The Reality of Financial Literacy Today: Where Do We Stand?
In 2023, the Organization for Economic Co-operation and Development (OECD) conducted a survey encompassing 40 participating countries with the aim of assessing average financial literacy levels. According to its findings, across its participants, only 39% of adults reached the minimum target score1. In an era where information is available at the click of a button, this statistic is striking, highlighting the need for solutions that help individuals save, invest and overall make more informed financial decisions. Given this challenge, this article discusses how fintech could be a key part of the solution.
What Is Financial Literacy?
Before exploring how the fintech industry is addressing the need for better financial education, it’s important to define financial literacy. As the National Financial Educators Council (NFEC) aptly defines it, it is “the ability to understand and effectively use various financial skills, including personal financial management, budgeting, and investing” 2. Without it, individuals could find themselves making short-sighted decisions that may jeopardize their financial security, potentially affecting them long-term and taking years to recover from.
Having established that, we can now examine how the fintech industry is leveraging technology to improve financial literacy and make financial concepts more digestible. That includes personalized learning through AI-driven platforms, gamification to bolster engagement, alongside the potential downside of over-reliance on technology which could hinder users’ true understanding of core financial principles.
Is AI the Personal Finance Coach We Need?
AI-driven fintech applications are revolutionizing personalized financial education, as these apps utilize machine learning to deliver tailored learning experiences that directly address each person’s unique financial needs.
For instance, ChatGPT based on GPT-4, achieved an astonishing near-perfect 99% financial literacy score, according to a study done within Cornell University3, demonstrating the potential of AI systems to grasp and explain complex financial concepts, offering invaluable support to users seeking to improve their financial decision-making.
Additionally, other applications leveraging AI include Mint and YNAB, which track users’ spending habits to provide feedback and guidance aimed at correcting unhealthy financial patterns — meaning if a user frequently makes miniscule impulse purchases, such apps may highlight that and accordingly suggest resources and tips to reduce unnecessary spending.
How Fintech Makes Saving Feel Like Winning
Another strategy some fintech companies have implemented is transforming financial tasks into interactive, gamified experiences by incorporating rewards, simulations and social features to engage users and promote responsible financial behavior.
Game-like elements such as leaderboards, rewards and challenges work as they trigger dopamine-driven motivation within individuals, encouraging them to build long-term financial habits. This approach shifts financial management from feeling like a chore to an actually appealing activity. For example, the application Monzo has “Saving Pots”, which allows users to set personalized goals and visually track their progress, reinforcing a sense of achievement every time a milestone is reached.
Another use of gamification in fintech applications is that some may provide risk-free simulated learning which translates to safe virtual environments where users can practice financial decisions without any consequences. This, in turn, removes the fear factor from finance, allowing users to experiment and learn before making any real financial decisions. An example of that would be Trading 212, which offers a demo account with virtual funds, enabling users to freely explore stock trading, market trends, and investment strategies.
Fintech: When Does It Help, When Does It Hurt?
Nevertheless, as with any technology, overreliance on them can have drawbacks. Basing every economic decision solely on fintech applications or AI can hinder an individual from properly developing their own decision-making abilities, limit their understanding of financial concepts and remove any sense of personal accountability over their finances. Therefore, it is essential to draw the line between utilizing these tools for one’s benefit and abusing such tools in hopes of achieving quick financial gains.
Take Away
Ultimately, to fully capitalize on this growing fintech technology, a mindful approach is necessary to avoid over-dependence and ensure users develop the essential financial knowledge needed to make their own informed financial decisions.
Sources:
1- OECD (2023), “OECD/INFE 2023 International Survey of Adult Financial Literacy”, OECD Business and Finance Policy Papers, No. 39, OECD Publishing, Paris,
2- Tstol. (2024), Financial Literacy Definition: Top 8 industry Definitions | NFEC. NFEC.
3- Niszczota, P., & Abbas, S. (2023). GPT has become financially literate: Insights from financial literacy tests of GPT and a preliminary test of how people use it as a source of advice. Finance Research Letters, 58, 104333.