By fostering greater financial literacy, new technologies can contribute to a better world, but only when adequately incorporated into educational initiatives.
The Fintech sector has emerged as a new tool to promote financial literacy as the fourth industrial revolution, a growing uncertainty, opportunities, and risks, gets underway. The removal of intermediaries and the fact that nearly all transactions can now work using a user-friendly tool are closing the gap between the world of finance and many young users.
Studies from organizations like the World Bank and the OECD, among others, demonstrate how using financial products is hampered by a lack of financial literacy. Fintech gets rid of this obstacle.
Finding structural solutions to enhance this group’s financial inclusion is more crucial than ever to assist them in rebuilding their lives and assimilating into their new communities. Unfortunately, certain people’s needs are frequently unmet by conventional financial institutions, leaving them with few options for managing their finances.
How Fintech Can Improve Financial Literacy
Applications that provide sound financial education through online videos as per the age group illustrate how Fintech can improve financial literacy. They all provide interactive, user-friendly, and simple applications instructing various age groups in personal finance.
By making banking more easily accessible, Fintech can also increase financial inclusion. According to the World Bank and the most recent Findex Report, many people worldwide can use smartphones but do not have access to banks (roughly 1.7 billion people).
Smartphone-based application solutions such as Tala and Branch International are bridging the digital banking gap by giving previously unbanked individuals access to various digital financial services.
Other forms of literacy, starting with environmental literacy, could be encouraged by Fintech. Fintechs can showcase innovative fintech apps that reduce pollution—and indirectly—by reducing significant paperwork since most conventional, non-fintech contracts are printed rather than stored on a single device.
But this only functions in specific situations, and Fintech can be beneficial only when other crucial literacies are present, such as media literacy (the capacity to access and critically evaluate media messages) or technological literacy (the ability to use, understand, manage, and analyze technology safely, effectively, and responsibly).
Fintech innovations may also harm one’s financial health because they may encourage impulsive buying and irrational investing. Mobile applications that speed up operations and shorten the gap between purchase and consumption may encourage impulsive purchases and overspending, which are frequently harmful to consumer welfare if they do not have adequate training and knowledge.
Cryptocurrencies are a prime example of potentially harmful technology for users lacking adequate financial literacy. Early adopters, sophisticated investors, and lucky investors made unanticipated fortunes, while the rest of the population suffered enormous losses. Recent research demonstrates a negative correlation between financial literacy and cryptocurrency trading.
Financially literate people seem more aware of cryptocurrencies and less likely to trade them, possibly because they can better understand risk. Even though media and technology literacy is needed for cryptocurrencies, financial literacy is still the most crucial trait.
The “generic” economy does not exclude these digital currencies, and like all financial assets, they are influenced by the fundamental macro-drivers of the economy, such as interest rates. Unsurprisingly, the prolonged period of almost zero interest rates is responsible for a large portion of their incredible performance.
The need for improving financial access for everyone
Traditional banks prefer not to serve these customers because the potential economic gains do not outweigh the potential financial losses due to all the financial and regulatory risks and limited revenue opportunities. However, from an ESG standpoint, this is a lost chance for a bank to support the neighborhood.
New digital techniques, such as those used in artificial intelligence, can help alleviate some risks and boost potential profits.
Modern digital (mobile) payments work more quickly, efficiently, safely, and affordably. Examples include businesses’ low-cost remittance services, which enable immigrants to send and receive money across borders, frequently using mobile devices.
(Biometric) Identifying Systems: Fintechs are creating biometric determining systems (like fingerprints, iris scans, or facial recognition) to help refugees open bank accounts and gain access to financial services that do not have formal identification documents.
Microfinance: For refugees, microfinance (small loans given to people with low incomes) can be a lifeline, giving them the money they need to launch a small business, support their families, or put money into their education.
Credit history transfer: The current credit scoring model restricts cross-border credit mobility, meaning consumers cannot take credit profiles across national borders. As a result, since they have no credit history, refugees are frequently denied all forms of credit.
Many Fintech companies are working on ways to allow people to establish credit histories through small loans, perform credit scoring based on factors other than credit histories, and transfer credit histories across borders while guaranteeing the accuracy and authenticity of the data. Blockchain technology, for instance, can make it easier to create a tamper-proof and easily transferable digital credit history record.
Training and Support: Language barriers and a lack of familiarity with the local financial system are common problems for refugees. Fintechs and technology can significantly assist people by giving them opportunities to increase their financial literacy and develop their ability to make sound financial decisions.
Fintechs can make it possible through education and tools, such as apps for budgeting and financial planning. Organizations can also help by translating portals and all documents into the language of the refugee or by planning to have a support desk that speaks their native tongue.
Prepaid vouchers: Instead of distributing aid, governments and humanitarian organizations can use prepaid vouchers. These prepaid vouchers work similarly to meal vouchers because the government or a humanitarian organization gives a refugee a predetermined sum. People can only spend this money in a small (local) network of businesses that will accept the voucher as payment and use it for specific things like food, medical care, or shelter.
Compared to traditional aid, this system offers additional benefits, including greater autonomy, flexibility, and less stigma for marginalized communities. It also prevents money from being misused because voucher expenditure is brand-centric and easily traceable. Finally, by lowering the overhead costs associated with distributing goods and services, these vouchers are more affordable than traditional forms of aid and contribute to the growth of local economies.
Undoubtedly, those solutions can potentially increase marginalized communities’ access to financial services, but there is still a long way to go before they are accepted worldwide.
The fourth industrial revolution ushers a meaningful and challenging era. By fostering greater financial literacy, new technologies can contribute to a better world, but only when adequately incorporated into educational initiatives. As more nations become aware of this, some policy decisions hesitantly include financial literacy. Utilizing the growing fintech industry can aid in this process.