Packin on Financial Inclusion Gone Wrong: Securities Trading for Children

Nizan Geslevich Packin (City University of NY, Baruch College, Zicklin School of Business; City University of New York (CUNY) – Department of Law) has posted “Financial Inclusion Gone Wrong: Securities Trading For Children” on SSRN. Here is the abstract:

For the majority of Americans, money is the primary source of anxiety. It is especially tolling for parents and younger adults, with more than three quarters of parents, millennials and Gen Xers frequently experiencing emotional stress about money, and almost 90 percent of Americans believing that nothing could make them happier than knowing that their finances are in order. Looking for ways to help Americans deal with this source of anxiety, some believe that teaching children about financial investments at young ages can help increase financial literacy, and lower people’s money-related anxiety level.

There are many different ways to increase consumers’ financial literacy starting at a young age. Yet, despite the available public and private sector offered resources, and the clear need for caregivers to focus on this issue, studies show that most people do very little, if at all, to increase financial literacy. In recent years, identifying the educational market opportunity and the potential of the children’s financial literacy business niche, FinTech companies and even traditional financial institutions started offering financial services for children, reassured by research that shows that by six years old, children already are veteran consumers of smart device content.

The potential of this new market’s clientele is valuable for two reasons. First, having more customers is always a good thing. Second, these new customers will eventually mature into more traditional adult customers, and presumably, they will continue using the services with which they are familiar. And while there are some legal challenges associated with children not only entering into investment contracts, but also doing so online, this new market will continue to grow, because offering financial services to children is becoming more socially acceptable for Gen Z and Alpha members than ever before. Especially, given society’s newly adopted paradigm for describing, understanding, and shaping children’s rights, domestic relationships and custodial status, and even digital purchasing power.

But although digital financial apps can help educate children about the value of money, the importance of investing, and even the risks of trading, the trend of offering financial services directly to children should be of concern to anyone focused on consumer protection and financial regulation-related issues. Among those, the SEC, its new Chair, and other public figures, which are tasked with regulating these issues, and have raised concerns about the growing interest of financial service providers in younger users, as that interest became more apparent during the January 2021 RobinHood/GameStop stock controversy. Likewise, FINRA, which enables investors and firms to participate in the market with confidence by safeguarding its integrity, announced that it is looking for public feedback on the gamification used by financial service providers since it identified “risks associated with app-based platforms and ‘game-like’ features that are meant to influence customers.”

Using ethical reasoning and behavioral economics tools, this Essay explores several important issues as it suggests regulating FinTech companies’ and other financial institutions’ offerings of digital financial services to children. First, digital gaming is well-known to be addictive for children. Second, gamifying investing makes it feel less serious, not more serious, contravening the very notion that early education will help young adults understand the seriousness of money. Moreover, there is a connection between gamifying and gambling that is especially relevant in connection with gamifying investing. Third, children’s financial choices are more susceptible to the influence of outside, interested (and uninterested) parties. Lastly, parents are already struggling to keep up with supervising their children’s online activities. Enabling children to use digital financial apps will require much more effort on their parents’ part, as there are many things that parents need to be on the lookout for.