Financial literacy is almost a given when applying for credit, taking out a mortgage or signing a hire purchase agreement – but it’s not a tool that is always available to the masses.
The Global Financial Literacy Survey indicates that:
- Only 33% of adults worldwide are financially literate.
- An average of 52% of people in Europe understand basic financial concepts.
- In emerging economies, education drops significantly – only around 20% of people in India are equipped with the skills to make informed decisions.
Those statistics paint a worrying picture where many people, including those otherwise deemed ‘educated’, cannot grasp inflation, compound interest or risk exposure.
Today we’ll explore why lenders need to make financial literacy a priority.
Why Does Financial Literacy Matter?
There are a number of real-world benefits to fluent financial understanding but the first step to achieving these benefits is a clear understanding of what the term actually means. True financial literacy can be defined as:
- Having control over regular finances.
- Being able to cope with an unexpected cost.
- Planning financial goals.
- Being able to spend on things that make life enjoyable.
Financial literacy outcomes include confidence, knowing that you can influence your life opportunities, and feeling positive about your financial behaviors.
These are no small attributes to aim for when we think about the risks of a lack of financial knowledge.
They include vulnerability to fraud, illegal loan sharking, spiraling debt, reliance on state benefits, lack of access to medical care, poor life outcomes and an inability to save for important things such as a child’s education.
It’s also vital to be conscious of the links between uncontrolled debt and severe health issues, such as depression and related conditions. It has long been speculated that debt is a significant contributor to stress, suicide, anxiety and depression compared to other socioeconomic factors.
What is the Benefit to a Lender of Having Better Informed Customers?
There is a dark argument that from a lender’s perspective, keeping as many people as possible uninformed and ignorant of their finances would increase business for the lender.
There is an obvious counter argument to this regarding ethics and corporate responsibility, any compliant lender operating in 2022 and beyond needs to have such stringent approval processes that only financially literate customers would get the green light from the rigorous risk analysis algorithms used by lenders during a loan application. i.e. it’s actually better for business to have more financially literate borrowers who are capable of using credit responsibly.
What’s more, an existing or potential customer who has received support and guidance from a specific lender, will inevitably be more likely to give preference to / remain a customer of the lender who has worked on building trust and educating the community.
Brett Van Aswegen, CEO of Wonga South Africa, believes initiatives focusing on financial literacy will have a “profound impact” on consumers.
He also proposes that this is a field where established lenders can ‘differentiate themselves as a responsible lending institution’, enhancing their reputation as an advocate for greater customer education.
What Can Credit Lenders Do to Improve Consumer Financial Education?
Most banks and lending providers distribute information or ask applicants to tick a box to say they have read and understood the guidance, but it’s just touching the surface.
An analysis of the UK financial literacy status showed:
- 90% of customers feel undereducated about personal finances.
- 82% of students want more financial tuition in school.
- 75% get their financial knowledge from family members.
- 50% think that their bank is responsible for helping them make better decisions.
- 39% are not confident that they can manage their money properly.
A new scheme called the UN Environment Programme Finance Initiative was launched in early 2022, setting goals to end poverty and generate sustainable, inclusive economic growth.
Around 28 major banks have enrolled so far, highlighting the focus on consumer benefits and reaching big picture aspirations to even the playing field.
Comments