Financial literacy entails comprehending the mechanisms of money. It provides individuals with an understanding of their finances and an ability to manage them better. Standard & Poor’s Global FinLit Survey reports that across the world, only 1 in 3 individuals are financially literate. The report measures financial literacy based on people’s skills and understanding of numeracy, interest compounding, comprehending inflation, and risk diversification and shows there is significant evidence suggesting there is a need to improve financial education and awareness among a large proportion of the population.
Financially educated consumers ensure that the financial sector makes an effective contribution to poverty reduction and economic growth and development. In developed economies, financial literacy makes consumers save enough to provide an adequate income post-retirement while avoiding debts.
Digital transformation has given access to fintech services to those who were underrepresented in traditional financial services in the emerging economies. However, where people lack experience, they need financial education to minimise their risk vulnerabilities and help them get positive results out of the adoption of fintech. This also serves the purpose of finclusion.
Not only are technology and financial services very much intertwined, but access to technology is a prerequisite for the application of financial education. Informal channels like social media, and podcasts, are 24×7 available and accessible compared to in-person education. Financially literate people are not only better empowered in themselves, but also are an asset to banks, industries, and other financial service providers because they understand the products and services better and can make well-thought-out decisions.
Banks are the primary financial channel for consumers. It is imperative for people to understand how money works, for instance, what deposit scheme will give them a better return. On the other hand, it is important for banks and other financial service providers to understand their customers. Digital Sandbox is a feasible way to link one to the other. Banks can evaluate fintech products and solutions using synthetic data in secure and controlled environments. This evaluation enables a bank to understand how the solution would work with their customers and within their infrastructure, without having to onboard the fintech.
Sandbox solution providers are assisting banks, regulators and other financial organisations to better understand customer’s level of preparedness for the future financial landscape. This enables developing products and services that can either assist customers or prompt them to explore more and become financially aware. Regulators are using the Digital Sandbox environment to understand the market appetite for regulatory initiatives. It is also strategically important for governments to evaluate the level of financial literacy of their people and help improve it.
How lack of Financial Literacy risks Customers
Financial decision-making without a financial know-how is risky and when using technology, a few things should be kept in mind:
- Paid Advertisements: Paid advertisements are dangerous when done with no substantial background check. For instance, if one invests in a particular cryptocurrency on the basis of paid hearsay, and then loses, not only is nobody accountable but it might also be regressive to the objective of financial education and planning.
- Influencers: It can be the case that somebody not only lacks an adequate understanding of the complex financial ecosystem but also believes themselves to be far more accurate and predictive than they actually are. If individuals take their financial decisions based on advice from such influencers, it might risk their financial stability and security.[HS4]
- Analysis Paralysis: Being overloaded with information but not being able to choose what information is relevant is counterproductive for financial decision-making.
- Instant Gratification: Progress happens over time and not overnight. Anything that is enticing and promises lucrative rewards in a short span of time should not be trusted. It is always healthy to be cautious to avoid falling for scams.
With technology-based education modules, human logic and critical thinking need to be developed in order to understand what is being taught. When not able to decide for oneself, it is best to seek third-party financial services providers, advisors, and other fintech ecosystem members for insights and guidance.
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