Yes, youth financial services can be sustainable for financial service providers, especially if they take a long-term, holistic view of sustainability which takes into account the growth of youth customers into loyal adult customers, and cross-selling opportunities to other family members.
To delve further into this question, CGAP has designed a framework for developing youth financial products in a more sustainable and inclusive manner. The framework considers three different levels which reflect the internal and external contexts of financial institutions - market, institution and segment – and analyzes different costs and revenues that affect the FSP’s decision-making process around offering savings products for young people.
This framework has been applied across different financial institutions worldwide. A CGAP study involving banks in Mongolia, Germany, and Nepal showed that the marketing and operational costs of offering banking products to children and youth were substantial compared to the revenues generated from offering these products. As a result, the banks struggled to cover the expenses of such products despite lower costs of client acquisition. However, the banks involved in the research took a long-term view, expecting to become sustainable and increase profits in the future as their clients become adult customers. They also saw the opportunity to increase profit by cross-selling products to the family members of young clients. However, despite the importance of the business case and sustainability, the banks’ social mission was their main reason for launching banking products for children and youth.
Findings from the UNCDF YouthStart program in Rwanda, Burkina Faso, and Malawi demonstrated that the business case is stronger in highly competitive environments, and is positively affected by stable, high GDP growth and low inflation. In addition, countries with a youth bulge, in particular urban youth, represent an untapped market for FSPs.
In terms of the financial viability of offering integrated financial services, studies in Mali and Ecuador demonstrated that institutions are financially sustainable as long as they maintain variable costs to a minimum, leverage higher profit margins from older youth, and cross-sell products to youth’s family and friends. Further, studies demonstrate that most of the financial institutions have the potential to achieve profitability within five years or less without grants, and even faster with financial support. Finally, other reports show that FSPs need to make a trade-off between greater profitability linked to products offered to older youth and the lower financial capacity of younger youth.