Fintech has emerged as a new tool to spur financial literacy.
By Carlo Sala, Associate Professor of the Department of Economics, Finance and Accounting at Esade
Like mathematics, literature, and the basic skills that people learn as children, financial literacy should be an ordinary course taught in every school to every student. A person who acquires an understanding of finance early in life has more time to benefit from compound interest rates, can take more risks, and build a better credit rating. Moreover, the positive spillover effects benefit the whole community. A growing body of evidence shows that people with financial knowledge are less prone to bankruptcy, invest more, and take better risk-weighted decisions under uncertainty – and this paves the way for a less worrisome and stressful life. Financial literacy can improve the overall well-being of society.
At the beginning of the fourth industrial revolution, an era of growing uncertainty, opportunities, and risks, fintech has emerged as a new tool to spur financial literacy. The removal of (often not fully trusted) intermediaries, together with the fact that almost all operations can now be performed with a friendly tool – the smartphone – is shortening the distance between the world of finance and many young users. Studies by the World Bank and the OECD, among others, show that a low level of financial literacy obstructs the use of financial products. fintech removes this hurdle.
The best example of how fintech can improve financial literacy are applications like World of Money, a US non-profit organization that empowers youth with a sound financial education through on-line videos divided by age group and subject. Other similar examples include Zogo, Rooster Money, Guardian Savings, Prism, Savings Spree, Mint, and Investmate. They all offer easy to use, intuitive, and interactive applications that teach personal finance to different age groups.
Fintech can also improve financial inclusion by making banking more accessible. There is still a large percentage of the world population without access to banks (approximately 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 like Tala or Branch International are helping bank unbanked people by providing them with first-time access to a range of digital products, like instant loans, money transfers, bill payment, high-yield investments, and savings.
Fintech could also spur other literacies, starting with environmental literacy. This can happen indirectly, by saving considerable paperwork as most traditional non-fintech contracts are usually printed and not stored on an individual device (contracts are usually just stored by the issuing company); as well as directly, through innovative fintech companies that help fight pollution. This is the case of the new kid on the block Kakubi, which considerably eases the access to otherwise difficult to buy EUA carbon allowances (exchange-traded certificates that represent the right to emit one ton of carbon dioxide). The acquisition of each allowance through Kakubi means polluters will not be allowed to pollute a ton of carbon dioxide.
Evidently, this works only under certain circumstances. All that glitters is not gold. Fintech can be positive only in the presence of other essential literacies, like media literacy (ability to access and critically analyze media messages), or technological literacy (ability to use, understand, manage, and analyze technology safely, effectively, and responsibly). Moreover, fintech technologies may harm financial well-being, as they may 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 overspending, which are 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 unexpected riches for a tiny 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 prone to trade them, possibly due to their higher ability to perceive risk. While cryptocurrencies require media and technology literacies, the most important skill is still financial literacy. These digital currencies are not isolated by the “generic” economy and, like all financial assets, they are highly determined by the basic macro-drivers of the economy, like interest rates. Not surprisingly, most of their amazing performance seems to be linked to the long period of almost zero interest rates.
The fourth industrial revolution opens 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 timidly entering into some policy decisions. Leveraging the rising world of fintech can help this process.
