How rethinking financial literacy can empower a new generation of investors

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The global financial system is undergoing a multitude of transformations at once. In fact, digitalisation and democratisation are changing how capital markets work. With that happening, investors’ and corporate issuers’ needs and expectations are changing, and a variety of new actors are joining the traditional financial institutions to meet this demand.

In the middle of this new, dynamic landscape, the finance sector continues to digitalise across the board and continues to display enthusiasm for further digitalisation of financial services.

Communities have been receptive to this change, with increased ease and efficiency of payments and money transfers becoming the most significant benefits of digitalisation. According to the World Bank’s latest Global Findex Database, 76 per cent of adults across the globe now have a bank or mobile account.

That being said, financial literacy is a major stumbling block on a global scale. A 2020 international study by the OECD revealed that only 17 per cent of the adults surveyed rated their financial knowledge as high. That percentage is concerning, considering the importance of being financially literate in today’s world, where complex financial systems are a necessity and consumers are constantly faced with decisions that involve managing their finances.

A new generation is emerging

The financial literacy gap is partly driven by a younger demographic entering the capital market, as highlighted in BNY Mellon and World Economic Forum’s 2022 Retail Investing Survey. As many as 70 per cent of retail investors were under 45. Most retail investors did not have early exposure to investing principles – 55 per cent of retail investors learned about investing only after entering the workforce, and less than 10 per cent learned about investing in early schooling – which contributed to a gap in financial literacy later in life. A majority (74 per cent) would prefer to have more learning opportunities to support their investment activities better. Further, 31 per cent of non-investors would invest if they had opportunities to learn about investing.

The world of social media has made it easier and faster to share information on a large scale, which has changed the balance of power when it comes to gathering and acting on financial information. However, it is frequently difficult to tell whether the information being consumed is based on actual financial fundamentals or someone’s personal perspective and advice.

This presents an opportunity to engage and empower individuals who can assume responsibility for their financial future by participating in the financial markets. Whether they currently invest or not, it is imperative that industry leaders empower individuals to make optimal financial decisions for their own betterment.

The role of the industry

An average investor requires a broader understanding of why and how to invest, thereby creating potential for market regulators and organisations to work collaboratively. To help people see the benefits of participating in the capital markets, companies can improve their communication of the value proposition of investing, even if it means paying fees and services.

First, financial literacy skills must be taught at a young age, and education must link basic financial health with advanced investment and retirement practices. Financial education must also be provided alongside investment opportunities.

Second, efforts by industry participants should be concentrated on increasing widespread financial literacy and promoting responsible investment strategies. Companies must improve their strategies to meet the requirements of modern investors. This vision requires both short- and long-term steps to be realised.

Third, the capital markets ecosystem should give all investors, no matter how much money they have, access to the tools and advice they need. To thrive in today’s increasingly digitalised financial landscape, the industry must democratise individualised advice. Technology can help in this effort by providing cost-effective solutions that reduce the complexity of investing and allow people to manage their own finances with more confidence.

Understanding the transformation driven by rapid technological advancements, and closing the significant digital and financial literacy
gaps, are vital for accelerating the adoption of advanced financial services and ensuring long-term financial resilience for individuals, businesses and economies.

Muhammad Rasoul is the CEO of amana.