There are certain indisputable and widely held financial principles such as, for example, “it is advisable to save to face future complications,” “it is bad to live beyond our means,” or “it is unreasonable to be heavily in debt.” We are all sensitive to these principles and, despite this, millions of people—even those with high levels of education and sufficient disposable income—violate some of these fundamentals at some point. Why is managing basic finances so difficult for a large part of the population? What can be done to prepare young people or to enable consumers to make better decisions in their daily lives?
The immediate answer to these concerns has traditionally focused on insufficient levels of financial knowledge. 46% of the Spanish population considers their financial knowledge to be “low” or “very low,” according to the Financial Competencies Survey by the Bank of Spain (BdE) and the National Securities Market Commission (CNMV). This result is in line with the ranking of the PISA report prepared by the OECD in 2018: Spain, in 11th position out of the fifteen OECD countries analyzed, is among those with a financial education index in the classroom below average, and more than 15% of students lack even the most basic financial knowledge. This figure should alert the authorities, as Spain has a population of nearly ten million young people between the ages of five and twenty-five who will have to face a progressively more complex, uncertain, and dynamic world, in which information will pass before them at the same speed with which they must integrate and process it to make the right decisions.
The economic difficulties caused by the pandemic and the uncertainty associated with an unpredictable crisis are a good example of the future environment they may face, in which it will be key to develop the financial skills and competencies necessary to protect themselves from unforeseen events. But this is not the only argument. Economic trends that were visible before the pandemic already anticipated that the need to acquire financial education skills can only grow in the future for various reasons.
Firstly, young people are likely to face more difficult decisions if financial transactions continue to grow at the speed of digital transformation. The ubiquitous presence of technology among digital natives means that young people may be among the main beneficiaries of the digitalization of financial services. However, just as the spread of digital financial services can open up new opportunities, it can also expose consumers to new threats such as misleading advertising, misselling, over-indebtedness, or scams linked to identity theft, among others. This set of challenges is aggravated when low financial education is combined with limited awareness of cybersecurity. Therefore, the combination of digitalization and education appears to be the most powerful mechanism to continue expanding financial competencies among the younger population.
Secondly, as the OECD emphasizes, future generations in Spain will likely assume more financial risks during their lives than the current adult population, due to factors such as increased life expectancy, less welfare protection, and greater uncertainty regarding retirement income. Varying employment prospects and the effects of digitalization, technological change, climate change, pandemics, globalization, and the transformation of the nature of work may also contribute to financial uncertainty. Furthermore, growing income and wealth inequality could mean that, without a solid financial education, disadvantaged young people could fall further behind.
Thirdly, the development of sustainable finance has the potential to generate more sophisticated financial products and services, aligned with environmental and social issues with the purpose of generating impact and transforming our environment. Therefore, having the ability to choose the most appropriate products, make responsible consumption decisions, and be sure of contributing effectively to the sustainability of our planet requires not only strong conviction but also basic financial knowledge. Not surprisingly, a high level of financial competence is associated with more responsible basic financial behaviors.
In an increasingly complex world, young people are likely to face more difficult decisions as financial transactions continue to expand their range of products and services. Therefore, financial education, together with an appropriate balance of consumer protection regulations, will play a fundamental role that should be reflected by introducing basic notions of economics and finance into the curricula of the first years of compulsory education. Unfortunately, as much as the OECD insists on recommending it, there are few countries in the world where financial education is part of the curricula. In Spain, the economics subject, which also touches on some financial topics, is only compulsory for those students who decide to study the social sciences branch and is optional for those who choose the arts, technological baccalaureate, and health sciences branches.
For this reason, the Spanish Banking Association and its member banks, as well as many other institutions in Spain—such as the Bank of Spain and the CNMV, which lead the National Financial Education Plan—emphasize the importance of financial education as the most appropriate mechanism for citizens to have a better future and even achieve economic freedom. This genuine interest is two-way, as the financial sector also needs users with adequate knowledge to be able to make correct economic decisions that guarantee a relationship of trust and transparency between entities and their clients.
Education is the most important asset of any individual, and financial competencies become a fundamental pillar to ensure better control of personal finances, which contributes to reducing household vulnerability, reduces family stress and, at the same time, contributes to increasing the stability of the financial system. Financial education is one of the best tools we can provide young people to ensure that knowledge ultimately leads to good individual decisions, as well as for society as a whole.
Juan Carlos Delrieu, Director of Strategy and Analysis at the Spanish Banking Association
