"The key is to design and roll out financial literacy programs that incentivize a correct use of digital financial services while at the same time promoting responsible financial behaviors"

The Latin-American Development Bank (CAF) is committed to enhancing the life quality of all Latin-Americans, actively promoting the region’s integration and sustainable development. It has a model for sustainable development through credit, non-refundable loans and support to technical and financial projects in both the public and the private sectors. Its contribution to regional development is reflected in the results of its lending and asset investment transactions.

Diana Mejía is Senior Specialist in Financial Inclusion at the CAF. Previously, she worked at Banco de la República (the Colombian Central Bank), where she was director of Economic & Financial Education and head of Institutional Communication, among other responsibilities. She is an economist, with one master’s degree in Economics from the Andes University in Bogotá (Colombia) and another in Public Administration from the Kennedy School of Government at Harvard University.

She has worked on a range of financial education and inclusion projects in Latin America, such as measuring different populations’ financial capabilities in several countries within the region and advising national governments on how to design and implement domestic strategies for financial literacy and inclusion. She has also led projects for work-oriented education, innovation and productivity in several Latin-American countries. And she has authored publications on related subject matter, such as the challenges of implementing national financial inclusion strategies in Latin America, what determines financial well-being in Latin America, what determines financial literacy in Latin America, final inclusion for women, etcetera.

 

• CAF promotes a model for sustainable development based on non-repayable loans and funding and access to basic services to boost the quality of life for vulnerable populations. What role does financial literacy play in this?

CAF is a development bank committed to enhancing the quality of life for all Latin-Americans. What we do fosters sustainable development and regional integration there. Financial literacy can be understood as a set of knowledge, skills, attitudes and behaviors that are fundamental for countries to develop, and there is ample evidence that greater financial literacy makes markets run more smoothly, as citizens on the whole make better financial decisions, which in turn reduce crisis incidents and favor systemic stability. Financial literacy stimulates a more sustainable economic policy, as citizens who are better educated in financial and monetary matters are better equipped to take a stance regarding the economic and social policies of their governments. And on the reverse side of things, bad financial decision-making among consumers has negative effects on the economy, such as low savings ratios and limited capital formation, shortfalls in investment for pension schemes and a higher inequality index in income distribution.

One of the most relevant lessons we can extract for recent crises concerns the ignorance and disinformation suffered by a major part of the public regarding basic economic and financial tenets. This limits their capacity to take responsible, conscious, competent decisions. Thus, financial literacy is critical for inclusion, as it not only facilitates effective use of financial products, but also helps people to develop skills to compare and select those best adapted to their needs and possibilities, empowering them to exercise their rights and responsibilities.

 

• You worked at Banco de la República (the Colombian Central Bank) where you held various positions, including director of economic & financial literacy. How did you promote financial literacy from such an institution?

Financial literacy is a key issue for central banks and that is why most of these institutions in the region are spearheading the implementation of nationwide financial literacy programs and strategies. Many central banks have been concerned by the fact that individuals lacking basic financial knowledge just don’t have the tools to make the most advantageous decisions for their economic wellbeing. And that affects both their long-term behaviors, such as acquiring tangible goods, investing in human capital or saving in retirement funds as well as their behavior when trying to manage financial resources. If such shortcomings are widespread over large chunks of the population, frictions can appear that hamper the optimal performance of the markets. That is why financial literacy contributes to the overall wellbeing of the economy, something of particular interest for central banks.

Those are the reasons why several central banks in the region have focused on rolling out financial literacy programs for children and young people, in order to generate conditions such that, from the time of their formal education these future adults are able to wield appropriate tools to make better financial decisions that can boost their wellbeing.

 

• You’ve also been involved in advising national governments on the design and implementation of national financial literacy and inclusion strategies. What are the main aspects to be taken into account to make such strategies work efficiently?

Over the last decade, an ever-growing number of countries have established financial literacy and inclusion strategies as part of their overall policy to reduce poverty, aiming to promote the stability and development of their financial systems. In many cases their commitments were set out in public policy papers. Known as national strategies, these policies establish the lines of implementation in different areas of action.

Actions for financial inclusion cluster around promoting access, use and quality of financial products and services, whereas those for financial literacy pursue the roll-out of programs and initiative to develop the financial skills of specific groups within the population. A national strategy can be established as an efficient instrument for laying down a clear, coordinated path towards enhanced financial literacy and/or inclusion within the entire country, enabling stakeholders to define common goals, identify relevant threats and opportunities in achieving them, and prioritize a specific set of actions to be performed most urgently.

Here, to sum up, the key aspects to consider for national strategies to be efficient are, firstly, having the baselines or diagnoses of the levels of financial literacy and inclusion to ensure effective implementation of national strategies.  Analyzing the data collected can also help policy makers to better understand the links between financial education, inclusion and the specific socioeconomic context in each country. The periodic application of surveys of this type will facilitate better assessment of the results of the programs and policies implemented. Secondly, designing and maintaining effective coordination mechanisms over time, throughout the different stages of conception and implementation of the national financial literacy and inclusion strategies is essential to achieve the goals established. Thirdly, ensuring a specific budget is allocated, assigning existing resources to the implementation of the strategies within each public authority, or grouping together funding to create a common budget and then drawing up a specific financing plan. Fourthly, establishing a communication plan to ensure you have the media on your side, as using mass media, such as television or radio broadens the scope of the general public’s knowledge of the activities, boosting awareness of the issues and sensitivity to them. Fifthly, going through a consultation process with the stakeholders and the target population to supplement the diagnosis from the design stage of the national strategy, to have a deeper understanding of the groups and ensure that the financial literacy programs have the right content and format and that the financial products and services for them are appropriate to their needs and capacities. Sixthly, establishing a monitoring, follow-up and assessment system for the national strategies right from the outset at design stage. And finally, using international instruments and regional dialogue to encourage mutual learning and discuss how to best apply the instruments designed to really support the roll-out of the national financial literacy and inclusion strategies.

 

• In FMBBVA we foster financial literacy among our clients. Specifically, we have virtual financial learning platforms for entrepreneurs. Do you think digital development and innovation have played their role or do they still have further to go yet? What do you think the priorities for a microfinance institution should be in this area?

I consider there is still a long way to go still. To achieve greater digital financial literacy, we need to deal with the possible barriers preventing people from putting such services to use. In particular, it’s important to foment the financial skills of an ever-growing number of people in vulnerable situations who have been brought into the financial system through the governments’ transfer programs. Here, the key is to design and roll out financial literacy programs that incentivize a correct use of digital financial services while at the same time promoting responsible financial behaviors. The digital media become an excellent opportunity to improve interventions trying to promote financial skills. By using applications and robo-advisors, digital media incorporate elements that have been successfully tested by behavioral economics and found to promote good financial behavior. For example, using gamification and personalized “nudges” to remind people to set financial goals, and providing information at key teachable moments. Digitalization also helps to measure financial behaviors and see their impact on individuals’ wellbeing.

Special attention should be paid to the need to boost the digital know-how and skills of the most vulnerable groups who have traditionally been excluded from the financial system.  Here, what matters is how the public financial inclusion policies contemplate the strengthening of digital capacities. In parallel to this, rolling out programs to boost digital skills should be segmented for different target audiences. The approach for the elderly, indigenous peoples and rural population must be personalized in line with their specific characteristics and conditions.

One of the greatest opportunities the microfinance institutions have here is to design their products and services on the interface with their clients’ needs. Thus, we recommend taking advantage of new digital tendencies to refit products and services to match the real needs of the users, while accompanying clients with continuous help in their financial and digital learning.

 

• FMBBVA is convinced that a good corporate governance system requires an organizational structure with well-defined lines of accountability, based on responsible, coherent and transparent action. What measures do you think the major economic agents should adopt as their priority for putting these values into practice?

A good corporate governance system is fundamental to an appropriate implementation of national financial literacy and inclusion strategies. Effective leadership and the participation of all relevant stakeholders make an enormous contribution to the successful roll-out of such strategies.

To design and implement national strategies that can most effectively and efficiently tackle the needs of citizens and economies in Latin America and the Caribbean, the countries in the region must identify a national coordinator or a technical secretary who can protect the roll-out of the strategies from electoral and political cycles, insofar as possible. Likewise, it’s important to identify explicit mandates for the institutions and authorities participating in the different strategy areas. These may be implicit, identified from existing mandates or granted through primary legislation, and can range over key aspects from financial stability to consumer protection.

Explicit mandates facilitate the design and implementation of national strategies that are most sustainable and can ensure greater responsibility and visibility for the public, along with clear recognition from all levels of government. They can also enhance cooperation between institutions with a broader range of authorities. Effective leadership and legal mandates can also boost the capacity of the national strategies to overcome changes in top-level staff within the institutions implementing them.

 

• It’s said that the greater a country’s financial literacy, the higher the savings, the better the investment decisions, the lower the borrowing, the better the pensions and the higher quality the standard of living. Do you agree or is it not always the case?

I agree. We are gathering ever more evidence worldwide to demonstrate how people with higher financial literacy plan better, save more, earn more on their investments and manage the money for their retirement better. This has very important implications, as people with greater financial know-how are more resilient to economic shocks, including crises like the Covid-19 pandemic.

The financial literacy programs prove to have the most impact focus on triggering positive changes in the financial behavior of individuals. This can significantly influence levels of financial well-being and health among the general public, understood as the degree to which a person or a household can manage their current obligations without problems and feel safe about their future.

 

• Financial literacy and inclusion are matters of increasing concern in the countries that are regulating them. What improvements do you think can be made in the standards and regulations?

To achieve financial inclusion in the region, we need to design and implement an integrated package of measures to tackle issues on both the demand and the supply side.  On the supply side, there need to be regulatory frameworks to promote capacities and efficiency in the telecommunications industry to make data use more affordable. The same should happen in the finance industry and among all providers of digital financial services, whether traditional banks or fintechs, to ensure competitive pricing and servicing so that the entire general public can make the most of digital opportunities.

Countries in Latin America and the Caribbean must promote appropriate regulatory frameworks to achieve the multiple goals that policy makers are setting for financial integrity, stability and inclusion and for consumer protection. The rules should protect consumers and investors, ensuring healthy competition and safeguarding the public from financial instability and lack of integrity. Likewise, the policy makers should consider novel approaches to ensure high-quality standards and supervision, supporting safe use of innovative technologies while guaranteeing that the regulation is proportional to the risks. Here, it’s important to adapt regulatory frameworks to reach the right trade-off between innovation and dealing with the challenges and risks to integrity, while protecting consumers and financial stability.

In particular, traditional regulatory frameworks (aimed at financial institutions) are not necessarily the best for fintech business models. In a rapidly changing environment, regulators should make more use of activity-based regulations. It is vital to have adaptable, flexible standards to reduce the probability of repeatedly having to make abrupt changes to keep them in line with current needs. Likewise, regulators should help public-sector institutions to become more robust and stay abreast of the latest developments in the industry and in the technology, while ensuring they have appropriate skills and tools to exercise effective oversight over the financial technology industry. Here, regulators can make use of new technologies by developing suptech and regtech schemes.

And then, cybersecurity policies are fundamental to safeguard citizens’ rights online, such as privacy and data ownership, and to boost citizens’ trust in digital technologies so they can feel comfortable using them. Cyberattacks have increased in the LatAm region, mainly targeted at financial institutions. So countries must continue to foment greater cooperation with each other, involving all relevant stakeholders and establishing mechanisms to monitor, analyze and evaluate impacts for cybersecurity issues within their borders and throughout the region. Having more data regarding cyberspace will enable them to build up a cyber-risk management culture, which must spread more widely in both the public and the private sectors.

 

• As a member of the Advisory Board on the BBVA Center for Financial Education and Cability, promoting the importance of financial skills and know-how as a key element in boosting the level of financial health and contributing to inclusive, sustainable growth, how do you think it can contribute to financial literacy and sustainable, inclusive recovery?

People’s decisions about how to prepare for and respond to life’s vicissitudes, such as the current pandemic, also influence financial health.

Healthy financial habits include regularly setting aside small amounts in saving, controlling expenses, managing debt, making prudent investments and seeking sound advice to protect against predatory practices and fraud, and to increase resilience against financial shocks. Financial literacy and the efforts to develop skills help people to create healthier habits and avoid costly errors in their decision making. It is also important that financial literacy programs and policies incorporate a gender focus, taking into account significant gender gaps observable in Latin-American citizens’ knowledge and behaviors.

Significant shortcomings in financial health point towards the need for the public and private sectors to direct resources into the development of people’s financial skills. The main challenge is to find efficient ways of doing so. The available evidence, including the studies we have been bringing forward in CAF, show that higher skill levels are correlated with greater financial wellbeing.

The core objective of the national financial literacy strategies which incorporate a financial health perspective should be to endow people with financial skills, encourage healthy financial habits and hone their financial decision making. Traditional financial literacy programs assumed that the spreading of information on financial products to consumers would lead to better options. However, the evidence gathered by numerous impact assessments over the last decade suggest that this is an erroneous hypothesis. A more promising path is the use of behavioral economic in designing financial education, changing its goals and the tactics so that rather than focusing on information transfer, financial literacy becomes about the development of skills. This often means integrating the educational aspects into the process of using financial services to promote learning through hands-on practice. A growing body of evidence demonstrates that interventions designed using behavioral economics principles can feed into decision making, so that they have higher probability of improving behaviors around the handling of money.

Financial decisions are often complex, requiring trade-offs and uncertainties, involving aspirations and fears. As a result, people often make decisions that do not reflect their best interests. Behavioral science tries to understand how and why individuals behave the way they do, how they process information and how the context affects their behavior. “Nudges” based on behavioral understanding, include embedding instructions, predetermined values and tips within the processes people go through when actually using financial services.

In this order of ideas, it is recommendable to use financial health as a lens through which to oversee the finance industry, especially for the sake of consumer protection and financial literacy. In their consumer protection and financial inclusion policies, the authorities can ensure that the financial services people are using lead to good financial health and, through financial education based on behavioral changes, they can support financially healthy habits and decisions.