YOUR kids are worth $10 billion to Commonwealth Bank.
That’s the “true” value of all those little $2 coins in yellow envelopes to the nation’s biggest lender, according to the first analysis of its kind to attempt to put a dollar figure on the iconic school banking program which reaches about 574,000 children every year.
“There has been a lot of scrutiny into Dollarmites in the past, but no one has really tried to quantify the value — I think because no one, except CommBank really knows what it’s worth,” Reji Eapen, founder of financial education start-up Pennybox, said in an email interview.
He described the analysis as a “wake-up call” to the Australian government to mandate independent financial literacy and prohibit bank marketing activities in schools.
“The financial analysis is important because it puts into perspective the dollar value of the program to CommBank as a group — which is about eight per cent of their current market cap,” he said.
“I believe this is why they defend the program so vigorously. If the Australian government — and the public more widely — are more aware of the financial value, they can then take a closer look.”
Mr Eapen, a former equities analyst with Bank of America Merrill Lynch and UBS, based his analysis on two key elements.
The first is how much CommBank makes on the program itself. By combining the number of accounts, the average child balance, and the bank’s net interest margin, he arrived at a figure of $6.6 million per year in revenue, minus $2.3 million a year paid in commissions to schools, for an annual gross profit of $4.3 million.
The second and more important element — the “true genius” of Dollarmites and its successor, the high-school-age targeted Start Smart program — is how much CommBank makes from those kids when they grow up and stay on as customers.
A survey last year by consumer group Choice found 46 per cent of Australians who opened their first account with CommBank had not left. Mr Eapen combined a “conservative” 40 per cent retention rate with an estimated customer lifetime value of $76,000 to arrive at a figure of $9.9 billion.
“Basically, this is a huge long-play business for CommBank,” Mr Eapen said.
“The customer lifetime value for Dollarmites is built up around the reliance of these kids staying sticky to a single bank and rolling through products like credit cards, personal loans, mortgages, and maybe even share trading through CommSec.
“It goes without saying that CommBank has an unfair competitive advantage against the other banks to the tune of $10 billion. While the intention of the Dollarmites program was once pure, this is no longer the case when a for-profit bank apparently owns the entire financial literacy space in Australian schools.”
CommBank was unable to comment on financial details ahead of its half-year results early next month, but in a statement appeared to dispute at least part of Mr Eapen’s analysis, saying the school banking program did not make money.
“Our school banking program is designed to teach Australian children regular savings habits,” a spokesman said. “It is not designed to make money — it costs more to run than it makes.
“The program is delivered to educate schoolchildren about the importance of saving on a consistent basis, and motivate them through a rewards program that encourages regular deposits.
“It has been running in Australian schools since 1931, and we are very proud of the contribution it has made to the financial education of millions of Australian students over the course of the last 86 years.”
But CommBank did not directly address the assessment of the long-term value of the program, saying it did not track retention rates.
“The school banking program is run separately to our banking business, and we do not capture data that tracks whether school banking participants become adult customers,” the spokesman said.
The Dollarmites program was originally created in 1931 when CommBank was still government-owned and operated — but in 1991, when CommBank was privatised and floated on the Australian Stock Exchange, the program continued.
While Westpac also offers a small school banking program through BankSA, Dollarmites has an effective monopoly on the space.
Last October, consumer group Choice called for an outright ban on Dollarmites accounts, with chief executive Alan Kirkland saying bank-run financial literacy programs in schools “give banks unfettered access to market their brand to schoolchildren”.
In 2015, financial counsellor Pam Mutton told a Senate inquiry how all four of her children had been invited by CommBank to take out a credit card shortly after turning 18.
“They used the engagement through Dollarmites to send them [letters to apply] for their very first credit cards,” she said. “Commonwealth Bank practices cradle-to-grave banking.”
Personal finance author Scott Pape, who writes under the name the Barefoot Investor, told the same inquiry that letting banks educate children about money was like “Ronald McDonald teaching them about nutrition”.
Following Choice’s criticism last year, CommBank said it would overhaul the commission structure — $5 for every account opened and 5 per cent of every deposit — which saw it pay $2.3 million to schools in the previous year.
In response to Mr Eapen’s analysis, Choice spokesman Tom Godfrey said with CommBank “dominating the first account market, this is a clear competitive advantage for a company that has a track record of treating its customers poorly”.
“Banks with in-school programs, like Commonwealth Bank, are given a significant marketing advantage — they collect new customers, expose them to the brand and cement a relationship with them from a young age,” he said.
“As they reach adulthood, these former Dollarmites become easy marketing targets for the bank’s other products, such as credit cards. New protections are needed to prevent banks aggressively marketing to children.
“Banks should be prevented from giving kickbacks to schools to market and sell products to children. Financial literacy education for young children is vital, and Choice supports the ASIC MoneySmart Teaching program. This program provides teachers with skills and independent resources to provide financial literacy education.”
Mr Eapen said CommBank was not doing anything wrong “legally”. “Ethically, I and many others before me, have questioned the motivation behind a bank teaching financial literacy to our kids,” he said.
“On the surface, they promote social and community responsibility, however my analysis suggests that there is a significant financial incentive for them to run the program. I wrote this piece as a call to action for the Australian government.
“As a nation, we have regulations against companies marketing and positioning their brand with kids when it comes to alcohol, toys and even junk food — why not financial products?”
Mr Eapen said Australians “need to wake up to the reality of what Dollarmites and Start Smart really is — it’s an avenue for a single bank to inexpensively reinforce their brand to young and unsuspecting kids”.
“It’s time for our government to regulate banks out of our schools, and then think about mandating financial literacy into our school curriculum as the next step,” he said.
“Short of exiting schools and competing for these customers in an open market, nothing CommBank does will really fix the problem. When the program is worth $10 billion to them, I don’t think they would want to do much either.”
Treasurer Scott Morrison and Shadow Treasurer Chris Bowen did not immediately respond to requests for comment.