To what extent does having a bank account while still a minor— without parental oversight or control of other guardians — influence one's life? This is one of the principle questions answered by research conducted by Carly Urban of the University of Montana and selected by the BBVA Center for Financial Education and Capability during the first installment of the BBVA EduFin Research Grants.
"I just recently got a job and I obviously need some type of savings or checking account but I want it completely out of my parents’ reach.” This statement, which encapsulates how many young people feel as they try to assert control over how they manage their finances, was published in a personal finance forum on the online social platform, Reddit.com, and subsequently collected by Carly Urban and her team as part of their research, “Banking on the Future: Minor-owned Accounts and Financial Inclusion.”
In the United States, some state laws allow minors to have their own, non-custodial bank accounts. Urban's research is the first of its kind to study how having legal control over a bank account as a minor impacts financial inclusion, if these laws work to bring people into the banking system earlier, and if the benefits of early financial inclusion persist in the long term.
Pros and Cons
The study starts off presenting three advantages that having complete control over a bank account gives young people:
- It is a natural counterpart to employment: it allows young people to develop a savings habit; they learn how to use financial products and save what they earn.
- It emphasizes the individual: having autonomy over their bank accounts, minors will manage their money and learn about finance in a hands-on, practical way. For example: if a bank charges a penalty for a late invoice payment, young people will learn how important it is to keep an eye on the state of their finances to be sure they always have sufficient funds. This learning-through-experience represents an improvement to their financial skills.
- It nurtures a relationship of trust with financial institutions: young people who from an early age have a direct relationship with these kinds of institutions tend to trust them more; consequently, it is easier for them to access different financial products in the short, medium, and long term.
Young people who generate the demand for these kinds of bank accounts — and those who benefit in the long term — are generally those who start work at a young age, who don't pursue higher education, and who become financially independent earlier than those who go to university. But Urban and her team have discovered that, although state legislation is important in initiating young people's involvement in the banking system, “its influence begins to fade away when the individual reaches 29.” The conclusion is that these laws attract young people’s attention, but only during a determined period of time.
In the United States, only entities that are chartered by the state can provide accounts to minors. The study assesses whether the approval of these laws alters the banking landscape in a specific area, reflecting a change in the number of banks with state or federal authorization. The conclusion is clear: "We found no evidence that the policy substantially changes the supply of federal or state authorized banks in a region.”
It is possible that this is explained by the fact that accounts targeting young people “are not an attractive product option” for the banks, which then decide to keep offering only joint or custodial accounts. The reason may be due to the fact that "it is unlikely that accounts for minors generate much revenue, and they could actually cause the financial institution to incur costs.” Nonetheless, the study explains that in the long run this type of product could be advantageous to both the bank and the young customer.
Young people represent a financially vulnerable segment. Urban’s research explains that they tend to have difficulty raising money to deal with emergency situations; they often take out loans with high interest rates, and generally they do not actively participate in the banking system, which in turn translates into lost opportunities: "Checking and savings accounts are important for a young person in terms of day-to-day financial management, where having an account allows a young person to deposit paychecks, transfer funds and smooth consumption.”
Active participation in the banking system is a boost to young people's financial education. "Offering more opportunities for minors to independently engage in financial services could be supportive of later-life financial wellbeing.” Urban's research also confirms that young people who have had contact with a financial institution from an early age, will have a better credit history in the future. "Account access is important for making financial decisions.” Because state laws facilitate young people's access to their own bank accounts, young people who have accounts are less likely to seek out short term, high interest borrowing options like payday loans or services offered by pawnshops.
This study confirms the results of the OECD PISA 2015 study, which confirmed that, in certain countries, having a bank account is associated with a higher score in financial education. The study reveals that performance in financial education and maintaining a bank account are strongly related to socioeconomic status. In countries like Australia, Belgium, Canada, Italy, the Netherlands, Spain, and the United States, students who had a bank account received better results in financial education than students without a bank account in a similar socioeconomic position.
A relationship between young people and banking institutions could be a win-win. On one hand, as Urban’s research explains, banks have extra motivation to provide accounts to the young because the relationship with their youngest customers could be far-reaching. Furthermore, the study points out that banks could benefit from various family generations of customers: it has been proven that young people tend to open accounts in the same banks as their parents. On the other hand, allowing minors, “to gain experiences early in life, learning-by-doing, they may be better prepared to manage liquidity, plan for shortfalls, and use financial products to smooth consumption.” These factors influence a future with better opportunities and financial peace of mind.
If you want to read the complete study published by the BBVA Center for Financial Education and Capability, click here.