POLICY BRIEF

Why We Need to Promote Digital Financial Literacy

There is a need to develop education programs to improve digital financial literacy, focusing on skills that are likely to be critical for workers and consumers in the digital economy. Photo credit: ADB.
There is a need to develop education programs to improve digital financial literacy, focusing on skills that are likely to be critical for workers and consumers in the digital economy. Photo credit: ADB.

Digital finance promises to be an effective means of reaching the unbanked, but its use must be accompanied by consumer information and education.

Introduction

Digital financial literacy is likely to become an increasingly important aspect of education for the digital age. The development of the ”gig” economy means that individuals will become more responsible for their own financial planning. Individuals will need to manage their own retirement savings and pensions more, because of the trend of switching to defined-contribution from defined-benefit pension plans. Consumers will need to have a higher level of financial sophistication to make effective use of financial technology (fintech) products and services, and avoid fraud and costly mistakes.

These developments point to the need to develop digital financial education programs to improve digital financial literacy, with a focus on skills likely to be critical for those participating in the digital economy. Group of Twenty (G20) countries need to define digital financial literacy, design tools to assess it, and develop programs to promote digital financial education as well as special programs for vulnerable groups, including the elderly, the less educated, owners of small and medium-sized enterprises (SMEs) and startup firms, and women.

This is adapted from a policy brief developed under the T20 Japan Task Force 7: The Future of Work and Education for the Digital Age for the G20 Leaders’ Summit in Osaka in 2019. THINK 20 (T20) is the research and policy advice network for the G20, an annual meeting of leaders from the world’s major economies.

Policy Proposal

G20 countries need to cooperate to develop consistent definitions of digital financial literacy, to design and implement tools to assess it, and develop strategies and programs to promote digital financial education as well as special programs for vulnerable groups, including the elderly, the less educated, owners of small and medium-sized enterprises (SMEs) and startup firms, and women.

Increasing recognition of importance of digital financial literacy

Fintech, i.e., using software, applications and digital platforms to deliver financial services to consumers and businesses through digital devices such as smartphones, has become recognized as a promising tool to promote financial inclusion, i.e., access of excluded households and small firms to financial products and services. In 2010, the G20 endorsed the Financial Inclusion Action Plan (FIAP) and established the Global Partnership for Financial Inclusion to coordinate and implement it. The 2014 G20 Leaders Summit in Brisbane updated the FIAP and, acknowledging the importance of fintech, included a commitment to implement the G20 Principles for Innovative Financial Inclusion under a shared vision of universal access (BIS and World Bank 2016).

However, improved access to financial services via fintech requires higher levels of digital financial literacy to make effective use of them and to avoid mis-selling, frauds such as phishing, hacking attacks, unauthorized use of data, and discriminatory treatment and behavioral issues, such as excessive borrowing.

Digital financial literacy is likely to become an increasingly important aspect of education for the digital age. The development of the “gig” economy means that individuals will become more responsible for their own financial planning. Individuals will need to manage their own retirement savings and pensions more, because of the trend of switching to defined-contribution from defined-benefit pension plans. Also, the decentralized nature of fintech implies that consumers will need to have increasing financial sophistication to process financial information. This points to the need for nations to include digital financial education in their national financial education strategies.

To be sure, financial literacy has become recognized as an important requirement for effective financial inclusion, along with consumer protection, and has gained an important position in the policy agenda of many countries (OECD/INFE 2015a). At the Los Cabos summit in 2012, G20 leaders endorsed the High-Level Principles on National Strategies for Financial Education proposed by the Organization for Economic Cooperation and the International Network on Financial Education (OECD/INFE), thereby acknowledging the importance of coordinated policy approaches to financial education (G20 2012). In 2016 G20 leaders focused on digital financial literacy more closely and endorsed the High-Level Principles for Digital Financial Inclusion, which include Principle 6 on “Strengthen Digital and Financial Literacy and Awareness” (GPFI 2016).

However, most national financial education strategies do not address digital financial literacy specifically, but instead focus on basic financial concepts. Moreover, the G20 has not yet developed guidelines for digital financial literacy or digital financial education. We consider this to be an important gap that needs to be filled. Also, digital technology can make financial services borderless, which would allow people to easily access financial products and services in other countries. This shows the importance of global coordination not only in regulating fintech, but also in improving the digital financial literacy of the public.

Definition of digital financial literacy

Similar to digital literacy and financial literacy, digital financial literacy is a multi-dimensional concept.[1] While some previous literature (e.g., OECD 2017) has described various aspects of digital financial literacy, there is still no standardized definition of the term. We propose awareness of digital financial risks dimensions of digital financial literacy, including knowledge of digital financial products and services, awareness of digital financial risks, knowledge of digital financial risk control, and knowledge of consumer rights and redress procedures.

The first dimension is knowledge of digital financial products and services, which captures the basic understanding of digital financial products and services. Individuals should be aware of the existence of non-traditional financial products and services provided through digital means, such as the internet and mobile phones. These services generally fall into four major categories, although there are overlaps:

  • Payments: Electronic money, mobile phone wallets, crypto assets, remittance services;
  • Asset management: Internet banking, online brokers, robo advisors, crypto asset trading, personal financial management, mobile trading;
  • Alternative finance: Crowdfunding, peer-to-peer (P2P) lending, online balance sheet lending, invoice and supply chain finance, etc.; and
  • Others: Internet-based insurance services, etc.

In addition to being aware of digital financial services, people should be able to compare the pros and cons of each available service. Such knowledge would help them to understand the basic functions of different types of digital financial services (i.e., either for personal or for business purposes).

The second dimension of digital financial literacy is awareness of digital financial risks. Individuals and firms need to understand the additional risks that they may incur when using digital financial services, which are more diverse but sometimes harder to spot than those associated with traditional financial products and services. Users of digital financial services should be aware of the existence of online fraud and cyber security risks. They face a multitude of potential risks, such as:

  • Phishing: When a hacker pretends to be an institution in order to get the user to divulge personal data, like usernames or passwords, via emails or social networks;
  • Pharming: When a virus redirects the user to a false page, causing her to divulge personal information;
  • Spyware: When malicious software inserts itself into the users’ personal computer or mobile phone and transmits personal data;
  • SIM card swap: When someone poses as the user and obtains the user’s SIM card, thereby obtaining private data.

Digital financial service users should also be aware that their digital footprint, including information they provide to service providers, may also be a source of risk, even if it does not result directly in a loss, including:

  • Profiling: Users may be excluded from access to certain services based on their online data and activities.
  • Hacking: Thieves may steal personal data from their online activities, such as on social networks.

Due to easy access to credit enabled by fintech, consumers of digital financial services could also face potential problems of overborrowing or excessively high-interest rates. Such risk can trigger unexpected and large losses when the service providers are not regulated or only weakly regulated. Overborrowing may also harm their credit rating. Finally, unequal access to digital financial services could exacerbate gaps between the rich and the poor.

Users should fully understand the terms and conditions stipulated in contracts they digitally sign with service providers. They should also be aware of (risky) implications of digital contracts. They should understand that digital financial service providers might use their personal information for other purposes, such as calculating their credit demands, advertising, and credit evaluation. In terms of financial risks, easiness of access to finance may lead to overborrowing.

The third dimension of digital financial literacy is digital financial risk control, which is related to users’ understanding of how to protect themselves from risks. They should know how to use computer programs and mobile apps to avoid spamming, phishing, etc. They should also know how to protect their personal identification number (PIN) and other personal information when using financial services provided through digital means.[2]

The fourth dimension is knowledge of consumer rights and redress procedures, in cases where users fall victim to the above-mentioned risks. Users of digital financial services should understand their rights and know where they can go and how to obtain redress if they fall victim to fraud or other loss. They should also understand their rights regarding their personal data, and how they can obtain redress against unauthorized use.

Develop and implement tools to measure digital financial literacy

The OECD/INFE recommends that dedicated national surveys or coordinated international studies be used to collect high-quality, comparable data on levels of financial literacy (OECD/INFE 2019). Internationally standardized surveys of general financial literacy have been developed by the OECD/INFE (2018), the World Bank (2018), and others. However, these surveys do not include the aspects of digital financial literacy described in the previous section. We recommend that a standardized set of questions be developed to cover these dimensions, and that they be included in these questionnaires. The augmented surveys should be carried out as soon as is practicable to acquire baseline literacy on the state of digital financial literacy in individual countries.

The data so acquired should be analyzed to identify aspects of digital financial literacy that may cause particularly significant issues, especially to the vulnerable groups in greatest need of digital financial literacy. Furthermore, it should be used to analyze the financial behavior of the population or specific subgroups in relevant areas, such as accessing and using digital financial services for saving, borrowing and investing money, and acquiring insurance.

Develop digital financial education strategies and programs

The OECD/INFE also recommends that countries establish and implement national strategies to ensure a coordinated approach to financial education (OECD/INFE 2019), including the following aspects:

  • recognizing the importance of financial education—through legislation where appropriate—at the national level;
  • cooperation with relevant stakeholders and identifying a national leader or coordinating body/council;
  • establishing a roadmap to support the achievement of specific and predetermined objectives;
  • providing guidance on individual programs to be implemented under the national strategy in order to efficiently and appropriately contribute to the overall strategy; and
  • incorporating monitoring and evaluation processes to assess the progress of the strategy and amend it accordingly.

All of these aspects should be applied to the development and implementation of national strategies and programs for digital financial education as well. The OECD and other relevant organizations should incorporate such recommendations into their guidelines for national financial education policies, such as OECD (2012). Within the context of such national strategies, the G20 should also support the development of recommendations for regulating financial service providers, such as fintech companies, including requiring them to fully disclose the product information and relevant risks to the general public in an appropriate way.


[1] Digital financial literacy straddles the concepts of digital literacy and financial literacy, but has its unique aspects due to the nature of the products and risks involved. For a proposal to define digital literacy, see the earlier policy brief by Chetty, et al (2017). One definition of financial literacy, together with survey questions to measure it, can be found in OECD/INFE (2018).
[2] This overlaps with digital literacy.

Resources

Bank for International Settlements (BIS) and World Bank Group. 2016. Payment aspects of financial inclusion. 

Global Partnership for Financial Inclusion (GPFI). 2016. G20 High-Level Principles for Digital Financial Inclusion. Global Partnership for Financial Inclusion.

Group of Twenty (G20). 2012. G20 Leaders Declaration. Los Cabos, Mexico, June 19.

K. Chetty, et al. 2017. Bridging the Digital Divide: Measuring Digital Literacy. G20 Insights.  

Mandell, L., and L. Klein. 2009. The Impact of Financial Literacy Education on Subsequent Financial Behavior. Journal of Financial Counseling and Planning 20(1): 16–24.

Organization for Economic Cooperation and Development (OECD). 2017. G20/OECD INFE Report on ensuring financial education and consumer protection for all in the digital age. Paris: OECD.

OECD. 2018. G20/OECD INFE Policy Guidance on Digitalisation and Financial Literacy. Paris: OECD.

Organization for Economic Cooperation and Development International Network on Financial Education (OECD/INFE). 2012. OECD/INFE High-level Principles on National Strategies for Financial Education. Paris: OECD.  

OECD. 2015a. Policy Handbook on National Strategies for Financial Education. Paris: OECD.

OECD. 2015b. 2015 OECD/INFE Toolkit for Measuring Financial Literacy and Financial Inclusion. Paris: OECD.

OECD. 2017. G20/OECD INFE report on adult financial literacy in G20 countries. Paris: OECD.  

OECD. 2018. OECD/INFE Toolkit for Measuring Financial Literacy and Financial Inclusion. Paris: OECD.

OECD. 2019. Draft OECD Recommendation on Financial Literacy and Education. Paris: OECD.  

World Bank. 2018. Financial Literacy Survey Questionnaire. Washington, DC: World Bank.  

Ask the Experts

  • Peter J. Morgan
    Senior Consulting Economist and Vice Chair of Research Department, Asian Development Bank Institute

    Peter Morgan joined the Asian Development Bank Institute in December 2008. His research areas are macroeconomic policy and financial sector regulation and reform. Previously he served in Hong Kong, China as Chief Asia Economist for HSBC, responsible for macroeconomic analysis and forecasting for Asia. He earned his master’s degree and PhD in Economics from Yale University.

  • Bihong Huang
    Research Fellow, Asian Development Bank Institute

    Bihong Huang joined the Asian Development Bank Institute as a research economist in February 2016. Her research interests include economic development, climate change and the environment, and inclusive and sustainable finance.

  • Long Q. Trinh
    Project Consultant, Asian Development Bank Institute

    Long Trinh’s joined the Asian Development Bank Institute in July 2015. His research interests include financial development, small and medium-sized enterprise development, international trade, structural change, and economic growth. Previously he worked as an economist at the Central Institute for Economic Management in Viet Nam.  

  • Asian Development Bank Institute (ADBI)

    The Asian Development Bank Institute provides intellectual input for policy makers in Asian Development Bank’s developing member countries. It does so by conducting research with a focus on medium- to long-term development issues of strategic importance that affects the region and through capacity building and training activities that contribute to ADB’s overarching objective of poverty reduction.

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   Last updated: July 2019



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