A new payment company is addressing what it sees as a gap in young people's knowledge about how their purchases can impact their future financial health.
The end goal is to find success in a challenging niche category — teen spending — where others have failed.
"There are a lot of educational tools that teach children about how to save money, how to manage chore money. But there's not a lot of education on how a credit card works," said Charles Polanco, founder of Greenhorn, which is accepting signups and plans to launch this year.
Polanco contends Greenhorn's model will be successful because it moves the focus away from parental controls. While Greenhorn will offer some parental controls, it will put more emphasis on enabling the user to earn and spend money under parental supervision.
"This is more of a credit card with training wheels," he said. "They can make a mistake here without it impacting them."
The New York-based Greenhorn offers a prepaid card that parents can use as a make-believe credit card to teach children the ramifications of spending money they don't currently have. Young people fill out an application for a Greenhorn card online. This application is then send to the child's parent or guardian for approval. The parent then extends a certain amount of "credit" of up to $1,000, though Polanco said a typical amount would be about $100.
The card operates like a prepaid card, and the parent sets payback terms, which are usually chores matched to a monetary amount. When the child does a chore, he or she registers that on the Greenhorn app or site, and the parent is sent an invoice. These "invoices" are paid through a link to the parent's bank account.
Parents can add chores and the amount of money for each chore through a menu on the site, which is still under development. There's also a feature to give a child a "credit score," along with emoji.
The parent pays a monthly subscription fee of $9.95. Since it is not a real credit card, Greenhorn does not report to credit bureaus. "If someone's not educated on credit, they may use it unwisely and accumulate a lot debt," Polanco said.
There have been other attempts to offer payment products for young people that have not worked out. Oink, which was also known as Virtual Piggy, shut down its teen prepaid card in 2016. Visa Buxx had a similar model to Oink, and worked through financial institutional partners such as Navy Federal Credit Union. Visa Buxx shut down earlier this year.
Greenhorn will face similar challenges to other providers, according to Michael Moeser, director of payments practice at Javelin Strategy & Research, who adds there is a definite gap in financial literacy among young people and there are very few starter cards to help young people build credit.
"In terms of the market for starter cards aimed at consumer new to credit or rebuilding credit, it is a very small market that is difficult for banks and card issuers to navigate," Moeser said, adding these "new" consumers tend to have thin files and fall into subprime categories. "The fees and APRs tend to be very high with the credit lines being very small. Charge off rates for these cards are higher than average cards."
Since Greenhorn is not a real credit card, some of the lessons may be lost on its target audience, Moeser said.
"In credit products, the bank gives you a loan for which you can make purchases that extend your ability to buy things," Moeser said. "In return, you pay the bank interest on the revolving balance and sometimes annual fees. If you miss a payment you are penalized. Not having these features does not teach a person about lending products."
Parents will not be able to set interest, Polanco said, but can select chores a child must do for "free" as an alternative to interest.