Digital finance and its impact on financial literacy

By Dr Chow Yee Peng.

FINANCIAL literacy refers to the ability of individuals to manage personal finances effectively and achieve their goals.

It plays a crucial role in reinforcing good financial management practices and decisions, such as making wise spending and investment decisions, avoiding over-indebtedness and adopting proper risk management strategies.

In addition, financial literacy improves financial inclusion and overcomes inequality issues in the economy.

The present era is marked by phenomena such as rising living costs, materialistic lifestyles, increasing life expectancy, and greater sophistication of financial products and services, which pose challenges to achieving one’s financial goals.

These developments render knowledge of financial matters increasingly important. Although a gradual improvement in financial literacy has generally been observed globally in recent years, some important concerns regarding overall financial literacy still prevail

For instance, according to the China Residents Financial Literacy Report 2023 by Shanghai Advanced Institute of Finance and Charles Schwab & Co Inc, China registered an average financial literacy score of 68.7 out of 100 last year, a slight improvement compared to 64.4 points in 2022.

Although many Chinese citizens demonstrated a growing understanding of and interest in financial products, many were still confused and unsure of what to invest in due to the lack of knowledge in investment and wealth management.

Similar evidence is observed in Malaysia, where the 2023 RinggitPlus Malaysian Financial Literacy Survey reveals that although Malaysians in general displayed financial resilience, 32% of respondents believed that their financial situation was worse than in 2022; 71% could only save RM500 or less every month; and 67% claimed that they could only survive for less than three months with their savings.

The financial literacy gap is exacerbated due to recent developments in digital finance and the digital economy, where the introduction of new technologies has brought about important implications for the financial services industry.

One of the most prominent new technologies that have disrupted the financial services industry is financial technology (fintech), which has contributed to the proliferation of numerous products and services in the market, including ewallets, mobile payments, peer-to-peer (P2P) lending and digital microcredit.

This offers a much wider choice of financial products and services, at the same time increasing the complexity of digital finance.

For example, China has emerged as one of the leading countries globally when it comes to the investment, development and adoption of new technologies, including fintech.

Meanwhile, there were over 300 fintech companies in Malaysia as of last year, with more players expected to join the ecosystem.

As a result, individuals not only need financial literacy but more importantly, digital financial literacy. This can be defined as the acquisition of knowledge, skills, confidence and competencies to safely use digitally delivered financial products and services to make informed financial decisions and act in one’s best financial interest.

The recent developments in digital finance and the digital economy offer various opportunities for promoting financial literacy and inclusion. Fintech enables unserved or underserved consumers to gain access to finance, hence advancing financial inclusion.

Take, for instance, digital microcredit, which has expanded access to credit for many low-income consumers who may not have formal credit histories.

Digital microcredit can also be obtained in a fast and convenient manner via online channels, with fewer requirements for formal documentation.

For example, Ant Group-backed MYbank, a leading digital bank in China, reports that about 80% of its women-owned small and medium-sized enterprise (SME) customers obtained their first-ever online SME loan from the bank.

This indicates that MYbank can overcome the issue of unequal access to capital by reaching out to unserved and underserved customers.

According to Bank Negara Malaysia, digitalisation has become an integral part of economic activity in Malaysia. Electronic payment services, in particular DuitNow QR, have registered an impressive growth from 125 million transactions valued at RM5.5bil in 2022 to 360 million transactions worth RM14.6bil in 2023.

Meanwhile, the 2023 RinggitPlus Malaysian Financial Literacy Survey reports that nine out of 10 Malaysians used at least one ewallet app last year.

These developments can also pose a threat to financial literacy in certain ways.

The first is related to the limited understanding of digital finance, where many consumers do not know how to use digital financial services or possess a limited understanding of their purpose and functionalities.

The second is associated with inadequate information regarding these digital products and services, including their terms and conditions, product features, fees, pricing and risks.

Thirdly, consumers may be exposed to the risk of over-indebtedness. Although fintech enables the previously underserved or less financially literate consumers to obtain faster access to digital loans than traditional credit, these consumers may encounter difficulties comprehending the implications of credit on their financial well-being, even if full disclosure and transparency are available, because of their limited financial capability.

Lastly, consumers may be subject to the risk of fraud, data theft, data privacy issues and other security threats. According to the World Bank Group, 16% of unbanked individuals worldwide cited distrust of the financial system as a major impediment.

In China’s case, it was reported that a rapid expansion of the P2P lending market in the country for the first half of the 2010s was followed by major platform collapses and incidents of fraud and platform operator misconduct, which led to significant losses to consumers.

The 2023 RinggitPlus Malaysian Financial Literacy Survey highlights the need to raise awareness of digital financial literacy given the prevalence of financial frauds and scams in Malaysia, where Malaysians need a better understanding of the importance of protecting their personal and financial information online.

To address the financial literacy gap, especially in today’s digital landscape, efforts should be taken to promote better financial education supported by legal and regulatory reforms.

Financial sector authorities should foster more collaborations with various institutions, including financial and educational institutions, to incorporate financial education, such as awareness campaigns and educational programmes, for potential and existing consumers.

Besides, a robust consumer protection and prudent regulatory regime should be established to empower consumers, in particular the less financially literate and more vulnerable ones, by ensuring that they can make informed financial decisions, gain appropriate access to various financial products and services, and are aware of the proper channels to seek redress and exercise their rights.

As such, financial sector authorities, financial service providers, consumers and other stakeholders should work closely to narrow the financial literacy gap and safeguard the financial well-being of society.

Dr Chow Yee Peng is an Assistant Professor at Tunku Abdul Rahman University of Management and Technology. The views expressed here are entirely the writer’s own.

The SEARCH Scholar Series is a social responsibility programme jointly organised by the South-East Asia Research Centre for Humanities (SEARCH) and Tunku Abdul Rahman University of Management and Technology (TAR UMT), in conjunction with the 10-year anniversary of the Belt and Road Initiative.