Digitizing Finance, Financial Inclusion and Financial Literacy

In this article, I intend to provide food for thought on the topic’s multi-sided issues. There are opportunities as well as need for organized approach to deal with associated risks.

Financial products and services have become increasingly intricate; people are making transactions at a quicker pace and frequency because of technology; and there’s been a relocation in accountability to consumers to take more decisions for themselves. Financial literacy has always been important but is even more so in this backdrop. Digitization and technology must also be at the core of our intercessions aimed at raising the financial literacy level of citizens.

Financial inclusion is thought to be contributing to growth of economy and moderating inequality. Financially included people are in a better position to start and develop businesses, to invest in their children's education, to manage risks, and to absorb financial jolt.

On the other hand, there is a trade-off between financial inclusion and financial stability. Increasing footprints to financial services - especially to credit - at too rapid a speed and with too less control exposes economies to stability risks, and households to the danger of over-indebtedness. The country’s microfinance crisis in 2010 showed us what can happen if too many households have access to credit despite being subprime borrowers.

And this is the reason why financial literacy is so crucial. People with access to finance need a basic understanding of financial concepts like compound interest, asset classes, risk diversification etc.

Financial literacy is of key importance for individuals, for households, for societies, and even for the central bank.

Effective monetary policy communication relies on a basic grasp of concepts such as inflation and interest rates. Understanding such concepts determine investment and consumption decisions.

Surveys show that a basic understanding of economic concepts and a level of knowledge about monetary policy are essential for inspiring trust in central banks. And trust is the core asset of central banks.

Pioneering technologies and forms of financing can unleash competition, foster transparency and foster efficiency, while also facilitating access to payment services (e.g. mobile payments), credit (e.g. peer-to-peer lending) or equity (e.g. crowd investing), for consumers and diversifying buy-side opportunities for investors. At the same time, we should be heedful of emerging risks, such as those arising from an increase in flocking behaviour.

There is also the growing issue of cyber security. The use of digital means creates the potential to make financial services available to a wider range of consumers and enterprises, promoting financial inclusion and the affordability of financial services. However, a certain level of financial literacy is required in order to use these means and manage risks

Digital finance  - technologically-enabled financial innovations  (FinTech) can facilitate transformative changes in financial markets and financial intermediaries. While these innovations might foster efficiency gains, they can also lead to financial stability risks. As new technologies, applications and business models are developing at a rapid pace, empirical evidence on many innovations remains limited. Therefore, authorities may want to consider taking steps to actively study FinTechs, both domestically and in cooperation with international organisations and standard-setting bodies.        

On the one hand, regulators will need to ensure that potential risk created by technological innovations in the financial sector is contained by appropriate regulation. On the other hand, overregulation might disincentivise the development of innovative solutions and impede market entry.

Financial inclusion that relies on digital financial services like mobile payments might be especially conducive to growth and to lowering inequality. Digital technologies could be one of the key drivers of financial inclusion in the coming years. Nevertheless, uncontrolled expansion in access to financial services, especially to credit, could lead to instability if supervision, regulation and awareness of financial risks connected with the use of financial services do not keep pace

The challenge for those at the helm of affairs is to ensure that FinTech develops in a way that maximises the opportunities and minimises the risks for society