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How much pocket money do Indian kids get? A fun estimation based on heuristics.
Which is the right product for pocket money and why is it prepaid card?
Who are the main players? What’s their Value Prop and business model? How will they likely evolve in the future?
My official pocket money was INR 500 per week when I was a final year undergrad student at IIT Delhi, way back in 2009-10. On top of that I used to sneak another Rs. 100-200 as gratuity for household chores (which was mainly showing up at home once a month).
The money was spent primarily on food (thanks to the gourmet delicacies served at the hostel mess) and *some* alcohol. Clothes and shoes were provided for by parents over and above the pocket money. There was not much else to spend on, given I had a very sensible set of friends who came from similar backgrounds, and given that the social media machinery to reward vanity was not as well oiled as it is today. On the whole 2009 was a lot simpler: Facebook used to be classy and e-commerce was almost non-existent. My batchmates aimed at clearing CFA and not raising startup funding.
So give and take Rs. 3000 as the monthly pocket money for a 21 year-old kid from a quintessential middle class household in 2009, what do you think is the pocket money kids get today?
If I extrapolate using inflation1 the pocket money comes to around 7k / month.
If I use the same growth as for the NIFTY502 Index, the current pocket money comes to 9k / month.
We’ll work with this base pocket money of INR 9k / month
But this is not our final number. 2021 kids are a whole new generation compared to 2009 kids. There are more things to spend on (like mobile devices, electronics accessories, gaming, etc.), more channels to spend via (e-commerce, social commerce) and more compelling reasons to spend for (beauty, cosmetics and fashion for better social media presence, going out).
I haven’t added more awareness and ownership to spend as that is not mutually exclusive of the 3 drivers mentioned above.
In order to take into account the impact of these drivers we can bump up the 9k estimate by 50%, which brings us to INR 13.5k / month as the pocket money for a 20 year old college student belonging to an upper-middle class family.
Note that this 13.5k monthly pocket money for a 20-year old includes all spends which the kid makes independently across categories from clothing to food to entertainment. Does not include spends which parents make over and above.
Considering that the target user base for any pocket money app offering is kids between ages 11-20, we’re looking at a base of 250 million3. Assuming that this age group is uniformly distributed across income groups, we get the following populations:
Bottom 50%: 125 million
50 to 70%: 50 million
70 to 90%: 50 million
90 to 95%: 12.5 million
Top 5% 12.5 million
Taking the 90 to 95% bucket as the one where a 20 year old gets 13.5k monthly pocket money, we can use assumptions to estimate the total pocket money given to kids between 11 to 20. These assumptions are:
Pocket money increases progressively from ages 11 to 20, irrespective of wealth groups
Pocket money penetration (% of kids in a particular age-wealth group getting pocket money) also increases progressively from ages 11 to 20, irrespective of wealth groups
For kids belonging to top 5% by wealth group the pocket money is twice that of those belonging to 90 to 95 %ile wealth group
Bottom 50% do not get any pocket money
The 3 tables below have been created based on these assumptions. We use the simple Sumproduct in excel across these 3 tables to get the total pocket money.
The total annual pocket money for kids aged 11 to 20 years in India comes to INR 4.5 Trillion. Although kids are encouraged and do save their pocket money, it is meant to be spent at some point. Piggy banks are about delayed gratification rather than growing money. Hence, INR 4.5 Trillion is the annual spend by kids aged 11-20 years.
THAT’S A TOTAL ADDRESSABLE GMV OF ~USD 60 Bn in 2021.
With such a large TAM and some obvious pain points, there is definitely need for a dedicated banking / payment product for teens. However, there are hurdles across the customer journey, some are due to regulations, some due to the nature of the user, but in the end everything boils down to the fact that nobody wants to trust a teenager with money.
In the vast universe of retail banking products, there do exist offerings which have words like “Young”, “Star”, “First” in their name but they’re essentially parent controlled bank accounts with a debit card which kids older than 10 years of age can use (note that this 10 year age limit is applicable to Fampay and Junio cards as well). The funda is simple, parents need to be customers of the bank in order to give their child financial access.
There is but one product which does not impose this requirement and which can help teenagers cross the chasm of ubiquitous mistrust and allow them to manage “their” money. That product is the humble prepaid card, which works best for teenagers in a digital avatar. Here is a look at how prepaid cards compare to other retail banking products when it comes to teenager-friendliness.
We see that the while the kid savings account + debit card combo has big pluses of interest income and much stricter “inherent” usage controls, it does not solve the purpose of teaching kids how to control their money. You want to give some level of freedom to kids in order to teach them so the strict usage restrictions are actually a hindrance. The digital onboarding without the need for the parent to have a banking relationship is a big-pull for Fampay and Junio offerings.
In terms of usage the kid needs to get a typical debit card and probably make do with a clunky mobile banking app in order to monitor spending in real-time. Independently shopping online is also a challenge given the OTP might land up at the parents’ phone. There are of course no loyalty & rewards system because hey - why would a large bank care for kids’ loyalty?
Which brings us to the moot point: a child account is meant to tie-down deposits for a period of 18 years, and the sweep deposit to FD feature gives it more of a college fund type of objective.
The primary objective of a child account is for the parent to save money for their kids, the debit card for ages 10 years and above is just an afterthought and entirely optional.
On the other hand, Fampay and Junio are offering a transactional product targeted at capturing pocket money. Their value props are built using the limitations of a prepaid card combined with a seamless digital experience and a host of cool value added features.
Before we get into the business model and how it can evolve in future, it’s worthwhile to look at what can be the ideal value proposition for a digital prepaid card for teens. The table below shows a master list of teenage banking use-cases and which of these are offered by the 4 main players in India. It also shows the positioning for these players.
We can see that Fampay clearly rules the roost when it comes to the offering. A few things stand out in the above comparison, and these directly map to the needs of the customers, which in this case are urban teenagers and their parents from relatively well to do financial backgrounds:
In-app shopping: Neobanks the world over want to keep customers within their mobile apps, but have achieved little success with it. In-app shopping as a use-case by banks has intense competition from the likes of Instagram and the merchants themselves. In India, HDFC has attempted it with Smart Buy and PayZapp, and while it has been successful to an extent, the PayZapp app basically redirects consumers to merchant apps such as Big Basket rather than keeping them within PayZapp’s environment.
So while teenage neobanks can definitely have links to mainstream merchants such as Zomato, Amazon, etc. (and these partnerships can of course be a source of revenue), the real buck lies in selling more niche products which are hard-to-find-otherwise within their app. These products can be especially tailored to teenagers, and just might prove to be an easy sell given you already have a customer who is digitally savvy, young, aspirational and has spending power.
As an example, Yodaa has a library of courses and books on life and finances, things which make teens feel more mature. These can easily be bumped up to a subscription based model wherein the subscription amount is automatically deducted from the prepaid card and in exchange the teen can have access to all these great courses on life, finances, career, etc. Something which parents will also readily approve of.
Deeper Spend Control: While on the one hand there is this need to appear mature, on the other hand there are also typical teenage demands which can be paid for from within the app - online gaming and other virtual products, beauty products, fashion - areas where usually you need parents to approve the expense or areas where parents might want to set spend limits. The 2 use-cases which make parents feel in control are present in teen neobanking apps to some extent or the other. These are Personal Finance Management (PFM, expense tracking - whatever you may want to call it) and spend controls (implicit in the prepaid card which doesn’t allow loading money beyond a certain point). However, given the need and the susceptibility of teens to spend more on a certain category, setting category-wise or merchant-wise spend limits is a use-case which will really sweeten the value proposition for parents. For example, I can set a limit that my kid can’t spend more than INR 500 per month on Epic games (Fortnite).
Community and Social Engagement: need we even speak about this? Every teenager wants to be a part of something, and community management and engagement on the right social media channels is imperative for teenager neobank.
At this point it might be helpful to have a look at Step, a newly minted unicorn teen neobank in the US. In terms of value proposition its very similar to its Indian counterparts, key similarities being:
Banking as a Service (BaaS) model with a small bank acting as the card issuer
Core proposition i.e. parents have full visibility and can monitor the account till the kid turns 18
Teen community and referral programs
Key differences:
Step is completely free and makes money from interchange fees
While it works as a prepaid card, the word “prepaid” is not used anywhere in any customer facing communication channel - app, website, social media promotions, news articles.
The card is positioned as a “credit card which works like a debit card”, and the transaction history will help in building a credit score
Money upload in Step App can be done via any of the payment apps in the US e.g. Venmo, Cash App (Square), etc. However, this is not a requirement in India where you have this beautiful centralised payment rail called the UPI.
Any type of card makes money for its issuer when it is used to make spends, or by charges such as annual or one-time issuance fee, or other charges which may or may not apply based on the card e.g. fees for loading money, FX charges (highly unlikely in the case of a teenager), etc. In the case of prepaid card the issuer also makes money on float, breakage or inactivity on the card as well. So is this how the likes of Fampay and Junio make their money? The answer is not really, because its a co-branded card.
A co-branded card is jointly issued by a bank and a corporate / merchant. The key objective is to drive loyalty for that particular merchant by giving extra reward points.
This raises 2 obvious questions:
Are Fampay / Junio / Walrus / Yodaa merchants?
Do they plan to become merchants / shopping platforms in the future?
The answer to the first question is No and to the second is Yes, they can, as we saw above while on the topic of in-app shopping.
So then the possible revenue sources for these Teen neobanks are:
Commission from banks (e.g. Fampay is a marketing and distribution partner for IDFC prepaid card which is branded as the Fampay card) - note that this commission from bank might be a function of not just the cards sold but also a whole host of other parameters depending on the exact nature of the agreement. So this can well include interchange fees too
Commissions from partner merchants (redirecting to merchant apps)
Revenue from in-app shopping: building this requires setting up an e-commerce capability, focus should be on niche, not-so-easily-searchable, relevant to teenagers products
Direct fees: Yodaa has this model where they charge annually for the card. Other players charge only for the physical card
Adulting journey: this is where we talk about the evolution of a teen neobanking app. The true win for such an app would be the ability to maintain the relationship even when their customers “graduate”. Planning the exit when a teenager turns 20 or when a minor turns an adult is going to be a crucial part of any teenager neobank’s strategy. There are multiple ways in which this “exit” can be managed. An obvious way can be to act as a lead generator for adult neobanks or legacy banks. But this needs to be done keeping in mind the customer experience - you don’t want 20 banks calling your customer. Another way (or one of the tricks) can be to extend the loyalty program for life or partner with a universal loyalty program (e.g. FamCoins can be converted to Cred Coins). A third way is to expand the product offering - the moment someone turns 18, you automatically get them a bank account and a credit card. The overall value proposition can also be expanded so that when someone turns 18 or 20 a different “adult” interface gets unlocked in the app and then you hand hold them into a more autonomous financial life.
There is only so much a teenager can get as pocket money and spend, The adulting journey is what will enhance the proposition and increase the LTV of customers.
So overall, teenage neobanks tick all the right boxes: a large, digitally savvy, high income, high spend propensity, highly aware customer base, the right features and exciting possibilities for a future roadmap.
References:
https://www.inflationtool.com/indian-rupee/2009-to-present-value
NIFTY was ~5k in Dec 2009 and is ~15k now, so 3x growth: https://www1.nseindia.com/products/content/equities/indices/historical_index_data.htm
https://statisticstimes.com/demographics/country/india-population.php