The market for financial products that teach kids about budgeting, saving, and spending has opened up massively. So, how does KYC for these types of digital financial services work? Let's take a look...
The market for children’s financial products is huge and growing fast. It makes sense when, according to Ofcom research that suggested in 2024 "nearly a quarter of UK five-to-seven-year-olds [already] have their own smartphone." The evolution to the first stages of financial independence through a digital financial product makes sense.
Giving young people access to controlled amounts of money for spending and saving via their phone or a card can be a way to learn about budgeting, saving, and financial management.
Fintica estimates a potential market value of more than $50 billion worldwide for products aimed at children and teenagers. This considers retail tech for kids, and the market includes a range of apps such as those for financial education, digital pocket money, trading, and money-for-chores.
There’s been a rise in the popularity of subscription-based financial products for children. Most of these services allow parents or guardians to set spending limits and some receiving limits. And with this comes the question of KYC or know your customer. Who is due diligence performed on? When does KYC happen? And how is ongoing risk monitored?
There might be a proliferation of financial products that can be managed from a phone and accessed via a card, but traditionally banks have offered accounts to children for a long time.
In the case of a good old bank account, a child becomes a part of an onboarding compliance process. Currently in the UK for instance, a child has to be at least 11 years old to open their own bank account and some bank accounts for children have a higher minimum age. Usually, a parent or guardian will need to be present to set up a bank account for a child – unless that child is aged 16 or above. Some banks offer separate accounts for teenagers with extra features that aren’t present on accounts for younger children.
To set up a bank account for a child in the UK, for example, you usually need to provide two identification documents, such as a name ID (passport or birth certificate) and address ID (these can be in the parent’s name if the child lives with the adult).
This is a necessary part of know your customer (KYC) activity to help prevent fraud and money laundering, taking advantage through a tax-free account. In fact, the FT reports a rise in children being recruited as “money mules”, with fraudsters encouraging them to open new accounts for cash. This sort of crime increased during the Covid-19 pandemic.
KYC is a process financial services providers go through before offering products to customers. It means the banks or provider will verify the customer and assess their risk level — identifying any significant issues such as fraud risk or sanctions exposure, which ultimately could lead to enhanced due diligence or even off-boarding.
However, for many of the newer, digital financial products, KYC isn’t carried out on the child at all i.e., the person receiving or using the app or prepaid card. Instead, KYC is carried out on the parent or guardian who is subscribing to the product and funding the card.
The subscriber i.e., the parent or guardian, is the person who goes through a verification or customer due diligence (CDD) process. This might involve checking the subscribers ID and address details to verify they are legitimate or what level of risk they might pose. In many instances, if risks are considered to be low on a junior account, the KYC and onboarding process are relatively straightforward.
But what happens when the subscriber’s child grows up or reaches 18? Does that individual then go through an additional KYC process? The answer—yes or no—may be down to each provider.
However, with some digital financial products for children, the account is allowed to carry on as long as the subscription is paid, regardless of whether the child has become an adult. The child could - for instance - be a student and still need access to the bank of mum and dad.
It could be argued, however, that there is a different or change of risk posed at this point to the financial institution. Potentially the provider or bank has a fully grown adult receiving funds via an app or prepaid card without them having gone through a KYC or anti-money laundering (AML) process.
There is a possibility this opens an avenue for money laundering. It's perhaps time to consider a stage in the KYC process that accounts for this, with requirements for additional risk monitoring. Adding this step automatically could put in place processes and decision checkpoints to support ongoing reviews that could help avoid risk and identify suspicious activity taking place on an account.
RegTech solutions can automate many different types of KYC process, and they can be used for perpetual KYC (pKYC) or set review periods. Moody’s KYC solutions with digital workflows can be configured to onboard and monitor risk for any product or customer - kids, adults, or something in between.
KYC software can also build flags into an automated compliance process to, for instance, highlight when a child turns 18 so that due diligence checks can be re-run, or a new process started altogether. This way, whether you are a high street bank or a digital provider, you can be more certain the adorable, toy-collecting kid you thought you knew at 11 hasn’t transformed into a master criminal aged 18.
Moody’s is transforming risk and compliance, creating a world where risk is understood so decisions can be made with confidence about who you work with.
Our customers build their own unique KYC ecosystem using our flexible workflow orchestration platform, leading datasets, analytical insights, and integrations with global providers to create solutions that help organizations identify risks.
Get in touch any time to talk about your KYC program – we would love to hear from you.