Critical need for digital financial literacy


THE traditional financial economy was already evolving towards a digital financial economy, even before Covid-19.

However, during the lockdowns more people began to move towards digital finance. The movement of the traditional brick and mortar financial industry to digital has been greatly hastened by the pandemic.

While the younger generation have been more immersed in a digital economy – through online purchasing and financial services – it cannot be assumed that young people automatically have all the skills, knowledge and understanding they need to apply to their use of technology.

They may be fully immersed in the digital economy but are not necessarily digitally literate.

The digital financial economy will certainly be of greater challenge to the more vulnerable groups such as senior citizens, people unskilled in technology and groups with limited access to both the knowledge, skills and means to use technology effectively and safely.

Fintech – using software, applications and digital platforms to deliver financial services to consumers and businesses through digital devices such as smartphones – is being increasing worldwide, especially during lockdowns.

Populations, such as senior citizens, who probably never have used fintech before have been often forced to do their banking online.

However, improved access to financial services through fintech requires higher levels of digital financial literacy to make effective use of them and to avoid mis-selling, fraud – such as phishing, hacking attacks and unauthorised use of data – and discriminatory treatment and behavioural issues, such as excessive borrowing.

Thus, digital finance promises to be a major convenience as well as an effective means of reaching the unbanked, but its use must be accompanied by consumer information and education.

Digital financial literacy is likely to become an increasingly important aspect of education for the digital age.

Consumers will need to have a higher level of financial sophistication to make effective use of financial technology (fintech) products and services, and to avoid fraud and costly mistakes.

These developments point to the need to develop digital financial education programmes to improve digital financial literacy, with a focus on skills likely to be critical for those participating in the digital economy.

Digital financial literacy is likely to become an increasingly important aspect of education for the digital age.

Consumers today are expected to take greater responsibility for their financial wellbeing. For example, the savings in the Employees Provident Fund is simply insufficient for most contributors, and thus they need to take additional steps to prepare for retirement.

Further, to face expensive medical treatment, consumers need to plan for their medical needs through healthcare insurance.

Also, the decentralised nature of fintech implies that consumers will need to have increasing financial sophistication to process financial information.

This points to the need for nations to include strategies for digital financial education.

Digital financial literacy implies the knowledge of financial products and services, the awareness of digital risks and the ability to mitigate those risks, and the awareness of consumer rights and redress mechanisms.

First, consumers should be aware of financial products and services provided through digital means, such as the internet and mobile phones.

These services generally fall into three major categories. First, payment systems such as electronic money, phone wallets and remittance services. Second, asset management services such as internet banking, personal financial management and mobile investing. Third are other services such as internet based insurance services.

In addition to being aware of digital financial services, people should be able to compare the pros and cons of each available service.

This knowledge would help them to understand the basic functions of different types of digital financial services for personal purposes.

Second, consumers should be aware of digital financial risks and how to mitigate these risks. Individuals need to understand the additional risks that they may incur when using digital financial services, which are more diverse but sometimes harder to spot than those associated with traditional financial products and services.

Users of digital financial services should be aware of the existence of online fraud and cyber security risks.

They face a multitude of potential problems, such as phishing, pharming and spyware.

Digital financial service users should also be aware that their digital footprint including information they provide to service providers, may also be a source of risk, even if it does not result directly in a loss, including profiling and hacking.

Due to easy access to credit enabled by fintech, consumers of digital financial services could also face potential problems of overborrowing or excessively high-interest rates.

These risks can trigger unexpected and large losses when the service providers are weakly regulated or not at all. Overborrowing may also harm their credit rating.

Users should fully understand the terms and conditions stipulated in contracts they digitally sign with service providers.

They should also be aware of risky implications of digital contracts. They should understand that digital financial service providers might use their personal information for other purposes, such as calculating their credit demands, advertising, and credit evaluation.

In terms of financial risks, ease of access to finance may lead to overborrowing.

Consumers should not only be aware of the risks but measures on how to mitigate these risks, for example they should learn to use computer programmes and applications to avoid phishing and spamming.

They should also know how to protect their personal identification number (PIN) and other personal information when using financial services provided through digital means.

Finally, consumer should be aware of consumer rights and redress procedures, in cases where users fall victim to the above-mentioned risks. Users of digital financial services should understand their rights and know where they can go and how to obtain redress if they fall victim to fraud or other loss.

In Malaysia, consumers need to understand the role of the Ombudsman of Financial Services, Consumer Forum of the Malaysian Communications and Multimedia Commission, Bank Negara Malaysia, consumer tribunal and the police in addressing complaints related to online fraud and complaints on financial issues.

Currently, despite the increasing use of digital financing by all sectors of the economy in Malaysia there is very little emphasis or empowerment of consumers in addressing the complexities in the digital economy.

The Federation of Malaysian Consumers Associations calls on policy makers to formulate and implement a national programme for digital financial literacy to empower all consumers to fully take advantage of the digital economy, understand the risks and take measures to mitigate these risks, and finally to better understand their rights as consumers and be aware of where to go to seek redress if they feel that they have suffered losses due the digital economy. – September 14, 2021.

* Paul Selva Raj is secretary-general of the Federation of Malaysian Consumers Associations.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight.


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