Should Banks Look for Customers in Schools? Some Say No – The Wall Street Journal

“It’s always sold as a really great numeracy program for the children and to teach them how to save,” said Ms. Donald. “But this is where the kids will end up having their first credit card and their first home loan.”

School banking programs, which typically involve a weekly deposit day and an annual visit from the bank and its mascot, are facing a growing backlash in Australia.

A recent critical report from the Australian Securities and Investments Commission looked at 10 banks and found they couldn’t show that their school programs helped children to develop long-term saving habits. It faulted the programs for exposing children to sophisticated marketing tactics and said banks didn’t state clearly a key objective was to attract customers.

The corporate regulator also objected to schools being paid to set up the programs. It found that four Australian banks contributed almost $2 million to schools that offered banking programs one year.

Victoria state—home to Melbourne, Australia’s second-largest city—this year banned banking programs from the schools that it runs. Other states plan to end the programs within months.

Concerns have been “repeatedly raised about banks using inappropriate tactics such as luring children with prizes and incentives to develop trust and loyalty in banks at an inappropriate age,” the Victorian government said when it unveiled its ban.

The securities and investments regulator found several banking programs offered rewards like toys or stationery to students. Ms. Donald said the program at her children’s school gave out rewards before it was dropped in 2018.

“They were designed to really appeal to children and they were always branded. They might be a handball for the kids, or it might be some colored pencils,” she said.

Supporters of the school programs counter that they play a key role in teaching the importance of saving and building trust in the financial system. Commonwealth Bank of Australia, the country’s biggest lender, says it is working with parents and groups including behavioral scientists to shape its school-banking program, which has the most participants.

Research by the Queensland University of Technology in 2019, which looked at persuasive advertising techniques, concluded that children aren’t necessarily vulnerable consumers.

“When we train children as consumers they are more responsible in their purchasing,” said Shasha Wang, a lecturer at the university.

Australia’s situation differs from the U.S., where some government bodies encourage lenders and schools to work together, taking a view that school-banking programs can contribute to the financial stability of individuals, families and communities.

The U.S. has historically had a large unbanked population, meaning that no one in a household has a checking or savings account at a bank or credit union. A survey by the Federal Deposit Insurance Corp., an independent agency created by Congress to maintain financial stability, estimated that 7.1 million U.S. households, or 5.4% of the total, were unbanked in 2019.

In 2015, the FDIC issued guidance to institutions encouraging youth savings programs in schools. Its regulations enable banks to establish the programs more quickly, provided the main purpose is education and not to make a profit. Almost 5,000 banks are currently insured by the FDIC.

Sherry Avena, chief executive of School Savings, which works with U.S. schools and banks to help students develop saving habits, says many parents lack the time to take children to the bank to make a deposit.

“Banking at school is a hands-on-experience that helps small children understand saving and the value of money,” she said. “Saving is the first step to financial literacy.”

Still, the programs have broader benefits for banks. Ms. Avena said more than 20% of parents have applied for a home loan from the bank that ran a School Savings program at their children’s school. On average, parents of children who used the School Savings platform will acquire four or more different products from the same bank.

For many in Australia, the intersection between business opportunities and education is problematic. Consumer group Choice estimates 35% of Australian adults still use their first bank account and they often have credit cards, home loans or other products with the same bank.

Among Australia’s four largest lenders, only Commonwealth Bank runs a school banking program. Choice estimated 46% of residents opened their first account with Commonwealth Bank, compared with 22% for the other major banks combined.

Matt Comyn, Commonwealth Bank’s chief executive, told lawmakers that more Australian states could follow Victoria by banning school-banking programs. “We, of course, hope that that is not the case. We obviously think financial literacy is very important,” he said.

Queensland state and Australian Capital Territory, home to Canberra, recently said they would end the programs. Some lenders have also pulled out. Bendigo and Adelaide Bank Ltd. stopped all its school-banking programs at the end of September, ahead of the release of the review by Australia’s corporate regulator.

Tanya Burton, assistant principal at Birralee Primary School in Melbourne, said parents and children haven’t complained about the cancellation of its long-running school-banking program, which followed Victoria’s statewide ban.

Even before then, she had worried parents would mistake the program for the school’s own efforts to improve financial literacy, and whether students who opened an account would end up becoming a lifelong customer of the bank. Annual visits by the bank and its mascot put too much emphasis on the brand and were very promotional, she said.

“Parents can still go and get their child a bank account and do their own banking,” Ms. Burton said. “Just because it’s not in schools anymore doesn’t mean that can’t happen.”

Write to Alice Uribe at alice.uribe@wsj.com