CMA) showed that 37% of consumers had been with their main Account Servicing PSP for more than 20 years. 57% of the consumers in the survey had been with their main Account Servicing PSP for more than 10 years. We can broadly assume that the same customer retention rates hold true across the entire European Economic Area, the scope area for PSD2.
It is not clear whether the CMA survey question started the clock for the 10 years or 20 years of retention with a single Account Servicing PSP at the point when the consumer opened a fully featured Payment Account designed for an adult or a reduced functionality account for a child. However, we can assume that a very large number of bank customers opened their first account as a child and did not switch suppliers until adulthood, if they switched suppliers at all. It is reasonable to assume that these very long periods of customer retention often started in childhood.
The first question we can ask about PSD2/Open Banking and the Youth market is whether any of the popular non-bank brands in this market segment might be attracted to the increased opportunity? The UK market has good sample data on the preferred brands for children aged 7 to 15. The top 10 brands are Walkers Crisps, The Simpsons, McDonalds, Coca Cola, Nintendo, YouTube, Maltesers, Haribo, Cadbury and Apple. We can probably eliminate the confectionary brands, as being unlikely to see Open Banking as a diversification/increased share of wallet opportunity. While “Bank of The Simpsons” has instant appeal to children of all ages, this brand also an unlikely Financial Services market entrant (the potential appointment of Chief Wiggum as Compliance Officer could also be grounds for concern).
The “tech platform” brands focused on gaming that appear at the upper end in the Youth Brand Rankings are significantly more likely to take an interest in the financial services industry. These platforms are already taking some margin from traditional #banks, in the form of cash float. Many of these youth gaming platforms have a “wallet feature”, where value transfers can be accepted from the mainstream payment platforms. In the youth market segment, there is a flow from the “Bank of Mum and Dad” through a Card platform into the in-game/in-platform wallet for youth gaming. Does this provide a starting point for a wider, life-long financial service? Nintendo seems constrained to be primarily a youth brand. Microsoft has a presence but through a subsidiary brand (Xbox). However, Apple, Facebook and Google have brand penetration in both the youth market and onwards into the older market segments.
Children in the 7 to 15 age bracket can have very active digital and social media lives. However, it is rare that they have active, self-managed and trackable financial lives in their own capacity. The “Bank of Mum and Dad” is usually the major donor, day-to-day creditor, conduct regulator and lender of last resort. Youthful account holders typically live at home, so they don’t pay rent or buy provisions. They typically don’t have a car nor pay utility bills. They don’t insure themselves nor have significant property to be insured. Their mobile credit top ups may be the mainstay of their simple expenditure patterns.
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PSD2 holds a broad promise of making financial behaviour data available from payment accounts to fuel competition and innovation. While youthful consumers may leave a rich footprint of behavioural data and preferences directly on social media, the “Bank of Mum and Dad” probably contains and conceals most of the the financial transactions that benefit these younger economic actors.
That said, even though the routine day-to-day account activity level is low, this does not mean that this age bracket does not have financial value. Children can be regular savers. Many youth bank accounts are likely to be savings accounts, rather than a Payment Account as defined by PSD2. PSD2 defines a Payment Account as an account held in the name of one or more payment service users which is used for the execution of payment transactions. The child who is the account holder may receive lump sum payments or recurring payments from a parent into the account, but this typically does not qualify the child as a payer using the account for a payments service. The number of savings accounts in this market segment sharply reduces the potential scope of PSD2 and reduces the addressable market for non-banks.
Nevertheless, again using the UK as a benchmark market, there are accounts for children that are used for payments rather than savings. From the age of 11, accounts are available that offer Debit Cards, Cash Cards, Direct Debits and Standing Orders. These meet the strict PSD2 definition of “Payment Account” but there is no certainty that these accounts are accessible online to the account holders. Articles 66 and 67 of PSD2 grants the customer of an Account Servicing PSP the right to use a Third Party Payment Provider (TPP) only if the payment account is “accessible online”. Many accounts for children are not accessible online. Perhaps PSD2 rules will prompt banks to ensure that they stay offline. In some cases, the child’s parent can view the account on their own Online Banking service, but they do not have a contractual right to be the payer on that account.
Aside from the low levels of financial activity in these accounts, the service providers smoothly and automatically move this youthful population through the stages of the lifecycle. The Youth Banking segment sets a pattern that attracts the attention of Competition Authorities because of concerns about “adverse effects on competition”. Bank accounts for children are like accounts for adults in that they have no contract end date. Competition Authorities can view this as a “lack of trigger points”, which means customers are not required periodically to consider if their payment account is best for them.
It is commonplace in this market segment for Account Servicing PSPs to “auto-convert” the account service to the next payment account at the next stage of the lifecycle. This means that a child can open an account aged 9 with features and benefits aimed at 7-14 years. They do not close this account when they become ineligible by age to use the features and benefits of the 7-14 account. The Account Servicing PSP will typically and automatically auto-covert this service into the 15-18 account when that birthday occurs; the same auto-convert process triggers a change to perhaps a “Student” account at age 19.
This “auto-convert” process can be seen as making the customer very passive in their engagement with the provider. One of the remedies to this lack of “trigger points” being considered by Competition Authorities is a “prompt” to customers to review their payment account provider at times when they may have a higher propensity to shop around. There will be much discussion on the potential effectiveness and timing of prompts to customers; the content of these messages; their source; and the medium of their delivery. The suitable times for these “prompts” being considered by Competition Authorities include an IT breakdown, a major dispute between a provider and a customer, a material change in the accounts terms and conditions, a branch closure or the expiry of a free banking period. Interestingly, Competition Authorities have also cited a customer’s transition from a young person’s or student account to an adult account as a good time to prompt some shopping around.
Banks may face a Conduct Risk dilemma on auto-converting Under 18 accounts to fully featured payment accounts following the implementation of the EU Payment Accounts Directive. Will banks still be able to auto-convert to a fully featured and full fees Payment Account at a certain age and ignore the potential suitability of the new “Payment Account with basic features” being implemented under the Payment Accounts Directive?
In crude conclusion, PSD2 and Open Banking may not have much impact on the Under 18/Youth market segment. Many of the strongest Youth brands are not financial in nature. Younger customers may like Apple, Google and Facebook, but their youthful financial lives are effectively managed by their parents. Banks conveniently and automatically transition the youthful customers through the life stages to fully fledged Payment Accounts, leaving few triggers to prompt the adoption of a non-bank alternative. Accounts for younger people can be savings accounts rather than payment accounts, moving them outside PSD2 and Open Banking. Even if they are payment accounts, they may not be accessible online, which is also outside PSD2 scope.
The PSD2 APIs seem far more likely to be a source of value for new competitors when consumer incomes become strong and their expenditure becomes complex. Highly active payment accounts for mature adults could show significant and diverse sources of income, which indicate a demand for savings, investments, mortgages and home improvements. The same accounts will show significant and diverse expenditure on homes, travel, cars, utilities, insurance and household expenses. The slim pickings of data from the Youth market would suggest that traditional banks will retain a very strong position in this segment. However, the long-term endowment value of this Youth market position for traditional banks could have been sharply reduced by PSD2. An Account Servicing PSP could now spend 20 years servicing a low value Payment Account from age 10, only to find a new competitor accessing data through PSD2 APIs and scooping a valuable pot of high value transactions at age 30.
[linkedinbadge URL=”https://www.linkedin.com/in/paulrohan” connections=”off” mode=”icon” liname=”Paul Rohan”] , the author of this post, is also author of “PSD2 in Plain English”.
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