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The developer of a new app that will tap into the $1.5 billion pocket money market to teach children about financial literacy says it will be more effective than the traditional model of kids' savings accounts, such as Commonwealth Bank of Australia's Dollarmites Club.
While CBA Dollarmites, used by more than 330,000 school students in 2016, and Westpac's new Bump account, which will seed with $200 accounts opened for babies born this year, have been designed to illustrate the value of savings, fintech start-up Pennybox's system goes deeper, by using pocket money to teach about the cycle of earning, saving and spending.
"We are not focused on dishing out accounts to kids. Banks have financial literacy programs through schools, which we see as important, but our take is about practical education. That is why we are focused on the family environment: we are a tool kids and parents use in their own home," said Reji Eapen, co-founder of Pennybox.
The app allows parents and their kids to propose tasks, for which pocket money is awarded. In order to get their money, kids need to request their parents to pay them out in cash. The child can log-on to the multi-account system with their own PIN-code to monitor tasks and their balance, which is effectively a spending limit. Children and parents can receive reports on budgeting and spending patterns.
Underlying the parent-child interface is a financial education syllabus. Every action and feature in the software has been linked back to the syllabus, said Mr Eapen, a former equity analyst at Bank of America Merrill Lynch and UBS. Adaptive learning techniques will tailor specific tasks for kids and parents to put more effort into concepts not initially understood.
Test version
Pennybox will launch a test version of the app this month which will be trialled by around 300 families before a global launch in late February or March.
"The idea of Pennybox is to get kids thinking about what they might be doing to earn that money and to make decisions themselves on how they are saving and spending the money," Mr Eapen said. "Why not let a child make a mistake in a safe, family environment for $10 or $100, as opposed to when they get a credit card they don't know how to use, or get a loan they can't afford, or get their first mortgage? Money is a very practical thing. It is something you can only learn by doing, and by making mistakes."
Citing a report by CBA, he said Australian children are estimated to receive $10 a week in pocket money, creating a market worth about $1.5 billion a year. Not surprisingly, it is a market almost entirely made up of cash.
The other co-founder is Adam Naor, who has spent the past seven years at Google, primarily in Google for Education, where he worked on the technology giant's relationships with schools and teachers.
Mr Eapen was an IT consultant at Ernst & Young before moving to Bank of Merrill Lynch where he covered mining stocks, and then UBS, where he analysed the technology sector.
"Working in the banking space, I could see that if people don't have an understanding around personal finances, it is very easy for them to make mistakes or be taken advantage of," he said.
Free to parents
Pennybox joins several local and global fintech start-ups moving in on the pocket money space. Locally, Spriggy provides a pocket money and financial literacy offering linked to a pre-paid Visa card. Other offshore start-ups like Oink, Allowance Manager and Osper in the United States, and goHenry in the UK, also offer systems tied to payments cards.
Mr Eapen said that because Pennybox does not provide payment cards, it doesn't have to be linked to any bank account. The company is not providing a financial product. This will allow Pennybox to launch in a variety of jurisdictions without having to establish local banking relationships that support cards.
Pennybox is open to talking to banks about working together to make kids more financially savvy, he said, adding the service will be free to parents.
Pennybox raised capital last August via a convertible note, an instrument that is rare in the Australian start-up market despite its popularity for early-stage funding in the US, which was backed by nine investors. It is looking to raise more capital this year.