Youth Savings Accounts: Good News on the Regulatory Front

Thursday, March 5, 2015

So far, it seems like 2015 is shaping up to be a pretty good year for children's financial inclusion. One of the recent developments in support of children's financial inclusion came last week when federally-insured depository institutions like banks and credit unions received new guidance1 from regulators that encouraged the development and implementation of children's savings account (CSA) programs.2 Moments such as these offer hope that these institutions will pay more attention to servicing young customers, given that they otherwise appear to have little incentive to open small-dollar accounts for children that often cost more to administer than they earn in profit. Lack of evidence of a "business case" is frequently considered one of the obstacles to wider adoption of CSAs by these financial institutions; though, our research at AEDI finds that these small-dollar accounts may serve to establish children's early relationships with financial institutions, developing their capabilities as potential future investors who accumulate savings and diversify their portfolios and perhaps becoming profitable customers for financial institutions in the long run.

Out of all the guidance provided to financial institutions, three points have immediate relevancy to youth financial inclusion. First, it is possible for children (for example, minors under the age of 18) to open a savings account without naming a parent or guardian as a custodian; however, this varies depending on states' legal definitions of "minor" and their laws governing the legal capacity of children to enter into a contract (as would be the case with opening a savings account). However, the child who opens the account becomes the institution's customer; otherwise, the customer is the parent or guardian who is listed as the account custodian. This guidance may make it possible for children to open CSAs of their own and under the direct protection of the institutions, without making their savings vulnerable to withdrawals by parents or guardians.


Second, while institutions must specify how they verify the identification of their customers, two options for children may be their school identification cards or independent verification obtained from another source. A student identification card may be especially helpful for opening a savings account, given that children may not have or have access to common forms of identification like social security numbers, driver's licenses, or taxpayer identification numbers. While an identity verified "from another source" is somewhat abstract, it is reasonable to consider that case managers, social workers, or probation officers could verify the identities of children in foster care or juvenile justice systems (or other vulnerable children) who might lack all common forms of identification and would otherwise be blocked from opening a savings account, for example. This guidance makes it possible for institutions to offer CSAs to young customers and to adhere to customer identification program requirements.

Third, CSA programs may be considered for Community Reinvestment Act (CRA) credits—credits that incentivize financial institutions' service of low- and moderate-income customers. This means that these institutions can receive CRA credits when they partner with school districts whose student bodies have a majority eligible to receive free- or reduced-price lunches. We learned about the importance of CRA credits during our research with Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP), finding that some GEAR UP programs' attempts to partner with federally-insured depository institutions could have been more successful if institutions' efforts were incentivized through CRA credits.

We applaud federal regulators for taking notice of CSAs and for providing this guidance to financial institutions. We look forward to seeing how this guidance may translate into the actual development and implementation of CSA programs and to discovering what other developments are in store for children's financial inclusion in 2015.

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