Is There a Business Case for Youth Savers?

Many MFIs may well ask themselves why they should make any special effort to serve youth savers. Youth savers may have smaller savings balances, take fewer loans, and use other financial products to a lesser extent than the average MFI client. In such cases, the business case for youth savers hinges critically on the future evolution of the youth savers. While one can never be sure of the future, it may be illuminating to examine immediately preceding past trends for clues about what the future might hold for today’s youth savers.

Consider, for example, youth who are 12-18 today. In 8 years, they will be 20-26 and many may be salaried employees or have their own businesses. They may be aggressively saving to start a family or business. Or they may already have a family or business and a greatly increased need for a personal or business loan. If the MFI served their financial needs well when they were young and still offers competitive financial services today, many former youth savers may well stick with the same MFI to address their now expanded financial services needs.

Moreover, young people with a greater ability to plan for the future may save more to start and expand a business, plan for a family, and meet other needs. And they may become more responsible credit clients. As noted in the 31 August 2010 blog on this website:

Research on the brain shows that starting at around age 11 and ending at age 24, the brain, if ‘exercised’ properly, develops the vital ability to plan and set goals. This fact has inspired Making Cents to investigate how to serve youth with financial services at a time when their brains are ripe for development and show the greatest potential to plan for a better future.

To see how young microfinance savers have evolved in the recent past, we might undertake a data gathering exercise for youth savers along the lines of a similar exercise that Xavier Martín and I developed for small savers, Is There a Business Case for Small Savers?.

In order to allow enough time for youth savers to adequately mature into adults, this exercise should likely be limited to MFIs that have been offering savings accounts to youth for at least 5 years and preferably for 8-10 years or longer. Moreover, the MFI must be able to access these data and match the older and current data on an individual client basis (typically by using a unique client ID number).

To begin, we would ask a MFI that meets these criteria to identify all depositors by age, say 8 years ago. Next, we segment these depositors into youth and non-youth savers as of that time. We would then look at key indicators among youth and non-youth clients, both 8 years ago and in the current year, such as: the average size and frequency of deposits, the number and size of their loans (and any other important cross-sold products), client retention rates, and delinquency rates.

Analysis of these data could indicate whether the average youth saver is likely to become a client whose profitability to the MFI is above that of the average MFI client. For example, analysis may show that while youth savers don’t provide much savings or take many loans as youths, they are loyal clients who disproportionately stay with the MFI, and whose early savings habits prove to be a good indicator of clients who later: have larger deposits than average, take more and larger loans than average, and repay their loans at above average rates. If the MFI wished to carry the exercise further, it could estimate the profitability levels of both groups of current MFI clients – those who are youth savers now and those who were youth savers 8 years ago – employing the principles given in the Westley-Martín paper. This would enable the MFI to see if future profits would likely be sufficient to justify any initial losses it may incur in serving youth savers.

On the other hand, the comparison of key indicators 8 years ago versus today may show that youth savers are not more loyal than the average MFI client or that they aren’t likely to evolve into clients who provide savings and take loans at above average rates and sizes. Though disappointing, this is still important strategic information for the MFI to have. It may lead the MFI, for example, to look for subgroups of youth savers who may be or become particularly profitable (for example, children of entrepreneurs, youth from rural areas or other regions with above average savings rates, or youth reached through lower-cost savings programs such as those based in schools). Such results may also encourage MFIs to more intentionally design appropriate youth savings products to encourage greater savings at a young age (for example, through raffles or prizes) or to experiment with different delivery mechanisms that reduce costs or use the encouragement of peers to increase savings levels (such as school-based savings programs). Finally, for both MFIs and policymakers convinced of the importance of youth savings, these results may suggest the need for financial education or smart subsidy schemes in order to build more of a culture of saving among youth.

Is there a business case for youth savers? In spite of a growing interest in youth-inclusive savings products and features, this question remains largely unanswered. Going forward, I urge microfinance institutions, banks, youth serving organizations, policy-makers, and donors, alike, to invest in the consideration of this question, in the collection and analysis of the data necessary to answer how to best provide young people with savings products.