Children’s Accounts : Going for the Gold in Piggy Banks

NEW YORK —  Seven-year-old Nicholas Franklin concentrated intently on the red, white and blue bank passbook in his hands as he pondered the question: Why did he think it was a good idea to have just handed over his only dollar to open his first savings account?

Then he looked up with a shy smile and a gleam in his dark eyes. “I need to save,” he replied, “because I think that some day I’m gonna build a robot and I’m gonna put an Apple computer in its brain and then program it so it can do things like clean my room.”

It was banking day at Beekman Hill Public School in Manhattan, and Nicholas and his classmates were depositing their hard-earned money with a PTA volunteer who would later take it to a branch of the Dollar Dry Dock Bank of New York, an institution with $4.6 billion in assets based in White Plains. In March, the bank launched a school savings program aimed at enrolling more than 2,500 elementary school students from four schools in Westchester County and Manhattan.

Educational Value Seen

“We feel it is very important to provide youth with as much information as possible about the wide variety of financial alternatives at an early age, when it could have impact on their lives forever,” said David J. Totaro, senior vice president and director of marketing for Dollar Dry Dock. “We want to establish a system in their lives of systematic savings.”

Savings institutions across the nation have begun to woo kiddy capitalists and, after years of dormancy, school savings programs are being dusted off, computerized and resumed.

Banking analysts cite several factors in this resurgence: concern about the course of the nation’s economy in an era of record budget and trade deficits and a low consumer savings rate, the opportunities that deregulation presents for banks and savings-and-loan firms to offer a wide variety of services and a perception that Americans now live in a more complex financial environment that requires education about financial responsibility at an earlier age.

Aimed at Parents

But another significant factor--perhaps the key to the phenomenon of revived emphasis on banking for children--is that banks, through children, are hoping to entice their parents to deposit funds with them.

“I believe, overall, that the school savings program is badly needed in this country, and that we need a greater savings rate,” said Lawrence Connell, chief executive officer at the $1-billion Commodore Savings Assn. in Dallas. “The first place to start is with children.”

During the 1980s, the U.S. consumer savings rate plummeted. The rate for 1987 was 3.7% of disposable income, the lowest since wartime controls were lifted in 1947, according to Mark Obrinsky, an economist at the U.S. League of Savings Institutions in Washington.

Connell and others see a recurrence of the savings patterns that were characteristic of 1930s but seemed to fall by the wayside in the 1960s.

“In the 1960s and 1970s, our culture took a different bent and the normal values of savings were not part of that time,” said Albert R. Dye Jr., senior vice president for marketing at the AmSouth Bank of Florida in Pensacola. “As we entered the ‘80s, there emerged more of a trend back to the family. So, I thought, then we ought to take a new look at the savings program.”

In addition to a general lack of interest in saving money, bankers had decided that the cost of maintaining children’s accounts, which have low monthly balances, were no longer worthwhile. The advent of electronic banking brought a significant decrease in labor costs and paved the way for banks to renew children’s programs.

“The whole key to this is reducing expenses,” said Sherry Avena, president of the Bellevue, Wash.-based educational firm Model Classrooms, which developed the program Dollar Dry Dock is using. “Now that hand-posting by tellers is not required, due to electronic transfers, the cost to maintain the program is the stamps to mail the quarterly statements--about 75 cents per customer. I think the school savings program is going to take off, across the country.”

Program in 50 Schools

Avena’s curriculum, the New School Savings Program, was developed in the early 1980s and is operated in 50 schools nationwide. The program received a grant from the Department of Education; starting it costs a bank only $5,000. First used by Washington Mutual Savings Bank, a Seattle institution with $5.5 billion in assets, it is a modernized version of the school savings program that many adult Americans can recall.

Under the supervision of PTA volunteers, the children use personalized magnetic cards with the school’s computers to record their deposits. At the end of the day, the volunteers take the computer disk and the children’s money to the bank.

“The purpose of the program is to teach children to save,” Avena said. “The average American spends 120% of his income, which means he or she is overspending 20% a month of what he is bringing home. Learning to save and becoming financially responsible is a basic skill for the 20th Century.”

In addition to the educational benefit of the program, Avena sees a practical application. She noted that, while the nation may have a surplus in the Social Security fund today, projections for the 21st Century show a potential deficit. Children who begin to save now may be better prepared for the future.

Industry experts offer another explanation.

Parents Are Target

“The only reason for (a bank to open) . . . a children’s bank account is to get to the parents,” said Frank Diekmann, editor of Bank Advertising News. “Banks are interested in one thing, and one thing only, and that is increasing their profits.”

“This strategy is known in the marketing circles as McMarketing,” explained Dye of AmSouth. “Like McDonald’s, you actually market to the kids, thinking it will bring in the adults.”

AmSouth, which has $800 million in assets, reinstituted a children’s savings program in September, 1987. Its symbol is Pockets McPhee, a birdlike character with bright blue hair and a yellow beak who wears “high-top tennies,” according to the coloring book children receive after they make deposits.

Dye said that the bank analyzed its clientele and found that the typical AmSouth customer was over 50.

“We were looking for ways to youth-en our customer base and to offer cradle-to-grave banking services based on life style, no matter what stage of life they are in,” he added.

Prizes and Cards

Children fill coin books that hold $25. Each time they bring a filled book to the bank they receive a prize, such as a Frisbee, a T-shirt, a coloring book or discounts at roller skating rinks or ice cream shops. When they start accounts, they become card-carrying members of the bank and receive a growth poster, on which they can measure both their physical and financial growth.

And as the children’s cards fill up, the bank’s marketing department gets the names of parents whom it can contact with offers of loans, certificates of deposit, portfolio management and other services.

United Savings of America in Chicago offers yet another variation on this theme. Marketing director David L. Mena of that $1.6-billion-asset institution developed a character named Commander Thrift, an “intergalactic emissary of savings” from the planet Savon, who urges children to join his Space Crew Savings Club for a minimum of $10. Crew members receive a special quarterly newsletter.

“We wanted to do something to pep up our youth accounts and wanted to establish relationships that would get the whole family in the bank,” said Jerome B. Toigo, senior vice president for administrative services at United Savings. “It’s futuristic and computerized. Kids are not into cowboys anymore. That’s passe.”

Prize-Winning Plan

The Financial Institutions Marketing Assn. gave United Savings’ campaign third prize in its national competition of marketing plans. With an initial cost of $25,000, the program has been running for a year, and between 7,500 and 10,000 crew members have signed up.

“The program is not profitable,” Toigo said, adding: “It’s developed to pay off later, not to get the high-balance deposits. We’re building up long-term relationships.”

Wanda Haggard, vice president and marketing manager at Commodore Savings Assn., which instituted the Model Classrooms program last month in Stamford, Tex., agreed with Toigo.

“We know that it is very expensive to open these accounts,” Haggard said, “but from a public-relations standpoint, the return over the years far outweighs the initial costs. You cannot buy that kind of advertising or good public relations. It makes us wear a white hat instead of a black hat.”

On Sept. 25, the First Women’s Bank in New York will give birth to the First Children’s Bank in Manhattan’s famed F. A. O. Schwarz toy store. First Women’s Bank is planning to offer each child who opens an account at the branch a debit card--featuring a picture of a “Banker Bear” in a hot-air balloon. The cards can be used only for purchases at the store.

Lower Minimums

The bank will lower its minimum deposit to $50 from $500 for children. It will be the only bank in the city that is open on Sunday and will offer all the usual banking services except credit. And, as a branch of First Women’s Bank, the F. A. O. Schwarz facility will welcome depositors of all ages.

President Neale Godfrey of First Women’s Bank got the idea to open the First Children’s Bank because her 4-year-old daughter wanted “to be able to do what her mommy did,” according to Georgette Bennett, first vice president and chief marketing officer of the $430-million-asset institution.

“The economic and financial environment is much more complex than it was a generation ago,” Bennett said. “It’s become very important that children feel comfortable at an early age with banking. Starting at college is now too late for a person to have his or her first experience with learning financial responsibility.”

Bennett added that proper money management and financial responsibility require discipline, which children generally do not like. Locating the branch in the “world’s greatest toy store” creates a very positive environment for the young customers, she said.

Bank Just for Children

While many banks are examining and beginning programs to entice young customers, one bank exists solely for children: The Young Americans Bank, founded by Bill Daniels, chairman of Daniels & Associates, a diversified Denver-based cable TV company.

Daniels, who also owns half of the Los Angeles cable sports channel Prime Ticket and 5% of the National Basketball Assn.’s Los Angeles Lakers, decided in October, 1984, to open a bank for children only after he read an article about an elementary school class that had taken out a loan for a holiday project.

The article reminded him of his first banking experience at the age of 24, which he described as “frightening and intimidating.” Daniels set out to provide people under 22 with the opportunity to use a bank of their own.

“Major banks do not like to do business with kids because they are a bother. They are reluctant to take the time,” Daniels said in a telephone interview. “I say that is wrong.”

Art Lucey of the Denver consultants Alexander Lucey Inc. said: “Daniels saw an opportunity for young people who want to liberate themselves, who want respect and to feel they are important.” Lucey helped set up the Young Americans Bank and is working with banks in Portland, San Diego, Phoenix and Houston interested in starting similar ventures.

‘Hands-On Experience’

“The Young Americans Bank’s major mission is hands-on experience for young people; that’s what we’re trying to create,” Lucey said, adding: “Banking doesn’t have to be boring, threatening or a circus. It can be fun learning how to save and spend.”

Daniels faced several initial hurdles. Colorado laws permit banks for minors as long as parents or guardians have a hand in the transactions. Daniels had to persuade the Colorado State Banking Commission to grant a commercial charter to a bank whose depositors would primarily be minors.

Daniels’ first attempt to get a charter was turned down in August, 1986, because his proposal did not convince the commission that it met a public need or would be profitable. In addition, the commission was concerned about what would happen to the bank if Daniels died, since he is its sole shareholder.

Undaunted, Daniels went back to the drawing board. He ordered additional marketing studies to assess the public’s interest in a bank for children. To demonstrate support for his concept within the business community, he asked individuals and corporations to pledge special deposits they would make once the bank was chartered. After obtaining the charter, the bank received $1.5 million--in deposits of $50,000 to $100,000--to redeem the pledges. The money was placed in below-market-value or zero-interest-rate accounts. These deposits are critical to the bank’s ability to stay afloat over the long haul, and it hopes to raise $3 million more from sponsors.

Daniels put up $2 million of his own assets to capitalize the bank and agreed to cover operating losses for three years to keep its capital intact. After that, if the bank does not meet its objectives, the project will be reexamined. If it meets all expectations, there are provisions in Daniels’ estate to cover its costs for the next 25 years. When Daniels presented his second plan nearly a year later, the commission approved a charter for the bank, the Federal Deposit Insurance Corp. granted deposit insurance and the bank was able to open for business on Aug. 3, 1987.

Overwhelming Response

The response has overwhelmingly exceeded expectations. The hope had been to open 2,000 accounts by the end of the year but, within a month of opening, the Young Americans Bank had 2,700 depositors. In the early weeks of operation, the bank’s three officers and four part-time staffers had to work 60 to 80 hours a week to keep up with the applications and the crunch of young depositors bringing in their piggy banks chock full of coins.

“We went through three automated coin-counting machines in the first few months,” said Phillip J. Hogue, chairman of the board of the Young Americans Bank and president of Daniels & Associates. “The Treasury ought to love us for all the money we brought back into circulation.”

On May 9, 1988, the bank signed on its 5,000th depositor and now holds accounts for children in 25 states and Canada.

“We’re not in the banking business,” Hogue said. “The free-enterprise system in this country offers enormous opportunities that children should have. We are in the business of educating young people, through hands-on experience, in the free-enterprise system.”

Children applying for loans are treated the same as adults who apply for credit: They must demonstrate a reasonable need for cash and ability to repay the loan. The bank currently processes between six and nine loan applications a week and has extended credit to 823 customers.

Early Credit Record

“When you reach the age when you want to get married or buy a car or a home, you need credit.” Daniels said. “Customers who borrow from the Young Americans Bank have the chance to establish credit at a young age.”

Anyone 10 or older can open a savings account with a minimum of $10. They receive interest of 5.5%, compounded daily and paid monthly. All depositors receive monthly statements, regardless of whether there has been activity on their account.

Customers 12 and older can open checking accounts with as little as $10, and must pay a $2.50 monthly service charge. A $30 limit is placed on checks written by customers up to age 15; those 16 to 18 may write checks up to $100. The checks must be co-signed by a parent or guardian and presented with the photo identification card the bank provides.

Every checking account is backed by the sponsoring adult’s personal line of credit, so merchants who accept the checks are covered if the account has insufficient funds.

The average age of the bank’s savers is 9, lower than the minimum age for opening an account because grandparents and parents have opened accounts for younger children. The average savings account balance is $230. The average age of customers with checking accounts is 14; their average balance is $260.

No Adult Accounts

Unlike the savings institutions that administer school savings programs, the Young Americans Bank does not have adult deposits to offset the costs of maintaining children’s accounts.

“I would think that you need an individual or a group of individuals or a coalition of individuals in the business community to really sponsor this kind of thing,” said Roger Knight, chairman of the board of the Bank of Aurora in Denver, who was a consultant to the Young Americans Bank. “It’s great to have the educational input, but you need the capital.”

Nonetheless, the bank does appear to be teaching some lessons. Adam Fingersh, 11, approached the Young Americans Bank for a $500 loan last winter with a business plan for his personalized sweat shirt business, which was beginning to take off.

“My parents bought the paints, but I wanted to do it all myself,” Fingersh said. “I got the loan to pay off my dad.”

He offered his Apple computer and his allowance as collateral and his father guaranteed the loan.

Learning About Interest

“I felt kind of nervous,” Adam said. “What would happen if it didn’t work and I had to lose my Apple computer?”

But his business succeeded and, when he was in the black, he returned to repay his loan. It was then that he learned one of the more painful lessons of borrowing money.

“I didn’t know what interest was,” he said. “It kind of surprised me.”