Archivio opinioni

Vittorio Emanuele Agostinelli

Consulta Giovanile Del Cortile Dei Gentili

FINANCIAL LITERACY, FINTECH, FINANCIAL INCLUSION AND THE UNSUSTAINABLE DEVELOPMENT GOALS

Abstract

ALFABETIZZAZIONE FINANZIARIA, FINTECH, INCLUSIONE FINANZIARIA E SDGs

L’alfabetizzazione finanziaria svolge un ruolo essenziale nel consentire agli individui di gestire le proprie finanze in modo efficace, influenzando di conseguenza il benessere personale e contribuendo alla stabilità economica. Consente a una persona di creare un budget realistico basato sulle entrate e sulle spese, assicurandosi che non siano basate principalmente sui desideri ma piuttosto sui bisogni. Comprendendo la propria situazione finanziaria, le persone possono allocare il proprio capitale in modo appropriato, tenere traccia delle spese e adeguarsi per raggiungere gli obiettivi finanziari. Coglie l’importanza di risparmiare regolarmente rendendoli in grado di identificare le aree in cui le spese possono essere ridotte e organizzare i risparmi verso fondi di emergenza o obiettivi a lungo termine come il pagamento della formazione universitaria, la pensione, l’avvio di un’impresa, ecc. Stabilire obiettivi finanziari è come l’acqua, fonte di cui la nostra mente ha bisogno per motivazione e direzione. L’alfabetizzazione finanziaria aiuta le persone a definire obiettivi realizzabili e a sviluppare piani per raggiungerli attraverso risparmi e investimenti disciplinati invece di scelte rapide che provocano risultati negativi. Quanto è legata al FinTech e quali sono le interconnessioni con gli SDGs?

Financial education, policies, financial inclusion, sustainability

1. Why is Financial Literacy important?1

Financial literacy is the ability to understand and use various financial skills, including personal management, budgeting, and investing. It refers to the knowledge and understanding of financial concepts, tools, and programs that enable individuals to make informed and effective decisions related to taking care of their money. It encompasses several other key components that are crucial for managing personal finances accurately as saving, debt management, financial planning, the comprehension of financial products, risk management, economic awareness, and monetary decision-making. These constituents collectively empower individuals to manage their funds, plan for the future, and navigate financial challenges with a peaceful mind.

Financial literacy plays an essential role in empowering individuals to manage their finances effectively as a result influencing personal well-being and contributing to economic stability. It enables a person to create a realistic budget based on income and expenses while making sure they are not mostly based on wants but needs instead. By understanding their financial situation, people can allocate their capital appropriately, track spending, and adjust to meet financial objectives. It snatches the importance of saving regularly making them able to identify areas where expenses can be reduced and arrange savings towards emergency funds or long-term goals such as paying student loans, retirement, starting a business, etc. Setting financial goals is like the water source our mind needs for motivation and direction. Financial literacy helps individuals define achievable goals and develop plans to reach them through disciplined saving and investing in place of fast choices provoking bad results.

Having financial literacy contributes to a stable, balanced economy by making well-based financial decisions. This includes responsible borrowing, saving, and investing, which together support economic growth and stability. A person with this magnificent theme will also see a reduction in their level of anxiety about money matters, promoting better mental health and productivity. When people understand their financial situation and have strategies to manage it with efficiency, they can focus more on personal and professional pursuits rather than sitting down in a mental caving cycle of negative financial thoughts towards their finances.

2. Financial Inclusion, FinTech, and the UN Sustainable Development Goals.2

Financial inclusion is not explicitly mentioned in the UN’s SDGs, but global access to financial services and products nevertheless plays a central role in achieving and supporting the financing of the SDGs (Arner et al., 2020, Sahay et al., 2020; Klapper, El-Zoghbi, & Hess, 2016). One way in which financial inclusion can contribute to sustainable development is by ensuring access to and the provision of basic financial services based on sustainability principles. These can include lower transaction costs, continuous access to formal finance in good times and bad, accessible savings opportunities at all times, no minimum amount of savings required, and lending to creditworthy individuals so that the lender can use the repaid loan to lend to other economic agents (Ozili, 2022b). In this way, financial inclusion can indirectly contribute to improving the level of social inclusion in many societies, reducing poverty levels to a desired minimum, and generating further socio-economic improvements (Oizli, 2020).

The relationship between FinTech and financial inclusion is described as positive by various authors (Ozili, 2022c, 2022d, 2018; Morgan, 2021, Arner et al., 2020; Beck, 2020). Technological development has made great strides in recent years, particularly in the area of electronic payments (BIS, 2020). The FinTech area of digital payments is therefore the most widespread instrument of financial inclusion (Ozili, 2022c; Sahay et al., 2020). At its simplest, cell phones are used to enable individuals and merchants to carry out transactions without physical cash. For example, 2/3 of all “unbanked persons” worldwide already own a cell phone (Demirgüç-Kunt et al., 2018). In conjunction with a (e.g., digital) account, the provision of financial services and the ability to use them can be facilitated or expanded. The digital financial services provided by FinTech also reach rural and poor areas more easily. This reduces, for example, the distance to access financial resources that would otherwise arise due to poor transportation networks or long waiting times in bank buildings (Ozili, 2022c, 2018; Demirgüç-Kunt et al., 2018). By also shifting routine cash payments to this area, governments and companies can reduce the number of people excluded. At the same time, this will reduce inefficiencies in cash payments as well as theft and corruption through the deliberate diversion of funds to the informal sector.

FinTech also contributes to reducing the gender gap and thus strengthens financial inclusion. (Ozili, 2022c; Chen et al., 2021; Sahay et al., 2020). Women in developing countries in particular face many obstacles when it comes to accessing financial services. These can include low literacy and numeracy skills, lack of documentation, different levels of risk aversion, family responsibilities, or social attitudes. FinTech solutions seem to be particularly well adapted to the restrictions, as they make interfaces consumer-friendly, reduce fears and barriers, and do not require physical presence (Sahay et al., 2020). Chen, Doerr, Frost, Gambarcota, and Shin (2021) also shows that the gender gap for new digital financial products that complement traditional financial services is 50% smaller than for products that replace them. This suggests that women may be more willing to use fintech products that are coupled with existing financial services.

FinTech solutions also offer the opportunity to reduce market frictions and information asymmetries and the resulting agency conflicts between lenders and borrowers (Feyen et al., 2021; Frost, 2020; Mhlanga, 2020; Beck, 2020; Amstad, 2019). A classic phenomenon of imperfect information in competitive credit markets is credit rationing. FinTech solutions improve access to credit for such groups, especially for those who lack collateral and credit history. Based on big data analytics and consumer data, FinTech companies are gathering information that could be used to improve risk assessment and reduce the need for collateral as an indicator of creditworthiness in lending (Feyen et al., 2021; Mhlanga, 2020). The last point is supported by Berg, Burg, Gombović, and Puri (2018), who show that the digital footprint provides a better way to screen borrowers. Similarly, Bartlett, Morse, Stanton, and Wallace (2019) show that fintech algorithms discriminate up to 40% less than face-to-face lenders when granting loans. This type of technology can help close the credit gap for people who cannot get a loan due to their lack of credit history (Allen, Gu, & Jagtiani, 2020). Closely related to the reduction of information asymmetries through FinTech is the reduction of transaction costs, which also contributes to financial inclusion (Ozili, 2022c). Transaction costs can be reduced both ex-ante (e.g., initiation, information procurement, and agreement costs) and ex-post (e.g., settlement, adjustment, and control costs).

In addition to transaction costs, FinTech also reduces company-specific costs, such as fixed and marginal costs for the provision of financial services (Feyen et al., 2020, Beck, 2020; Barajas et al., 2020). These include, in particular, fixed costs such as the provision of a physical infrastructure with a branch, front and back office, etc. FinTech companies can also reduce marginal costs through technology-supported automation and “straight-through processes” resulting from the expanded use of data and AI-based processes. For example, Philippon (2019) shows that the use of robo-advisors reduces fixed costs, which improves the financial inclusion of less affluent households. The use of FinTech solutions and digital platforms reduces the costs and risks of customer acquisition (Feyen et al., 2021). Overall, cost reduction means that previously excluded customers with small and few transactions are now economically viable, in contrast to transactions via traditional banking channels (Beck, 2020).

Another way in which FinTech can drive financial inclusion is by individualizing the financial services offered (Ozili, 2022c). For example, traditional core banking systems and marketing channels are characterized by their focus on standardized products and do not offer a fully consumer-centric approach. Customized financial services that consider the individual circumstances of a borrower in different countries and regions of the world have so far required highly qualified and expensive experts (Feyen et al., 2021). In contrast, FinTech solutions reduce the set-up costs for customized financial services by leveraging their technologies. The increasing availability of data and computing power makes it possible to better assess risks to tailor individual financial services to the needs of the consumer (Feyen et al., 2021).

Under the premise that services, products, and applications offered by FinTech are easy to understand and that it is a convenient platform to carry out basic financial transactions, further inclusion effects arise. For example, users can help inform and convince like-minded people in the formal and informal sectors to use FinTech services (Ozili, 2018). As a result, this leads to a positive network effect and thus promotes financial inclusion. Furthermore, the contribution of FinTech to the Sustainable Development Goals can be direct or indirect (Arner et al., 2020). The full potential of FinTech to support the SDGs can be realized through a progressive approach to developing the underlying infrastructure and further supporting digital financial transformation.

1 Sam-Haendell W. Thosiac Research Paper Finance Related Summer 2024, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4864463

2 International Journal of Economics and Finance; Vol. 16, No. 2; 2024 Published by Canadian Center of Science and Education, https://doi.org/10.5539/ijef.v16n2p1