Financial Literacy and Fintech: Superpowers for Wealth Creation

Globally, 2 billion people are excluded from financial services. This limits people’s opportunities to manage their daily lives, cope with unexpected difficulties, develop their entrepreneurial skills and plan for the future. Furthermore, between 14 and 20 million small and medium-sized enterprises (SMEs) in developing and emerging economies lack proper access to finance to start and grow. These businesses are firmly rooted in their communities, boost entrepreneurship and play a key role in creating jobs and generating income. 

These challenges make the need for financial inclusion evident. The call and urgency for financial inclusion is also embedded in the UN Sustainable Development Goals (SDGs). Not as a goal in itself, but as a powerful tool to attain many SDGs, such as affordable and clean energy, gender equality, clean water and sanitation, good health and quality education.  Financial inclusion is a cross-cutting theme that can help achieve these goals.

What Is Financial Inclusion?

Financial inclusion refers to efforts to make financial products and services accessible and affordable to all individuals and businesses, regardless of their personal net worth or company size. Financial inclusion strives to remove the barriers that exclude people from participating in the financial sector and using these services to improve their lives.

As the World Bank notes on its website, financial inclusion "facilitates day-to-day living, and helps families and businesses plan for everything from long-term goals to unexpected emergencies." What's more, it adds, "As account holders, people are more likely to use other financial services, such as savings, credit, and insurance, start and expand businesses, invest in education or health, manage risk, and weather financial shocks, all of which can improve the overall quality of their lives."

Thus, the first step to financial inclusion often is having a bank account. Importantly, promoting financial inclusion also provides a unique opportunity for innovation. Fintech, or financial technology, is the use of innovative technologies to deliver financial services. The fintech sector has opened the pathway for innovation to create new financial services within the context of the Fourth Industrial Revolution, but it is not enough.

Financial inclusion is a means to an end, not the end in itself. It is a lever for improving the financial health of citizens, granting them access to tools, products and services, as well as knowledge, which will help them manage and plan their finances effectively.

Even as concerted efforts are being made to improve financial access, it is important to remember that the excluded populations we’re targeting will not automatically understand how to harness the new tools and opportunities at their disposal (like mobile banking, customer loyalty programs, savings, quick loans and investment apps) without proper education and encouragement. This is where financial literacy comes in.

Aurel Schubert, director-general of the European Central Bank, explains financial literacy as “an encompassing knowledge about financial concepts, financial numeracy, the ability to make informed judgments and to take effective decisions regarding the use and management of money, as well as awareness of financial products and services.”

This knowledge is necessary particularly for the excluded citizens so they can take advantage of the financial inclusion.

A Savings Account isn’t Enough

Financial access does not necessarily equal financial inclusion. In spite of increased bank and mobile money accounts, account inactivity also spiked. People were opening accounts (or accounts were being opened on their behalf) but these accounts were being increasingly abandoned.

True financial inclusion goes beyond opening or having a bank account. Measuring bank accounts may be helpful but if it is not leading to improved welfare of the consumers, it becomes a vain metric. It is possible that accounts are being abandoned because the account holders are yet to see or understand the opportunities at their disposal, for example, credit history, loans and opportunities to formalize their business. This is a gap that financial literacy can close.

Financial Literacy, the Missing Link

The role of financial literacy in improving financial inclusion is crucial. The knowledge of tools and services, the inherent advantages and opportunities they afford are the building blocks of a healthy financial profile. Going forward, we need to build an understanding that the financial inclusion journey does not end at financial access. Rather, until people are actively using and exploiting the tools at their disposal to improve their financial situations, and thus creating a society with true shared prosperity, our job is not done.

As discussed, having a bank account and saving money is important, but it’s only part of the story. Smart savers start by building sufficient emergency savings within a savings account. But after building three to six months of easy-to-access savings, investing in other financial instruments offers many potential advantages.

Why is Now the Moment to Invest?

Investing is a technique of building wealth, but it's not only for the wealthy. Anyone can start investing. Various flexible vehicles make it easy to begin with small amounts and build a portfolio eventually. In fact, what differentiates investing from gambling is that it takes time and it requires patience.

Investing is the act of committing money or capital to an endeavor, with the expectation of obtaining an additional income or profit. Investment is important to accomplish one's financial goals and provides a buffer for unforeseen expenses that may arise in future.

Investing refers to long-term commitment, as opposed to trading or speculating, which are short term and, therefore, amount to higher risk. Knowledge and intelligent investing are the key to build wealth.

Why Investing Matters

Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value.

To build wealth, you should invest your money. If you don't invest, you will miss out on opportunities to increase your financial worth. Needless to say, you have the potential to lose money in investments but if you invest wisely, the potential to gain is higher. If not invested, the buying power of your money will depreciate over time.

The top reasons why you should invest your money are:

• Wealth Creation - Investing your money will allow it to grow. Most investment vehicles, such as stocks, certificates of deposit, or bonds, offer returns on your money over the long term. This return allows your money to compound, earning money on the money already earned and creating wealth over time.
• Beat Inflation - US$100 today would only be US$96.5 next year according to average international inflation statistics, which implies that you would lose 4.5 percent of our money every year if kept as cash. Returns from the investment help maintain the purchasing power at a constant level. If you don't beat the inflation rate, you'd be losing money, not making money.
• Retirement - A person should invest while he is earning so as to create a corpus of funds that can be used when one retires. This retirement fund accumulates over time and provides security to maintain a comfortable lifestyle even after retirement.
• Accomplish financial goals - Investing can help you reach bigger financial goals. This return on your investments can be used toward major financial goals, such as buying a home, buying a car, starting your own business, or putting your children through college.
• High returns - Investing would help to achieve high returns as compared to a bank savings account, which provides a minimum percent return. Investing in markets could provide you returns upward of 10 percent if given the right time horizon.

The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.

Risk-Return Tradeoff

Whether you are making an investment in equity in the stock market, real estate, government bonds or any other financial instrument, there are two factors your investment is guaranteed to have: risk and return.

Risk refers to the probability of incurring losses relative to your investment. No investment exists that is completely risk free.

Return measures the actual gain or loss your investment generates. While the word return is most commonly associated with a gain, it is perfectly possible to have a negative return, obviously indicating an actual loss on your investment.

The risk/return tradeoff is, therefore, an investment principle that indicates a correlated relationship between these two investment factors. The tradeoff is quite simple: investments with higher risk are associated with greater probability of higher return, while investments with lower risk have a greater probability of smaller returns.

The amount of risk you carry depends on your appetite — or tolerance — for risk. Only you can decide how much risk you’re willing to take for the potential of higher returns. But if you’re seeking to outpace inflation, taking on some risk may be necessary. An increase in risk may provide more potential for your money to grow.

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At MountX, we have created a proven formula for wealth creation, based on financial literacy and technology so you can accomplish your financial goals, levering risk and return tradeoff.

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