Shea Flynn, Camille Parker, and Allison Ryder

Financial inclusion has garnered broad support across the public and private sectors, with a range of actors developing innovative technologies and programs to help consumers in emerging markets gain access to financial products and services. However, with insufficient financial education, literacy and capability, vulnerable populations are likely to encounter over-indebtedness, fraud, or simply choose the wrong products for their financial needs.  Financial education has the power to build trust and customer resilience in rapidly evolving digital economies. The World Bank Group over the last year has echoed lessons we see still today, that “trust, not technology, is the real obstacle” to scaling digital financial inclusion.

Financial capability matters most for the vulnerable

Financial capability, defined as the ability to use one’s knowledge and skills to effectively select and manage financial resources, is one approach to mitigating consumer risks and building trust that is critical for sustainable financial inclusion. OECD studies further show that financial literacy is strongly correlated with financial inclusion; people with low levels of financial literacy tend to have low levels of financial inclusion and vice versa. Moreover, low levels of financial literacy carry significant costs which are magnified for the poor or vulnerable. People with weaker financial literacy skills tend to absorb higher transaction costs or incur higher debts than necessary, among others. Financial literacy matters because it enables consumers to be more informed about when or how to borrow, save, invest and become more resilient in the long run.

 A global financial literacy survey concluded that “despite increases in access to finance globally, only 1 in 3 adults are financially literate.”  This gap is greater in emerging markets, where digital financial services or fintech companies have prioritized building applications to expand access to financial services.  Innovations to advance financial education could provide value-added benefits particularly for customers in poor or rural areas. Without prior financial and digital literacy, customers receiving or seeking financial products are at risk, as they are less informed and their ability may be limited in how best to use financial services.

Lessons from traditional financial education

 To date, there has been mixed successes overall with the various methods used to provide financial education, ranging from mass-market media campaigns to small group, classroom-based trainings. In emerging markets with limited access to technology and multiple demographic groups, mass-market and group financial education programming has shown to be relatively successful. Mass-market, national level financial education campaigns introduce basic financial concepts to a broader audience through advertising campaigns, entertainment, and publicly available resources. While these programs lack the personalization of other categories of financial education, they are effective in ensuring that financial education messaging reaches a broad audience.

For example, the Reserve Bank of India’s Project Financial Literacy disseminates online resources and tutorials on key financial education topics in 13 languages. The initiative also organizes a “Financial Education Week” each year that promotes key themes to target audiences. In addition to these more “traditional” forms of advertising, other programs have aimed to spread financial literacy messages through innovative means, such as radio shows and television. In South Africa, the World Bank teamed with a popular soap opera to incorporate messages about the dangers of debt and predatory loans into its storyline. Research following this type of intervention found that viewers were more likely to be knowledgeable about borrowing sources and less likely to engage in gambling.

 To provide more curated content, group-based models for financial education have also been effectively implemented in emerging markets. Group trainings provide the benefit of tailoring the strategies and curriculum to a certain demographic or consumer profile. This approach is often employed to encourage youth to adopt savvy financial practices earlier in life. One example of group-based financial education is Egypt’s youth savings groups created under the Enterprise Your Life Project. This project, designed in partnership with Making Cents and Plan International, offers a curriculum of twenty, targeted half-hour training sessions to teach youth participants enterprising life skills and financial literacy. Another project in Uganda focuses on improving financial literacy among family units. These examples are among a number of notable financial education initiatives, in addition to others by the Mastercard Foundation, UNCDF, MSC, Mercy Corps Agrifin Accelerate, Making Cents and CGAP. These efforts rely on the premise that creating opportunities for young people to talk about money management with their family encourages them to adopt smart financial behaviors into adulthood.

More recent World Bank research has suggested that traditional approaches remain ineffective at substantially improving financial literacy and behavioral habits. Moreover, these approaches to financial education are expensive and hard to scale. Digital technology, on the other hand, can provide an innovative alternative given their greater outreach to more customers at a lower cost.  Due to the mixed results of using traditional financial education mechanisms, digital-low-touch, solutions have surfaced as an enabler for financial literacy in emerging markets.  Fintechs and digital finance partnerships have an opportunity to tailor financial education approaches to meet specific needs of customers in developed and emerging markets.


Teachable moments for digital inclusion

Financial education programs are leveraging digital technologies to bridge the gap between financial literacy and capability to reach broader audiences. Through a range of new partnership strategies, nonprofits, financial institutions, and multilateral organizations are pioneering creative approaches to bring financial knowledge and personalized financial education to marginalized populations in emerging markets.

As an alternative to traditional financial education models, evidence continues to show that individual financial education techniques at “teachable moments” can be a highly effective means for increasing financial literacy, especially with new technology innovation. In emerging markets with limited internet connectivity and smartphone penetration, SMS text messaging can be the best way to engage with potential customers. Fintech companies are rapidly developing these SMS platforms because they are easy to scale and provide access to personalized financial education.

Making Cents International created an SMS-based financial education platform to help prepaid mobile customers make better financial decisions for 30 countries in Latin America, Asia, Europe, and Africa. Its interactive, 12-month curriculum includes nearly 500 incoming and outgoing interactive SMSs, making it one of the more expansive digital financial education campaigns. Juntos and Arifu are two other examples of fintechs that are combining communication technologies like SMS, audio recordings, and video with digital analytics and automation to interact with customers’ needs at the right time.

In addition to evolving financial education tools for digital lending and savings, an IFC report emphasized that financial literacy in insurtech is equally important, especially in emerging markets, where individual households and small businesses may not be attuned to the risks they face and may end up losing all their savings due to events such as illness or loss of their business to flood or fire. Inclusivity Solutions, a Signatory to the Guidelines for Responsible Investing in Digital Financial Services applies a Human Centered Design as part of its insurtech solution to offer and educate its potential clients.

Responsible investing for digital financial health

Further innovation and investments are essential to strengthen financial education for sustainable digital inclusion.  A group of private sector investors have been co-leading a global effort to implement Guidelines for Responsible Investing in Digital Financial Services. These guidelines focus on good governance, risk management, consumer protection and with the broader aim of enabling financial well-being for the unbanked and underserved. As financial services continue to be delivered in rural or remote areas in emerging markets, inclusive finance actors, together with fintech innovators will play a critical role in providing just in time financial education for those who need it most.

About the Authors:  Allison Ryder, Camille Parker and Shea Flynn are Graduate Research Fellows at Georgetown University, Walsh School of Foreign Service.  This post is part of a series to broaden partner collaboration and harness evolving experiences from co-founding, current and prospective Signatories of the Investor Guidelines.