With the number of children using digital services increasing by the year, the need for greater online financial protections is increasing considerably.
In a recent post, RegTech firm PassFort looked deeper into the area of KYC compliance for kids with the rise of children’s apps for budgeting, saving and spending climbing in tandem.
According to research from Ofcom, in 2020, 55% of all children aged 5-15 had their own smartphone while 61% had their own tablet. Meanwhile, Fintica estimated a potential market value of over $50bn globally for products aimed at children and teenagers. This considered retail tech for kids as well as apps for financial education, digital pocket money, trading and money-for-chores.
PassFort noted that there has been a rise in the popularity of subscription-based financial products for children. Most of these services, the company states, allows parents or guardians to set spending limits and some receiving limits. In the area of KYC, how does this happen?
According to PassFort, in the case of a bank account, a child becomes part of the compliance process. To date, a child has to be at least 11 years old to open their own bank account. A parent or guardian will need to be present to set up a bank account for a child, unless the child is aged 16 or above.
The company added, “To set up a bank account for a child in the UK, you usually need to provide two identification documents, such as a name ID (passport or birth certificate) and address ID (these can be in the parent’s name if the child lives with the adult).” This is a necessary part of KYC to ensure no money laundering is taking place through a tax-free account.
For many of the newer digital financial products, KYC isn’t carried out on the child at all. Instead, it is carried out on the parent or guardian who is subscribing to the product and funding the card.
However, what happens when the child of the subscriber grows up? According to PassFort, the individual in question probably doesn’t go through a KYC process. The company remarked, “With many of the new digital financial products for children, the account is allowed to carry on as long as the subscription is paid, regardless of whether the child is now an adult. The child could – for instance – be a student and still need access to the bank of mum and dad.”
This can also pose a risk to the financial institution, for the reason that they have a full grown adult receiving funds via an app or prepaid card without them having gone through a KYC or AML process. There currently isn’t a legal requirement for KYC to take place on the child, and due to it being assumed they are a child or a dependent the perceived risk is low.
PassFort said, “There is a possibility this opens an avenue for money laundering, particularly if children have become adults with the natural passage of time. It’s perhaps time to consider a stage in the KYC process that accounts for this and to do additional risk monitoring. Adding this step would put in place processes and decision checkpoints to ensure ongoing reviews which may help avoid risk and identify any suspicious activity taking place on an account.”
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