Bank Accounts for Minors: A Pathway to Financial Inclusion or a Dead-End?

doi:10.21203/rs.3.rs-2978685/v1

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Bank Accounts for Minors: A Pathway to Financial Inclusion or a Dead-End?

https://doi.org/10.21203/rs.3.rs-2978685/v1

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published 03 Aug, 2024

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This study estimates the effects of state laws that allow access to independently owned bank accounts without a custodian. In states where minors can own accounts, youth aged 16 through 19 are more likely to be banked, although by age 24 those young adults are banked at similar rates to teens who grew up in states that do not allow minors to own accounts independently. However, young adults who had access to independently owned accounts at teens are then more likely to use high-cost non-bank financial services, particularly check-cashing services. Young adults who had access to non-custodial accounts as teens also show lower credit scores and more loan delinquencies at ages 21 through 24. While state banking policies can increase financial inclusion for teenagers, minors with bank accounts face frictions transitioning to adult accounts. Since minor accounts require opening a new bank account, this transition process appears to drive young people with non-custodial minor-owned accounts to use more alternative, non-bank financial services.

JEL Codes: D14, D18, G18, G21, G28

Unbanked

Financial Inclusion

Bank Regulation

“I just recently got a job and I obviously need some type of savings or checking account, but I want it completely out of my parents' reach.''

--Posting on Reddit.com Personal Finance Forum, September 8, 2018^{^[1]}

Financial inclusion is a goal for many policies across the world, with the intent to engage more people in the formal economy (Shah, Mullainathan, and Shafir 2012; Dupas et al. 2018). A lack of access to basic banking services and the inability to save and borrow at low costs may compound people's financial problems (Bertrand, Mullainathan, and Shafir 2004). Financial inclusion policies aim to expand the market for banking services to currently un- or under-banked consumers (Célérier and Matray 2019; Demirgüç-Kunt and Klapper 2013). Even within well-developed economies, there are some consumers who remain un- or under-banked for much of their lives (Rhine, Greene, and Toussaint-Comeau 2006).

For adults in the United States, banking access is common, but for teenagers, there are legal restrictions on owning a bank account before the age of 18. While teenagers can work and earn income, in many states they are only allowed to have accounts held jointly with a parent. Depending on state laws, state-chartered banks may be able to offer minors non-custodial bank accounts as young as at age 15. This study examines the long-run effects of these state policies that allow teenagers to own bank accounts in only their name on financial outcomes.

Since some minors want accounts “in their own name” as soon as they start earning money, it seems somewhat natural for states to allow non-custodial accounts for those under 18. Getting an account can be as easy as heading to a state-chartered bank, showing a school ID, and providing an address. If these accounts allow teens to have a positive first experience with the formal banking sector, they may have stronger preferences for using formal financial institutions in the future (Brown, Cookson, and Heimer 2019). Early life experiences could have lasting effects on how people develop attitudes about financial services (Malmendier, Tate, and Yan 2011; Alan and Ertac 2018).

Independent account ownership at before the age of 18 can also create unexpected challenges. When a minor turns age 18, a minor account has to be transferred to a new account where the now adult-age account owner can sign a legally binding account agreement. This transition requires a proof of identification and other documents required by Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations (Allen, et al. 2016; Karlan, Ratan, and Zinman 2014). This paperwork requirement may seem trivial at first, but a minor who needed an independent account may not be able to access the documentation required. These young adults may be more transient and lack a permanent address. Meanwhile, financial institutions offering minors independently owned accounts are likely to be quick to close minor-owned accounts with a negative balance or unpaid account fees, since they have little legal recourse. A minor may never re-open a new “adult” account, instead using alternative services for check-cashing and payments (Padua and Doran 2016; Rhine, Greene, and Toussaint-Comeau 2006).

Using variation in state laws regarding minor account access and a two-way-fixed-effects difference-in-difference framework, this study analyzes the Survey of Income and Program Participation (SIPP), the Federal Deposit Insurance Corporation (FDIC) National Survey of Unbanked and Underbanked Households, and Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP) to estimate the effects of teenagers having access to an independently owned accounts as a minor.

This study asks three research questions. First, do state laws allowing minor-owned accounts increase the likelihood that teenagers in these states are banked? Second, are young adults in states allowing minor-owned accounts more likely to be banked in their 20s? Third, does access to independently owned accounts impact young adults’ financial behavior, including their alternative financial services and credit use?

This work contributes to research examining the effects of bank regulations on financial behaviors. Brown and colleagues studied the effects of growing up on American Indian reservations with banking services (compared to those without) on credit use in adulthood (Brown, Cookson, and Heimer 2019). Their findings show that young people in areas with expanded access to banking institutions are more likely to be banked and show higher credit scores later in life. Our study focuses on a different policy, access to accounts owned by minors, and shows increased rates of being banked. However, the narrow populations of teens who use independently owned accounts as minors to not show better financial outcomes as young adults. Although we cannot identify the mechanisms involved, it is likely due to problems with the transition from minor-owned to adult-owned accounts.

This study also contributes to the literature on the heterogenous effects of banking regulations. Washington finds that when states require banks offer low-cost bank account options, Black and Hispanic low-income consumers are more likely to be banked (Washington 2006). State regulations do not require financial institutions to provide minors with non-custodial accounts, but they do permit them in certain years. However, minor-owned accounts are a very temporary type of account that must be transferred at age 18, so that most minor-owners only have these accounts for a few years at most. This is a different context than low-cost basic banking products for low-income adults that may be open for many years.

Much of the existing research on bank access is broad and focuses on the location of branches. Célérier and Matray (2019), for example, show that interstate bank branch deregulation in the 1990s and early 2000s increased the number of bank branches in low-income areas, and in turn that shift increased the likelihood individuals were banked and as well as high levels of wealth later in life. Other studies focus on the expansion (and later collapse) of the Freedman's Savings Bank after the Civil War (Stein and Yannelis 2020; Célérier and Tak 2021). Our study is unique in that we are not focused on bank locations but rather how a small subset of the population has access to accounts as minors in some states but not others.

This study also contributes to policy debates about the role of regulations in balancing access for young consumers into financial markets while also protecting them from harm. The increased use of investment and stock trading technologies aimed at young investors is an example of how young people are engaging in riskier financial markets. (Welch 2020). Policymakers must balance increased access to financial services with rules that keep young people from making mistakes. In credit card markets, for example, the 2009 CARD Act restricted access to credit cards for young adults aged 18 to 20 years old. However, Debbaut, Ghent, and Kudlyak (2016) show the policy reduces independently owned credit cards and increases the ownership of co-signed credit cards. This results in young adults entering the credit market later and using higher-cost loans.

Our findings show that there is demand for independent bank accounts for minors: state laws allowing minor account ownership increases the likelihood that an individual is banked before age 18. While the effect of early access to independent accounts on the rate of being banked persists until individuals are age 19, the effect dissipates with age. We show that access to minor-owned bank accounts increases the use of costly alternative financial services when these individuals are 21 through 24 years old —particularly for check-cashing services. Further, access to minor accounts increases credit delinquency and reduces credit scores once these individuals are 21 through 24 years old (although both effects are modest in magnitude). One reason may be due to other regulations in the banking industry that create bottlenecks to the continued access to accounts when minors transition to adult accounts. Policymakers should consider ways to reduce the frictions in the transition between minor and adult accounts or provide other provisions for minors who cannot obtain an account without a custodian.

[1]Source: https://www.reddit.com/r/personalfinance/comments/9e9yfm/im_a_teen_17_who_wants_to_open_up_a_bank_account/

[2] There are also several studies on banking deregulation more broadly. For example, Sun and Yannelis (2016) find that banking deregulation increases college-going due to reduced credit constraints. Popov and Zaharia (2019) show that banking deregulation increased female labor force participation. Further, Gerardi, Rosen, and Willen (2010) and Hacamo (2020) show the effects of deregulation on expanding the mortgage market.

Understanding how youth access to bank accounts improves financial outcomes is an important piece of evidence to better design policies, regulations, and financial products that benefit firms and consumers.

2.1 Account Access Before Age 18

Financial institutions in the US are generally chartered at the national or state level. Each state is left to implement regulations for state-chartered institutions, including whether teenagers under 18 years of age can own an account without an adult co-owner. The result is that financial institutions operating in the same market may have different regulators and have to adhere to different rules (VanHoose 2017). In the absence of state legislation, state-chartered firms adhere to the federal policy for nationally chartered institutions, which only allow accounts for minors using a joint account with a parent or guardian (a custodial account). Joint accounts operate like a minor-owned account, where the young person can make deposits and withdrawals but is not an independent owner and the co-owner can also make deposits, withdrawals, or approve or not approve certain account actions. Custodial accounts are set up by an adult to be used for the benefit of a minor, but an adult owns the account at least until the child reaches age 18. The experiences of a young person in interacting with financial services are not likely to be as significant with these types of accounts.^{^[3]}

State case laws and regulations allow state-chartered financial institutions to enter into agreements with minors to open non-custodial accounts at the age of 15, 16, or 17. However, these contacts are not enforceable. A bank account with outstanding fees or fines presents a risk to financial institutions. At age 18, a minor-owned account must transition to an adult-owned account. For most financial institutions, this means opening a new account. Unlike the simplified process used to open a minor-owned account, this type of account is treated as a new account application. The 18-year-old customer will be required to provide a valid form of identification and proof of a permanent address—information required under banking KYC regulations and customer due diligence procedures. These provisions are intended to comply with the Bank Secrecy Act and Anti-Money Laundering regulations, but they can be implemented in such a way that blocks people trying to open an account. Some young people may not have access to records or documents or have a permanent address. Other problems may include background checks that flag past problems in managing accounts, including having a bank account with a negative balance.[4] The bank may involuntarily close the minor-owned account, or the account may become dormant.

We collected data on minor account laws for this study (see Appendix A, Table A.1). Panel A of Figure 1 maps the states where teenagers are allowed to have independent accounts at state-chartered banks, as well as the first year in which this was legally permitted. These laws begin in the early 1900s. By 1985, 19 states had laws allowing minors ages 15 and older to have their own checking or savings accounts, and this number grew to 29 states by 1999 and 45 states by 2017. We rely on variation over time in state minor banking law policies across states from 2000 to estimate the effects of state laws in this study.

Since these policies only apply to state-chartered banks, it is important to see that state-chartered banks exist uniformly across states. In Panel B of Figure 1, we map every zip code where there is at least one state-chartered bank based on bank-level data from the FDIC from 2017. This map suggests that indeed, state-chartered banks exist in nearly all populated areas.^{^[5]}

Our thought experiment is as follows: a 16-year-old wants to open a checking account and wants the money to be hers and hers alone. Depending on the state and year, she is either able or not able to open the account on her own. That difference allows us to identify the effects of access to accounts.

2.2 Minor-owned Accounts and Financial Behaviors

Can minors benefit from access to an independently owned, non-custodial account? Survey data show that young adults (age 18 to 22) are among the most likely to report they could not come up with $2,000 in the event of a financial emergency within the next month. They are also more likely to use high-cost non-bank borrowing, including payday loans, auto title loans, rent-to-own stores, and pawn shops (FINRA Investor Education Foundation 2016). At the same time, young adults are the most likely age group to be unbanked, defined as not having checking, savings, or similar accounts used to deposit funds, store cash, and make payments (Hayashi, Minhas, and others 2019; Addo 2014).^{^[6]} Owning their own checking account may motivate teenagers to open bank accounts, and having these accounts may benefit them as they deposit paychecks, transfer funds, and smooth consumption over time.

For young people who are afraid that their parents or guardians will meddle in their finances, the prospect of having a custodial joint account may be especially problematic. These youth may have more to gain from being able to open independent bank accounts allowed under minor bank account laws. While there is scant research on the incidence of parents abusing their minor's financial accounts, one review is suggestive that, at least for some teenagers, the ability to have an account separate from their parents would be valuable (Postmus et al. 2020).^{^[7]}

Cross-sectional data from the Programme for International Student Assessment (PISA) study by the Organisation for Economic Co-operation and Development show that youth who report having a bank account also show higher levels of measured financial literacy (Federal Deposit Insurance Corporation 2014; Jappelli 2010). Prior studies show that account ownership could facilitate financial learning. Jamison, Karlan, and Zinman (2014) conducted an experiment randomizing financial education only, financial education and account access, and account access only. They found that financial account access has some positive effects independent of other interventions, although there is stronger evidence that bank accounts and financial education are complements.

Trust in banks has been shown to be a key factor that facilitates access to banking and the use of bank accounts (Traweek and Wardlaw 2020). However, if young people have a negative experience with fees, overdrafts, or the tricky process of transitioning the account from a minor to an adult account that could reduce the level of trust that teenagers have in banks. A negative first experience with financial services could result in a shift in longer-run preferences and beliefs (Christelis, Dobrescu, and Motta 2020). Younger, first-time banking customers tend to have accounts with low balances and incur costs both for financial institutions and consumers (Porteous 2015). Young adults are more susceptible to making financial mistakes (Agarwal et al. 2009) and negative experiences could affect their future (Christelis, Dobrescu, and Motta 2020).

[3] There are several additional legal issues related to accounts for minors. For example, there are regulations to protect minors from having their assets abused by an adult, as well as to protect them from their own potentially uninformed decisions (Rhine, Greene, and Toussaint-Comeau 2006; Office of the Office of the Comptroller of the Currency 2017).

[4] Common records databases include TeleCheck, ChexSystems, and EWS.

[5] FDIC Statistics on Depository Institutions Report as of September 2018 shows 1,159 total nationally chartered institutions with depository insurance, and 4,318 state-chartered institutions. However, nationally chartered firms have about twice the assets of state-chartered firms. At the same time, NCUA reports 5,480 credit unions; of these 3,608 have national charters, with both types of charters holding roughly equal assets.

[6] These types of transaction-based accounts are distinct from college savings or child savings accounts used to save for a specific, restricted purpose. See (Sherraden et al. 2013) for a discussion.

[7] For example, one post in 2018 included the following statement: “I just recently got a job and I obviously need some type of savings and/or checking account but I want it completely out of my parents' reach. They've borrowed money from my siblings...not paying [it] back.” https://www.reddit.com/r/personalfinance/comments/9e9yfm/im_a_teen_17_who_wants_to_open_up_a_bank_account/

We use a two-way-fixed-effects difference-in-difference (TWFE) strategy to identify the effect of minor account laws on account ownership. Our main dependent variable (Y) will equal one if the individual has a bank account (checking or saving) and zero otherwise. We will use variations of the below specification, though we use different datasets to understand different populations. We estimate forms of Equation (1) using a linear probability model (LPM).

Difference-in-difference (DD) specifications require that the treatment and control groups are parallel in the pre-policy period and the treatment group would have trended similarly to the control group in the absence of the policy. Figure 2 shows suggestive evidence for the validity of the parallel trends assumption by comparing the trends in the pre-period across the treatment and control group for those aged 18 to 20 and 18 to 24. We show these event studies for each of the downstream outcomes: whether or not the individual has an account (Panel A) and whether or not the individual has used AFS (Panel B). There is no evidence in any of the four graphs of a trend prior to the start of the policy.

Developments in the TWFE model, particularly with the staggered rollout of policies, suggests that using states that are always treated as a counterfactual could be problematic (Goodman-Bacon 2021). Thus, we provide robustness exercises in Appendix Table A.3, showing that the results are robust to dropping individuals in states where policies were always in effect.

[9] If we do not control for household type and/or race/ethnicity, our results do not change.

[10] While we technically control for the existence of a law allowing minors to have independent accounts at credit unions, only three states changed their laws since 2000—Michigan (2004), Iowa (2007), and Illinois (2012). Thirty-three states already had minor account laws for credit unions before 1999. Since we use state-level fixed effects, this means the control will only be included in specifications when we study downstream outcomes.

[11] See Appendix Table A.2. The only variable that is statistically different from zero at the 0.10 level is state gross product, where an additional $1 billion increases the likelihood of passing the policy by 0.1 percentage points. This marginal effect is quite small.

To estimate the effects of MBLs on account ownership and downstream behaviors, we rely upon three main datasets. First, we use the Survey of Income and Program Participation (SIPP) to gauge the first stage: do these laws increase account ownership among those eligible? Second, we determine how long the bump in account ownership lasts using the FDIC Un(der)-Banked Survey. The FDIC data also let us examine how the policy affects the use of alternative financial services (AFS). Third, we examine how MBLs affect downstream credit outcomes using data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP).

4.1 SIPP Data

We begin with data from the SIPP to estimate the effect of increased access to minor-only accounts on account ownership for minors. While the SIPP is a short panel, we use the data as a repeated cross-section of two survey waves: 2014 and 2018. Within these waves, there are observation periods from 2013, 2014, 2015, 2016, and 2017. While there are additional earlier waves, the availability of bank account information began with the 2014 wave of data. We build a cross-sectional sample of 16-year-olds to maximize our sample size and not consider the same people at different ages.^{^[12]} This strategy relies upon changes in Georgia (2017), Kansas (2015), Massachusetts (2014), New Hampshire (2015), and Oregon (2015).

4.2 FDIC Survey Data

To determine how MBLs affect downstream account ownership and use of high-cost alternative financial services (AFS), we use data from the FDIC’s Un(der)-Banked Survey (henceforth, FDIC data).^{^[13]} These data are collected every two years, as a supplement to the Current Population Survey, beginning with 2009. We use the data from 2009, 2011, 2013, 2015, and 2017 in this study. Across all waves, the FDIC survey asks about account ownership (checking and savings accounts) and alternative financial service use for each member of the household. We consider only those observations for whom the primary respondent in the household is aged 18 to 24.

The survey further asks why individuals are unbanked (if they are). In the 2015 and 2017 data, where the question is asked identically, there are three main causes among those under 25: “I do not have enough money to keep in an account” (35%), “Account fees are too high” (11%), and “I do not trust banks” (10%). The percentages are only slightly different for those of older ages.

Again, our focus for this study is to understand how account ownership at early ages affects downstream financial outcomes. To do this, the FDIC data help us to understand whether those in states where account ownership increases see a continued increase in having an account once they reach adulthood. We also investigate whether they use alternative financial services. (See Figure 3 for visual tabulations of bank and under-banked status.)

We are missing data on AFS use for 28 percent of the sample, who report that they do not know if they did or did not use AFS in the last year. This could be because they either do not want to admit to using it or because they have never used it and are unsure exactly what it means. In either case, we expect this to be uncorrelated with the policy and thus contribute to classical measurement error.

4.3 CCP Data

To understand how MBLs affect downstream financial outcomes, such as starting one’s financial independence earlier, credit scores, and delinquency rates, we turn to data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP). These data represent a 5 percent random anonymized sample of credit reports across the country, and also include any other household members of those who were selected for the random sample. Since the data were pulled from credit reports, we can observe only outcomes that would appear on a credit report, such as a measure of credit score, credit and debt accounts, and if the individual is behind on an account. This means we cannot observe any demographic characteristics outside of age, such as marital status, gender, race/ethnicity, and education. We also cannot observe any activity on the market for payday loans or other forms of AFS, commonly referred to as “alternative credit reporting.”^{^[14]} The data we use are from the fourth quarter of each year spanning from 2009 to 2017.

The CCP provides different evidence than the FDIC data. In addition to reducing measurement error based on self-reports, account ownership and AFS use are in a way, extreme outcomes. Since so many young adults are banked, account ownership may not fully reflect learning from early-life account access. Instead, learning through an independent account as a minor may allow those just starting their financial independence to make smarter financial decisions across the board. This may result in having a credit report relatively earlier, having a higher credit score, and being less likely to be behind on accounts. The CCP data allow us to explore this.

4.4 Additional Data

In addition to our three primary datasets, in Appendix B we investigate supply-side responses to the minor account laws using data from the FDIC on the number of state-chartered and federally chartered banks by state and year. Also, data from the Bureau of Labor Statistics on the state-level unemployment rate is included as a control in several estimates.

[12] In the SIPP, some observations experience a change in year-of-birth across the panel. To be consistent, we take the first observation (the first time it is asked) and drop observations when year of birth is 2 or more years from the first year reported.

[13] For more on these data, see https://www.fdic.gov/analysis/household-survey/.

[14] Others have referred to these agencies as “specialty consumer reporting companies.”

Do minor account laws affect bank account ownership among minors? Does access to an account impact young adult banking and credit behavior? This section discusses the results of our estimates and provides evidence on the downstream outcomes after minors become young adults, including account ownership, alternative financial services use, credit scores, and loan delinquency.

5.1 Minor account laws increase account ownership

In Table 1, data from the SIPP show that among 16-year-olds, state policies allowing minors to own independent bank accounts increase the likelihood that those eligible have accounts. MBL increases the likelihood that 16-year-olds have a checking or savings account by 8.1 percentage points (Column 1), which is about a 29 percent as a marginal effect relative to the mean rate of 28 percent banked. Column (2) further shows that MBL increases the likelihood of having over $100 saved in a checking or savings account by about 8.8 points.^{^[15]} The $100 threshold suggests that the individual did not simply open the account with a minimum balance and not use it. Column (3) shows that the MBL policy increases the likelihood of having an independently owned “solo” account. Specifically, the MBL shows a 5.4 percentage point increase in solo-owned accounts, which is 41 percent of the mean rate of 13 percent.^{^[16]} Column (4) shows that the MBL policy may shift minors away from joint accounts, though the magnitude is small (0.2 percentage points) and not statistically different from zero. We take this as evidence that the policy generates an overall increase in account ownership among minors, especially solo minor-owned accounts.

The findings from the SIPP data provide evidence that there is a first stage effect of MBL: minor account laws increase account ownership among minors.^{^[17]} To validate this even further, we investigate the effect of the MBL on having a checking or savings account among 18 and 19-year-olds in the FDIC data, as displayed in Table 2. Restricting the sample to the ages where an individual reaches adulthood (age 18) provides additional evidence of a first stage from the prior estimates. Indeed, we find that the MBL policy increases the likelihood of having an account by 8 percentage points in Column (1) among 18- to 19-year-olds. While this seems on par with the magnitude in the SIPP, the mean account ownership is much higher among 18- and 19-year-olds (90 percent compared to 28 percent). Thus, the effect is economically and statistically significant, though smaller in size than for 16-year-olds, at only 9 percent of the mean. These results are robust to dropping states that were always treated (as shown in Appendix A, Table A.3). We further show the two-way decomposition of the has account results in Table A.7, where all of the average estimates for each treatment and comparison group are positive and economically significant (Goodman-Bacon 2021).

Table 1: Overall Effects of Minor Account Laws on Account Use for 16-Year-Olds

	Has Account	Over $100 Saved	Has Solo Account	Has Joint Account
	(1)	(2)	(3)	(4)
Minor Banking Law	0.0811* (0.0480)	0.0883** (0.0384)	0.0536* (0.0317)	-0.0019 (0.0420)

Mean DV	0.2779	0.0852	0.1329	0.1548
N	3,417	3,417	3,417	3,417
Statistically significant at 10% level; * at 5% level; *** at 1% level.

Notes: Robust standard errors clustered at the state level in parentheses. Linear probability models estimated. All models estimate Equation (1). The data include 16-year-olds only. Data from the 2014 and 2018 waves of the SIPP.

5.2 Minor account laws and financial behavior

We have documented an increase in account ownership after MBL policies allow minors to have independent accounts. We next seek to understand if access to accounts as minors changes the trajectory of financial outcomes as young adults. We again assign treatment based on whether the policy existed in the individual’s state when they were aged 15 through 17.

One important question is: do those early accounts result in higher rates of account ownership at older ages? Using the FDIC data, we expand our sample to follow those treated as minors when they are 18 through 24 years of age. In Table 2 Column (2), the effect of the policy at 18 to 20 years of age is one-quarter the size of the effect at 18 and 19 years of age and is no longer statistically different from zero. Further, Column (3) shows that changing the ages for the sample to 21 through 24 flips the sign of the estimate, although it is not statistically different from zero. While the states being used to identify the variation in Columns (1) and (2) are the same, fewer states identify the variation in Column (3). If we restrict the sample in Column (1) to include only states that identify the effects in Column (3), our effect size becomes larger (0.147 with a standard error of 0.048).

Account ownership is extremely common even among 18- to 20-year-olds (89 percent have accounts). A supplemental analysis in Figure 4 plots coefficients and 95 percent confidence intervals for the effect of minor account laws on whether an individual is banked by each age group through age 29. These estimates confirm that the estimated effect falls to zero by age 20 and becomes a more precisely estimated null at later ages.

Though we see no change in the likelihood of having an account as individuals age into their early 20s, it could still be that there is some learning from early accounts that shifts them away from making financial decisions that are potentially costly. In Columns (4) and (5) of Table 2, we seek to understand how the MBLs affect the use of alternative financial services, which arguably are a substitute for being banked. When focusing on 18- through 20-year-olds in Column (4), we find that the MBLs decrease the use of AFS in the last twelve months by 7.7 percentage points, or 21 percent relative to the mean rate of AFS use of 36 percent. While the coefficient is large, it is not statistically different from zero at the 90 percent level; we are limited in our sample size because the 2009 survey wave asked the AFS question differently (ever versus in the last year). The magnitude of the coefficient suggests that early in life account access may potentially shift young adults away from high-cost borrowing. However, the final column shows that this effect flips signs and remains statistically indistinguishable from zero when we consider those 21- through 24-year-olds. Thus, the relationship changes relatively quickly.

Table 2: Downstream Effects of Minor Account Laws on Account Ownership and AFS Use

	Has Account				Use AFS
	(1)	(2)		(3)	(4)		(5)
Minor Banking Law	0.0811**	0.0233		-0.0214	-0.0773		0.0706
	(0.0325)	(0.0236)		(0.0144)	(0.0814)		(0.0644)
Mean DV	0.896	0.892	0.903		0.359	0.319

N	1,202	2,463	8,896		1,226	5,138
Ages	18-19	18-20	21-24		18-20	21-24

Notes: Robust standard errors clustered at the state level in parentheses. Linear probability models estimated. All models estimate Equation (1). Data from the FDIC Un(der) Banked Survey. “Has Account” equals one if the individual has a checking or savings account and zero otherwise. “Use AFS” equals one if the individual has used alternative financial services in the last 12 months and zero otherwise.

We further probe these AFS results by type of AFS used in Figure 5 to determine if the noisy coefficient comes from one type of product. In Panel A, we plot the coefficients and 95% confidence intervals for 18- to 20-year-olds and in Panel B we do the same from 21- to 24-year-olds. We see that for the younger sample, the noisy decrease in AFS use comes from a reduction in money orders, though it is still not statistically different from zero. However, there is a clear increase in the use of check-cashing services for the older sample.

Supplementary estimates show that these results are robust to dropping states that were always treated (Appendix Table A.5) and adding state-specific linear trends (Appendix Table A.6). The decomposition for the banked outcome (Appendix Table A.7) indicates that the bulk of the average estimates are positive for 18- to 20-year-olds and negative for 21- to 24-year-olds. The substantive comparison comes from treated states versus always treated states and treated states versus never treated states (Goodman-Bacon 2021).

To provide further evidence, we examine the effects of the MBLs on credit and debt behaviors using the CCP data. In the first column of Table 3, we see if MBLs change the age at which one has their first credit report. For this specification, we create a cross-section of over 3.7 million observations that were aged 18 to 37 in 2017, indicating at what age each had their first credit report. Since having a credit report suggests that the individual had sufficient credit activity to generate a credit file, this measure reflects early experience with credit and debt. This finding suggests that the MBL decreases the age at which one had a credit file, though the magnitude is small (0.19 years) relative to the mean of 20.6 years for the first incidence of credit.

If experience with a bank account is a valuable financial experience for minors, we may expect financial decisions to be reflected in higher credit risk scores (where higher scores predict lower risk). In Table 3, we find the effects are very small in magnitude in the case of 18- to 20-year-olds on both credit scores and delinquency behaviors (Columns (2) and (4)), and not statistically different from zero. Among 21- to 24-year-olds, the estimates on credit scores are statistically significant and negative: access to minor accounts reduces credit scores by 2.8 points relative to a mean of 633. MBLs appear to drive financial decisions that slightly reduce credit scores. This is further supported by the fact that we also see increases in delinquency rates due to the MBL for those 21 through 24 years of age in the final column of Table 3. Access to minor accounts increases the likelihood of being behind on account by 0.85 percentage points or about 5 percent as a marginal effect from the mean.

Table 3: Table of Downstream Effects of Minor Account Laws on Credit Outcomes

	Early Credit	Equifax Risk Score		Past Due
	(1)	(2)	(3)	(4)	(5)
Minor Banking Law	-0.188*	-0.470	-2.801***	-0.00011	0.0085**
	(0.112)	(0.917)	(0.953)	(0.0013)	(0.0035)
Mean DV	20.64	642.29	633.30	0.068	0.169

N	3,756,628	2,017,077	5,568,291	2,284,659	6,146,305
Ages	18-37	18-20	21-24	18-20	21-24
Years	2017	2009-2017	2009-2017	2009-2017	2009-2017
Statistically significant at 10% level; * at 5% level; *** at 1% level. Notes: Robust standard errors clustered at the state level in parentheses. All models estimate Equation (1) with data from the Federal Reserve Bank of New York/Equifax Consumer Credit Panel (CCP). Early Credit is the first year the individual shows up in the credit file. For this specification, we use a large age range in one point of time (2017). Risk Score is the CCP’s measure for credit scores and ranges from 280 to 850. Past due equals one if the individual is behind on any account and zero otherwise. We estimate linear probability models for that variable.

In comparing our effects on AFS use from the FDIC and on credit scores from the CCP data, we note a few caveats. First, the CCP data do not include information on AFS loans or repayments. Second, the FDIC data do not include young adults who still live with their parents, since we only observe cases where the primary respondent in the household is 18- to 24-years-old. Third, the FDIC account ownership question uses a 12-month look-back period. People who had minor-owned accounts but have not opened a new adult-owned account could report being banked at the same time they are using AFS for their financial services. Finally, the FDIC data are self-reported, and as discussed earlier, 28 percent of the FDIC sample report that they are unsure of whether they have used AFS in the last year. While these caveats do not undermine our main estimates, they do highlight the differences across datasets.

[15] Mean savings among those with a checking or savings account is $418.

[16] The reason that average is not zero before the start of the policy is because nearly all states allow state-chartered credit unions to offer independent accounts to minors.

[17] It could be that MBLs affect youth employment by making it easier to have one’s own money. We check this in Table A.4, and though the effects are positive, they are not statistically different from zero.

Access to financial services plays an important role for young people, including being able to become financially secure and independent from parents and guardians. Savings may be especially important, since even a small amount may facilitate investments in human capital (Martini et. al. 2021). At first blush, allowing young people to have their own accounts before they turn age 18 could help accelerate a young person’s financial independence. State laws allowing minors to own their own bank accounts appears to increase account ownership among 16-year-olds by 8 percentage points (or 29 percent as a marginal effect). This is consistent with increased financial inclusion for this targeted population. However, this increase fades out by age 24, when compared to others in the same state who did not have early minor-owned account access and across other states where minor-owned account access did not change. From ages 21 through 24, adults who had access to accounts as minors were more likely to use higher-cost financial services, particularly check-cashing services, were more likely to be behind on accounts than those who were not eligible for minor accounts.

Teenagers in all states can get accounts with a custodian or joint owner. These accounts can also transition to adult-owned, non-custodial accounts once the custodial co-owner turns age 18. However, with joint accounts a parent or guardian will still have access to the account when the minor turns 18; this is not the same with a minor-only account. The minor-owned, non-custodial accounts may be more likely to have problems like negative balances or back fees since there is no adult to serve as a backstop. This may also present a barrier to opening a new account, in addition to any problems the young person faces with having the appropriate identification documentation to open an account. Liu (2018) identifies the friction of low balances for account owners. Minor-owned accounts likely are small balance accounts, but also have a special form of friction as minors who have their own accounts before age 18 transition to being able to open a conventional account.

Financial institutions and bank regulators need to carefully consider the transition from minor-owned to adult-owned financial products. There are two potential problems: (1) frictions in applying for a new adult account, and (2) dealing with mismanaged accounts. Guidance from federal regulators provides some latitude for financial institutions to streamline due diligence procedures for opening minor-owned accounts, which presumably could be applied to the process of transition from minor accounts to adult-owned accounts (Board of Governors of the Federal Reserve System 2015). Minors with accounts could be provided with simplified procedures to open an adult account at the same financial institution, for example. Banks could also work with the minor to have all required paperwork on file, including their government-issued ID and valid address, before their 18^th birthday.

Strategies to address problems with minor-owned accounts include ways to remedy negative account balances, including limiting or forgiving fees and providing a way to pay off negative balances over time. These strategies should help consumers with minor-owned, non-custodial accounts to be able to fully participate in mainstream financial services.

Custodial accounts have the benefit of the parent or other adult to help the minor manage the account, avoiding mistakes, and then transition to an independent account as an adult. However, not all minors have a reliable adult to serve as a custodian. Alternative custodians, including nonprofit organizations, maybe another strategy to facilitate financial inclusion for minors.

The advent of FinTech and online financial transactions has increased the focus on how much independent access to financial services consumers should have (Welch 2020). Media attention has raised scrutiny about young people’s ability to actively manage financial services alternatives.[18] Nevertheless, teenagers appear to be able to access an ever-expanding set of financial instruments, including access to stock trading.[19] Young adults can engage in ever riskier financial products and investments (Hasso, Müller, Pelster, and Warkulat 2021). Based on the current study, more evidence is needed to understand the intended effects of minors managing their own accounts, including account misuse and KYC frictions. Regulators in states that permit access to minor-owned non-custodial accounts should monitor problems with these accounts. Banks and banking regulators should also focus more on how to expand financial inclusion for people aged 18 and older, including guardrail provisions to prevent problems like accrued negative balances or compounding fees, such as those promoted by the national Bank On certified account standards (https://joinbankon.org/). Stricter screening and monitoring of the use of products by both teenagers and young adults in financial markets may have benefits for both firms and consumers.

[18] See for example: Megan Mccluskey Time June 24, 2021 'Someone's Going to Be Left Holding the Bag.' How Finance TikTok Is Navigating 'Meme Stock' Hype Among Young Investors https://time.com/6073524/meme-stock-tiktok/

[19] Maggie Fitzgerald “Now teenagers can trade stocks with Fidelity’s new youth investing accounts” May 18 2021 https://www.cnbc.com/2021/05/18/now-teenagers-can-trade-stocks-with-fidelitys-new-youth-investing-accounts.html

The authors have no relevant financial or non-financial interests to disclose.

The authors thank Alfredo Burlando, Luke Reynolds, Chris Stoddard, Pierre Carl Michaud, and seminar participants at the University of Glasgow, HEC-Montreal, the BBVA EduFin Financial Education Summit in Buenos Aires, and the Economic Self-Sufficiency Policy Research Institute at the University of California-Irvine for helpful comments. Samantha Cleary provided excellent research assistance. Carly Urban’s work on this research was in part funded by the EduFin Center for Financial Education and Capability, an initiative by BBVA; the grant number is 4W7680. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the research staff or the Board of Governors. All authors contributed to the study conception and design. Larrimore and Urban performed data analysis. All authors contributed to the final manuscript.

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No competing interests reported.

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Bank Accounts for Minors: A Pathway to Financial Inclusion or a Dead-End?

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