Trainer wheels for children to learn to handle plastic money

(NYTIMES) – Introducing your child to the real-world use of money often means hacking together half-baked solutions: jars stuffed with bills combined with repeated trips to the ATM and teenage misuse of the parental credit card.

So the right piece of prepaid plastic – loaded by parents who can set limits – makes all the sense in the world. You have plenty of options, many of which you may never have heard of before.

Frequently, they cloak their offerings in a superhero’s cape of financial literacy through practice. That’s a great concept, in theory. But any time a company seeks profit on the backs of our offspring, we ought to raise our eyebrows and hold on to our wallets. That’s especially true when most of them want us to hook our bank accounts to their products.

You might be scared off by this, but I’m not. There’s a way to do it well and pick a product that works for you. Features matter – but not as much as how they align with your financial philosophy. Every conversation about money is a conversation about values waiting to happen, and these products can help inspire those discussions with your child.

But as valuable as those fireside family chats are to your kids, they’re not particularly profitable to the financial world. So it’s crucial to begin by examining why these companies have proliferated and how they make their money.

Training-wheel products have not really been a priority for banks, which could generally rely on their adult clients to take their children in and set up an account when the time came. From there, it was often sink or swim – and a whole lot of overdraft fees.

But recently it has become easier for start-ups to build products for beginners without becoming an actual bank, by renting all the back-end infrastructure that would be costly to build. In a twist, some banks are now using the start-ups’ products and slapping their own labels on them.

Some frustrated entrepreneurs – and equally frustrated venture capitalists – sensed opportunity, with good reason. The potential customer base is enormous: There are tens of millions of people aged eight to 18, and they very much want to have some agency in their financial lives. These kinds of products can allow them to ditch the piggy bank and spend the way their parents do.

At the same time, the rise of mobile phone use among children and the mini-economy that emerged around consumption-inspiring apps have heightened the need for some kind of spending vehicle with parent-managed guardrails.

“Those vendors are not afraid to hoodwink kids into spending,” said Mr Bill Dwight, who was among the first to build a kid-focused debit card when his FamZoo card debuted in 2013.

So how do these companies make money? Generally, they earn a handful of pennies on each transaction out of what merchants pay to accept plastic. Some, including Mr Dwight’s FamZoo, charge a set monthly fee. Greenlight, which claims 4.5 million paid users and counts both kids and parents in that figure, operates the same way.

Goalsetter lets its 250,000 users pay what they wish. It could not give an accurate count of what the average is, since many users are new, and it doesn’t make the request until a few months after they’ve started using the product.

Till is not charging a monthly fee, at least for now, but has two other revenue streams. It’s hoping to graduate its older customers to grown-up financial institutions and take a bounty when they sign up. And there’s also a data play: The company says it uses anonymised spending data to identify merchants popular among its users, who number in the “tens of thousands”. Then it gets those merchants to offer special deals to Till customers, and Till takes a cut when they keep spending there.

This feels a bit creepy, but Till isn’t directly selling data. And it’s probably not spreading around any more information about your children than they might do themselves in a few hours on Instagram. In any case, Till lets parents toggle those offers off.

So if you’re ready to consider using one of these products, first ask yourself this: Which is most likely to force you to check in with your kid the most? These conversations help children learn what we stand for – why we limit our spending in certain categories, save more for some things than others and give where we can.

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Then, a few basics. If you’re seeking regular allowance distribution and management, most services can handle that. But if you’re paying your children for chores and want to check tasks off on a line-item basis before pushing money onto a kid’s card, that’s a feature you should select for specifically.

Also, what sort of financial behaviours do you wish to encourage – or change? Many parents like to reward their kids’ savings with automatic interest-rate boosts or goal-based bonuses.

“That allows parents to exaggerate the point to make the point,” said Mr Tim Sheehan, Greenlight’s co-founder. So check for that feature if it’s important to you. Greenlight offers it, and FamZoo has a strong offering, too.

Then, there’s the goal of overarching financial literacy. Ms Tanya Van Court, founder of Goalsetter, has poured resources into that side of her business. “A card is actually an incomplete solution,” she said.

Goalsetter allows parents to pay their children extra for doing well on financial literacy quizzes and hold money back when they don’t complete them. Ms Van Court is also trying to persuade credit bureaus to reward 18-year-old Goalsetter customers who are particularly well-informed.

“It’s not fair that some kids get added to their parents’ American Express accounts and develop a fantastic credit score when they haven’t spent a dime,” she said. (Step already has a system in place to allow young users to begin building good credit.)

Finally, not every one of these products incorporates opportunities to try out investing. But Greenlight does, and Goalsetter plans to soon.

These cards and the companies behind them will come and go. And, in between, they may evolve. So it’s not possible or reasonable to name the one that is best. You’ll need to figure that out for your family – and it will be on you to make sure it’s still aligned with your goals after any such evolution.

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