Zurich IQ blog article
Walter Jopp - Zurich Middle East CEO

Does financial literacy equal economic stability?

Financial literacy impacts economic health. A global population with a better understanding of their fiscal responsibilities can drive more competitive and stronger economies. Walter Jopp, CEO, Zurich Middle East, deep dives into the issue of financial literacy or rather the problem with financial illiteracy.

The global financial crisis – a perfect storm of financial illiteracy?

It is 11 years this September since we faced the worst financial crisis since the Great Depression.  Lehman Brothers filed for bankruptcy, AIG accepted a federal bailout, and the stock market was down 20% – on its way to bottoming out and down nearly 55% from its previous highs. The causes of the financial crisis were complex, but the lack of financial literacy was certainly one of the factors that led to ill-informed decisions on mortgage loans.

Surveys taken just prior to the global financial crisis revealed that many Americans taking out home loans either didn’t read their loan documents or understand them. In many cases, they were unaware that they were signing ‘teaser’ loans where the interest rate starts low but increases after a few years. Arguably, this lack of financial literacy combined with a loose lending policy caused the subprime loan crisis, the precursor to the full blown financial crisis.

Since the crisis, we’ve all grown older but have we grown wiser and what lessons have we managed to teach future generations? Today, we rarely use cash when making purchases and online shopping has become the top choice for many, creating ample opportunities to use and overextend credit – an all-too-easy way to quickly accumulate debt.

It commonly known that global debt has reached record levels, climbing to $247 trillion in 2018. And while this may seem like an individual problem, it has far reaching implications. As we’ve seen in 2008 crisis, financial literacy is an issue that impacts economic health. A global population with a better understanding of their fiscal responsibilities can drive more competitive and stronger economies.

What does financial literacy mean?

Investopedia defines financial literacy as ‘the education and understanding of various financial areas including topics related to managing personal finance, money and investing.’ The Organisation for Economic Co-operation and Development (OECD) explains the term as ‘not only the knowledge and understanding of financial concepts and risks but also the skills, motivation, and confidence to apply such knowledge.’

Financial literacy therefore refers to both knowledge and conduct – it is a key indicator of a person’s ability to make financial decisions and how they will behave afterward.

Why is financial literacy important?

While financial know-how has always been an important life skill, kids today (mine included) are growing up in an increasingly complex world where they need to take charge of their own financial future.

In my own working lifetime, I’ve seen rapidly changing financial markets, with new and more complex financial products. Individuals are making substantially more financial decisions over their lifetime, living longer, and gaining access to a range of new financial products. Developments in technology have brought about greater global connectedness and massive changes in communication and financial transactions, as well as in social interactions and consumer behaviour.

These trends indicate that elevating consumer knowledge is a priority and the onus is on the financial services industry to lead the way.

An app is not a replacement for solid financial knowledge

Financial technology is revolutionising the way people make payments, how they make investment decisions, and seek financial advice. In a perfect world, we’d like to see the increase in tech adoption coupled with an increase in financial literacy and education. Unfortunately, while FinTech use is up, financial literacy numbers remain dismal. For example mobile payment users can display corrosive behaviours, such as spending more than they earn, overdrawing their bank current accounts and carrying numerous credit card balances.

The rapid growth in Fintech around the world means that more attention must be paid to its impact on consumers.

Educate to empower

Clearly, we have a lot of work to do as an industry, so where do we start?

Our experience with the Investars program has taught us that financial education can make a difference and we need to become more active in teaching our community especially the next generation of consumers.

It might be surprising to know that kids actually enjoy and embrace learning about money. Understanding the basic concepts of financial decision-making before they take on their own responsibilities, such as buying a car or starting a savings account, can equip young people with the knowledge, skills and confidence to take charge of their lives.

Financial education is a crucial foundation for raising literacy and informing the next generation, helping them to build a more secure future for themselves.

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