Building a More Inclusive Financial System

Compare Banks explores how to help Brits to keep up with fintech.

Updated: May 21, 2024
Matt Crabtree

Written By

Matt Crabtree

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A Psychology Today article called ‘Why Is the World Changing So Fast?’ was published in 2014. We’ve clearly been on a rollercoaster for decades now. 

Ever since the world grasped the truly mind-bending power of the Internet, we’ve seen all sorts of socio-economic changes: the crypto yo-yo; the fiat banking shakeup; the mysterious ChatGPT; an international proxy war between the world’s major powers; and a worldwide lockdown… transforming social norms including working from home and challenger banking. 

We are in a time of constant, radical informational competition. Adjusting is the name of the game. Learning is the key to adapting to change in general. Relationships are crucial to well-being, be it together or spiritually.

And technology including fin-technology is becoming harder to side-step as it grows exponentially powerful together with emerging quantum computing also inbound. 

In this blog post, we discuss the importance of financial inclusivity; enabling those who are not far ahead of the pack to get the access and support they need to stay well-adjusted, living with dignified humanity in this increasingly data- and digital-centric reality. 

Inclusive financial systems: Role of financial education and access: Overview

As financial services markets become more complicated as a result of AI and ML-powered technology, users face greater levels of accountability and risk.

Due to the rising complexity of financial services markets, customers now bear more of the burden and risk associated with managing their own finances. Customers who lack financial literacy may be more susceptible to fraud, less likely to make informed decisions on their savings and investments, and less ready for retirement. 

All individuals and enterprises, no matter how large or little, should be able to take use of the entire range of financial services available in order to build and maintain resilience, stability, and long-term financial security in a financially inclusive system.

Overview: Why is learning about personal finance important?

Some people lack financial literacy because they don't have a bank account, despite the fact that people are getting asked to take full accountability for their financial well-being; meanwhile, there are complicated financial markets, particularly in emerging markets, posing threats to consumers; with debt and low liquidity increasing worldwide at least partway because of widespread credit availability.

Overview: How can this be done?

In order to help people make sound financial decisions throughout their lives, and particularly as they approach retirement age, schools should begin teaching financial literacy early on.

National campaigns and free information (including web sources) on high-risk issues like fraud; provision of (distinct) private advice sector and public sector (government and regulatory body) information; provision of clear product documentation and avoidance of difficult-to-understand small print; a responsibility on financial institutions to ensure customers understand the services they use.

Overview: What is our level of financial literacy?

Countries are becoming more conscious of the need for financial education, however engaging consumers is not straightforward and some find financial problems distressing. Financial literacy is not good for most countries and across people's income levels and education.

Overview: How helpful is financial literacy training?

Although it is challenging and expensive to measure the impact of financial literacy, training has been effective in reducing mortgage default, boosting pension savings, and lowering levels of debt.

However, to benefit individuals' well-being and financial literacy, it must be supported by market regulation, consumer protection, inclusion, and automation of advantageous financial behaviours.

Overview: What more should be done?

Consumers need to be convinced of the importance of improving their financial awareness and literacy; schools need to teach about money; financial institutions need to educate their employees, organisations, customers, and countries need to share their experiences and best practices; financial education needs need to be identified by life phase; and programs need to be evaluated more thoroughly.

Why it's so crucial to learn about money management — A discussion

More and more people, not only potential investors, need to learn about personal finance. It's becoming more important for the typical family as they attempt to figure out how to save money, pay for a house, educate their children, and secure a retirement income.

People have always had to make decisions about their money, such as their expenditure on a vacation versus how much to set aside for their kid's education or how much to save for new furniture versus how much to set themselves up for life, but new factors have increased the significance of financial literacy and awareness.

One reason for this is that customers now have a plethora of complicated financial tools for saving and borrowing, rather than simply two alternatives for interest rates on savings plans or bank loans, thanks to the increasing complexity of financial markets.

However, employees are progressively taking on more of the responsibility and risk for long-term financial choices, such as pensions, formerly shouldered by the government and employers. The pension issue is of growing significance as people live longer and may enjoy their golden years for more years.

If people are not financially educated, they will be vulnerable to fraud and will not be able to make sound decisions about their own money and investments.

But if people learn how to manage their money well, they will be more inclined to save money and to push banks and other lenders to create solutions that are tailored to their specific requirements. This will boost investment and the economy as a whole.

Practical advice: Improving one's financial education: Tips

Possessing the knowledge and tools necessary to handle one's financial affairs responsibly is the definition of financial literacy.

Don't be fooled by the term “literacy”, though. While it's helpful to be aware of financial statistics and information, one is not financially literate unless you consistently engage in positive financial behaviours.

With this knowledge, you'll be prepared to handle any financial situation, from unexpected costs to mounting debt to the ups and downs of investing. Budgeting, sinking savings, and the distinction between different pension plans are all familiar concepts to anyone with a firm grasp of personal finance.

Consumers that are financially literate are well-versed in the following areas:

1. Budgeting

You carry around a computer in your pocket, which more and more people for their online banking. 

It's one thing to memorise the rules of arithmetic in arithmetic class; it's quite another to put them into practice with your own money. Most Brits get by from paycheck to paycheck due to a discrepancy between their take-home salary and their budgeted expenses.

People who are financially literate are more likely to stick to their budgets, save for their futures, and defer pleasure for the sake of contentment.

2. Emergencies

There’s no use in using robo-advice if you’re one paycheck away from disaster. If an emergency costing £1,000 suddenly arose today, just 39% of folk in the US would be able to afford it. (It may not be much better for Brits). 

Moreover, three out of ten Americans have no way to pay for a £300 emergency. Financially savvy individuals, on the other hand, know how to set aside £1,000 in case of an unexpected bill, and how to increase that sum so that they have enough money to cover three to six months of living costs in the event of a more severe setback.

3. Avoiding debt

The average amount of debt carried by Britons as of March 2022 was £33,410. There is no universally accepted figure for average personal debt; it varies widely among demographics.

Households headed by someone between the ages of 18 and 34 had the greatest non-mortgage debt, averaging £10,400. This is followed by households headed by someone between the ages of 35 and 44.

Car loans, credit card debt, and student loans contribute to the trillions in home debt that we carry. In 2018, the Federal Reserve Bank of New York estimated that Americans owed more than £3 trillion in consumer debt.

Consider the fact that 40% of Americans, according to Northwestern Mutual, pay up to 50% of their monthly income on debt payments to get an idea of the effect this has on everyday life.

Understanding how the time and resources spent on debt repayment prevent future investment is a key component of financial education. The trend of educating students about personal finance in the classroom is growing.

After all, the school is the ideal setting for imparting such monetary life skills. And you undoubtedly already know that we consider learning about money to be just as important as learning to read and write.

How many people can read a balance sheet?

We’re still getting to grips with crypto but what about regular personal finance management? From the data we have so far examined, it is reasonable to conclude that the vast majority of individuals are financially illiterate.

Even if there is no foolproof method of determining how many individuals are financially literate, the absence of certain abilities would lend credence to that assumption.

If you were to use the percentage of the population that is not living paycheck to paycheck as a proxy for financial literacy, just approximately 20% of the population would meet the criteria!

Unemployment, redundancy, decreased income or benefits, and a lack of financial discipline accounted for over half of all causes of financial distress in the United Kingdom. Also, during August and October of 2021, an average of 313 people per day in England and Wales were declared bankrupt or insolvent. One every four minutes and thirty-seven seconds.

Indicators of financial literacy might include the ability to create and stick to a budget. Let’s look at America: over 17,000 throughout the United States took the National Financial Capability Test, and the results are shown here.

Less than half (48%) of participants passed the 30-question exam that included issues including budgeting, paying bills, establishing financial goals, and more, according to the National Financial Educators Council (NFEC).

Only around a third of test takers get 63% or more of the questions right on a basic test of financial literacy.

On the plus side, many high school students are increasing their financial awareness by taking personal finance classes. And studies demonstrate that it has a beneficial effect.

Many of the findings from a study conducted by Ramsey Solutions Research of more than 76,000 American college students who have completed a personal finance course run counter to those found in the NFEC report. Students who have attended a personal finance or accounting course had a far deeper understanding of fundamental financial concepts like:

  • Credit cards (86% more frequent than debit cards)
  • The best way to file tax returns (87%)
  • The inner workings of insurance (90%)
  • The mechanics of student loans (94%).

4. What are some possible next steps? ✅

We hope you were able to confidently respond “yes” to all or most of the evaluation questions. If so, that's fantastic! If you've managed to become financially literate, count yourself among the lucky few!

Don't give up hope if you find yourself saying “no” to some of the questions. You may take action to improve your financial literacy. According to the same study stated above by Ramsey Solutions, many people who attend personal finance classes go on to achieve great financial success after adopting the following practices.

  1. ✔️ Create a rainy-day fund.
  2. ✔️ Get out of debt immediately.
  3. ✔️ Get your emergency fund to a full balance.
  4. ✔️ Put down fifteen per cent of your salary for old age.
  5. ✔️ Plan ahead and put money down for further education.
  6. ✔️ Try to get ahead of your home payments.
  7. ✔️ Keep amassing and giving back to the unfortunate.

See the Seven Baby Steps by Dave Ramsey.

Inclusive financial systems: Role of financial education and access: Solutions

To begin, what exactly is meant by a financially equitable system? 

According to our definition, an inclusive financial system is one in which all members of society, from individuals to small enterprises, have ready access to a wide range of financial services that contribute to greater economic security and stability.

Some groups suffer greater hurdles to participating in and benefiting from the system. In order to ensure that people from marginalised backgrounds may fully participate in and reap the benefits of the financial system, an inclusive financial system must address the gaps in the market, the decisions made in the past, and any other obstacles.

This is intended to have a reparative impact, as outlined by Wicks and Standaert in their paper, by, for instance, rerouting capital flows to institutions that assist previously excluded groups, individuals, and small enterprises.

A genuinely inclusive financial system is one that takes into account the needs of those who have been historically excluded, underserved, or preyed upon, and is developed with their involvement rather than without it. Therefore, in an inclusive financial system, previously underprivileged customers may benefit from financial goods and services.

They are built from the ground up to treat consumers with respect and dignity, giving them the confidence and control they need to use financial products and actively engage in the financial system. Lajewski and Sabharwal write on building financial products with and for underprivileged people and the methods that may be used to do so.

Strong consumer safeguards are another hallmark of an accessible financial system, one that goes after those who would do us (and our small companies) damage. Abusive, dishonest, or illegal conduct is included here.

Given the increasing digitization of banking services, this also involves a more robust consumer protection framework that takes into consideration the need of safeguarding personal information. These robust safeguards are weighed against the need to promote ethical innovation and market competitiveness.

A more consumer-friendly regulatory framework would pave the way for innovations that would benefit consumers' wallets. Evans and Pence, in their essay, provide a snapshot of the present level of consumer protection regulation in the United States and draw attention to several areas where improvement is needed from the government.

While financial access is essential, the success of an inclusive financial system is typically measured by its ability to improve other financial outcomes such as end-wealth creation, user resilience, stability, and economic mobility, rather than simply access. In their introductory piece on financial regulation, Asrow and Creehan show how to put an emphasis on results.

Exactly what are the advantages of learning about personal finance?

It’s not all bad news. Open Banking is being used in the credit industry to make banking more accessible to more people. Much of this could help consumers. 

For difficult savings duties that were traditionally shared by governments or employers, such as investing for a pension or for higher education for children, individuals are increasingly being expected to take on entire responsibility — and carry the cost of risk. 

But how can employees or parents, on their own, assess the risks and make informed decisions in today's complex financial market?

Even in nations where people have a basic understanding of credit cards, mortgage loans, and possibly private saving to “top up” workplace pension schemes, this remains the case.

This challenge is exacerbated in developing nations where fast economic growth has increased the number of customers with access to financial services, many of whom have little experience with formal financial institutions.

In order for the financial industry to make a genuine contribution to developing nations' actual economic development and poverty reduction, consumers in such economies need to be financially literate.

However, financial literacy is as important for countries that have already grown, since it may help people save enough for retirement and avoid excessive debt liabilities which may lead to foreclosure and bankruptcy. 

The available data on consumers' financial literacy is concerning for at least two reasons: first, most people lack the necessary financial knowledge to successfully navigate today's complex market, and second, most people incorrectly believe they have a much higher level of financial literacy than they actually do.

There are a variety of reasons why governments are starting to worry about this. One reason for this is that more people are declaring bankruptcy as a result of their own spending; in 2003, for example, over one in ten US families declared bankruptcy, while the number of private bankruptcies in Austria climbed by 11%.

There is an increase in private insolvencies in Germany and there has been a rise in consumer debt in Korea, both of which may be traced back to the easier access to credit in both nations.

What are all-inclusive financial structures?

The governmental, private, and social sectors work together with financial institutions to create a system that is both accessible and stable for all members of society. The financialization of non-financial systems in modern society is also taken into account by a comprehensive financial system such as digital crypto wallets.

For households and small businesses to reap the benefits of an inclusive financial system, four pillars of financial infrastructure must be in place: (1) payment systems; (2) credit and financing; (3) savings and investment vehicles; and (4) insurance.

For further research: Kumar and Ehrbeck discuss the payment infrastructure that supports the economy. Cochran's research interests are on the broad area of data and analytics applied to the credit decision-making process. 

Building both short-term stability via retirement savings and investment products and long-term riches through emergency savings options is made possible by a well-developed savings infrastructure. Phillips investigates how technology, and specifically mission-minded financial technology firms, may broaden access to the savings infrastructure.

Finally, we need a comprehensive insurance system that allows individuals and businesses of all sizes to pool their risks in order to hedge against sudden economic downturns and improve their long-term financial stability.

Other types of non-financial infrastructure support and facilitate broad use of an accessible financial system.

First, as addressed at length in the papers by Ehrbeck and Kumar and Jaquith and Carnahan, there has to be an inclusive identification infrastructure to make it easy for people, governments, and institutions to verify the identities of those who are taking part in the financial system.

Second, in this age of digital banking, it is crucial that homes and businesses have reliable, protected access to the Internet and devices that can connect to it, such as computers and smartphones.

Overall hallmarks of accessibility 

To be genuinely inclusive, our monetary system also has to take into account the ways in which it affects non-monetary institutions.

With time, the nonfinancial systems in our society have charged more users penalties and fees, ensuring that the conventional finance system worsens inequality, such as the health care, housing, higher education, and criminal justice systems.

It would be foolish to disregard the substantial costs associated with healthcare and legal systems, including administration fees, interest, financing charges, financial penalties, and intermediate goods like bail bonds and debt consolidation

This is even more true for debt collection schemes practises, as well as actors that utilise credit bureau data for non-financial applications like rental or job checks.

The financial system does not become more accessible simply by incorporating new institutions and networks into it. Instead, it highlights the need of an inclusive financial system that can anticipate and adapt to the future financialization of additional industries. 

This may, for instance, take the shape of a broader regulatory framework that takes into account the many new players and systems now playing a role in making it possible for hitherto nonfinancial systems to make use of financial tools.

How helpful is financial literacy training?

Remember when crypto exchanges were all the rage, and learning how to use them was a nightmare?

Things have opened up since. Still, most nations, including the more developed ones, have a poor degree of financial literacy. Seventy-one per cent of Japanese people polled had no idea how to invest in stocks and bonds, while high school students in the United States and South Korea performed poorly on a test measuring their financial literacy.

Even more worrisome is the fact that customers often exaggerate their level of expertise. 67% of Australians who participated in the study said they understood compound interest, but only 28% could correctly apply the idea to a situation. Governments must be convinced of the necessity for financial education for their populations before any action is taken.

While there is a correlation between education and financial literacy, data suggests that wealthy consumers with advanced degrees might be just as financially illiterate as those with less formal education.

More and more nations see the need of educating their citizens about money management, and many now provide financial education initiatives ranging from pamphlets and websites and or brochures to media campaigns and training courses. Topics addressed include budgeting, managing debt, investing, and saving for retirement.

However, piqueing consumers' interest in financial literacy is no picnic. Canadian poll takers ranked picking the best retirement savings plan investment as more stressful than going to the dentist. 

Who are the proponents of an open banking system? (Financial Inclusion Commission)

Key financial services for society are often provided by a mix of public, private, and social sector actors in a well-functioning system.

As our knowledge of what constitutes an inclusive financial system grows, so too does the number of parties with a stake in it.

A wide variety of private financial services and public sector providers of all stripes, social sector organisations (e.g., researchers, advocates, donors, and other communal organisations), and the technology sector at large are all essential players in the development of an inclusive financial system. 

The range of institutions working for a more equitable financial system has broadened during the last decade. Big Tech, its regulators, and other players in the digital economy have joined the ranks of those offering financial services as the industry has become more tech-enabled and digital.

The government has a duty to ensure the existence of a financial system that is open to everyone, free of discrimination, promotes the sale of trustworthy goods and services, and shields its citizens from scams and rip-offs.

As gaps appear between regulatory power and service supply, regulators must use a variety of mandates to promote inclusive finance. These include fairness, consumer protection, competition, financial stability, and responsible innovation. 

The judicial and court system, administrators of economic and social safety programmes (such as the Departments of Treasury, and any governmental firms that directly backstop or provide financial services to small businesses or individuals; such as student loans, health, mortgages or property insurance) all play important roles in ensuring that the financial system is accessible to all. 

Over 50 nations, including the UK's Financial Inclusion Commission, have developed specific national financial inclusion plans or commissions to assist coordinate national activity because to the large number of organisations involved in maintaining a stable financial system.

Realism: Why is it beneficial to have a monetary system that accepts everyone?

The nation's financial infrastructure relies on a system that allows all people, companies, and communities to participate in order to promote economic development, financial stability, and security for everyone. It also makes it easier to join other vital economic and social safety nets that are necessary for everyone's financial stability.

To promote equitable development, a financially accessible system is a powerful weapon. It bolsters business and employment by letting people and organisations seek material gain, make investments in themselves and their communities, limit undesirable outcomes, and amass riches.

Greater access to high-quality, consumer-friendly credit can equip people with the resources they need to successfully buy homes, upskill, and start businesses. 

The biggest practical benefits for people include protection from abusive acts or predatory products, elimination of credit invisibility, and prevention of data bias. New research from around the world is beginning to link stronger and more inclusive national economic growth with deeper and more inclusive financial systems.

On the flip side, when people are unable to get affordable financing or reliable payments for services, financial transactions reduce, thus decreasing total economic activity.

Other crucial economic and social processes can only operate with the help of and are dependent on an inclusive financial system. The worldwide reaction to the SARS and COVID-19 pandemics demonstrates the interconnectedness of the financial system with the social safety net that protects individuals and small companies. 

Direct cash transfers to households, investment funds and loan guarantees to stabilise commercial enterprises, and more have been used as responses by governments around the world, and the impact of these relief programmes has depended on the accessibility of the financial systems upon which they are built.

When the proper mechanisms were in place, the financial system was able to swiftly distribute gains to individuals and organisations. 

However, the government's response time and effectiveness were hampered by financial service access disparities. El-Zoghbi elaborates on these analogies on a global scale. In this issue's piece by Cuéllar, the author delves more into the idea that the United States might benefit from a more inclusive financial system if its social safety net were enabled by technological advancements.

Inclusive financial systems: Role of financial education and access: The Verdict

A universally accessible monetary system is hardly a magic elixir, however. There is no way to make up for a lack of money, steady employment, a safe place to live, or adequate medical care with the help of financial services.

In contrast, an inclusive financial system provides a tremendous boost for more prosperity when individuals and companies, particularly those who have been historically marginalised and excluded, gain access to, use, and profit from a complete range of financial services. 

As regulatory and market innovations continue to transform financial services, we have the chance to reframe inclusion as a guiding rubric for the future ecosystem, rather than as an add-on to current systems. This is a need from several angles. There are a plethora of jumping-off points in the pieces included in this issue.

See how to save money in 2024.

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FAQs

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