Risk Management Considerations in Offering Deposit Accounts for Minors

Offering deposit accounts for minors can be a rewarding experience for the bank, the minor, and probably parents or guardians of the minor who are also customers of the bank. However, because minors in most cases are deemed to be unable to appreciate the risks of entering into a contract, there are several risk management considerations for the bank in offering services to these customers; for example, the terms addressed in the account agreement, whether an account can provide a debit card, and other considerations set forth under state law.

States generally protect minors from their lack of maturity by making contracts with minors voidable. This means that a minor who enters into a contract may decide not to be subject to its terms and the other party (here, the bank) would be unable to enforce the obligations of the account agreement. Still, many states also balance the need of minors to obtain bank accounts with the reluctance of banks to offer them due to the voidable nature of the contract. 

State legislation varies widely in balancing these considerations. For example, the Texas Finance Code, § 34.305, allows a bank to establish a bank account for a minor in their sole name and hold the minor liable to the account agreement as if they are an adult. This provision is further subject to allowing the parent of the minor to deny access to the minor to the account. By contrast, Tennessee Code, § 45-2-702, allows a bank in Tennessee to establish a deposit account for a minor on the condition that another owner who is not a minor is also an owner of the account. Still, North Dakota, for example, passed on legislation thus far specifically addressing accounts for minors.

In light of these considerations, it is imperative for banks to review the governing provisions of their jurisdictions in structure account agreements and the accompanying services of a deposit account for a minor. A bank in Texas would have to create procedures to allow a parent or guardian to submit instructions to the bank in accordance with the provision above, Whereas, a Tennessee bank, would generally be able to hold the adult account-holder liable as a joint owner with the minor.

The above examples are default state provisions that undoubtedly inform bank procedures and the terms of deposit account agreements for minors. However, these examples are only the beginning of risk management considerations in offering deposit accounts for minors. For example, these default provisions may allow the bank to hold a minor liable to the account terms. However, a minor can still void contracts entered into with other parties. For example, if the bank issues a debit card to a minor, the minor may make a large purchase and void the purchase with the merchant on the basis of their age. In turn, such a merchant may pursue restitution against the bank for allowing the transaction to occur by having provided the minor a debit card. 

There are a number of ways to address risks like the debit card example above. The state provisions above may already allow the bank to transfer the liability incurred from the merchant to the minor. The consideration here is reputation risk. Such a liability transfer may result in collection efforts or litigation. It is very unlikely such actions would be well-perceived by the public when taken by a bank against a minor, even if in good faith. Therefore, a potential consideration would be offering lower transaction limits. This approach potentially balances offering a competitive deposit account for a minor with risks of substantial losses that can lead to dispute with minors.