How Fintech can promote financial inclusion and literacy

By Carlo Sala, associate professor at the Department of Economics, Finance and Accounting at Esade

Like math, literature, and the basic skills that people learn as children, financial literacy should be a regular course taught in every school for every student. A person who acquires an understanding of finances early in life has more time to take advantage of compound interest, can take more risks and build a better credit rating. In addition, the positive ripple effects benefit society as a whole. A growing body of evidence shows that people with financial literacy are less prone to bankruptcy, invest more and make better risk-weighted decisions under uncertainty – paving the way for a less anxious and stressful life. Financial literacy can improve the general welfare of society.

At the dawn of the fourth industrial revolution, an era of increasing uncertainty, opportunity and risk, fintech has emerged as a new tool to stimulate financial literacy. The removal of (often not entirely reliable) middlemen, together with the fact that almost all operations can now be carried out with a friendly tool – the smartphone – shortens the distance between the financial world and many young users. Studies from, among others, the World Bank and the OECD show that a low degree of financial literacy prevents the use of financial products. fintech removes this obstacle.

The best example of how fintech can improve financial literacy is applications such as World of Money, an American non-profit organization that gives young people a solid financial education through online videos divided by age group and subject. Other similar examples include Zogo, Rooster Money, Guardian Savings, Prism, Savings Spree, Mint and Investmate. They offer all user-friendly, intuitive and interactive applications that teach personal finance to different age groups.

Fintech can also improve financial inclusion by making banking services more accessible. There is still a large percentage of the world’s population without access to banks (about 1.7 billion people, according to the World Bank and the latest Findex report), but with the ability to use a smartphone. Application-based smartphone solutions such as Tala or Branch International help unbanked people give them first access to a range of digital productssuch as instant loans, money transfers, bill payments, high-yield investments and savings.

Fintech can also stimulate other literacy skills, starting with environmental knowledge. This can happen indirectly by saving significant paperwork as most traditional non-fintech contracts are usually printed and not stored on an individual device (contracts are usually only stored by the issuing company); as well as directly, through innovative fintech companies that help fight pollution. This is the case with new kid on the block Kakubi, which significantly eases access to otherwise difficult-to-buy EUA carbon allowances (exchange-traded certificates representing the right to emit one tonne of carbon dioxide). The acquisition of each allowance through Kakubi means that polluters are not allowed to pollute a tonne of carbon dioxide.

Obviously, this only works under certain circumstances. All that glitters is not gold. Fintech can only be positive in the presence of other important skills, such as media literacy (ability to access and critically analyze media messages), or technological competence (ability to use, understand, manage and analyze technology safely, effectively and responsibly). Moreover, fintech technologies can harm financial well-being, as they can lead to impulsive purchases and irrational investments. If not complemented with adequate training and knowledge, mobile applications that facilitate operations and reduce the time between acquisition and consumption can lead to impulse buying and overconsumption, which is often detrimental to consumer welfare.

A good example of potentially harmful technology for users without enough financial literacy is the world of cryptocurrencies, which produced windfall riches for a small minority of the population (early adopters, sophisticated investors and lucky investors) and huge losses for the rest. Recent studies show that financial literacy and cryptocurrency trading are negatively correlated. Financially literate people appear to be more aware of the existence of cryptocurrencies, and less likely to trade them, possibly due to their higher risk perception. While cryptocurrencies require media and technology skills, the most important skill is still financial literacy. These digital currencies are not isolated from the “generic” economy, and like all financial assets, they are strongly determined by the basic macro drivers of the economy, which are interest rates. Not surprisingly, most of their stellar performance appears to be tied to the long period of near-zero interest rates.

The fourth industrial revolution opens up an exciting and challenging time. New technologies can help improve the world’s well-being by increasing financial literacy, but only if properly introduced into learning programs. Nations are becoming aware of this, and financial literacy is entering some political decisions. Leveraging the growing world of fintech can help this process.