We at FAI have been closely following work on financial education and financial literacy to better understand whether financial education can improve financial capability. So far, the evidence has been mixed at best. A recent meta-analysis, largely focused on the United States, finds overall little evidence for impacts of financial literacy education on financial behaviors, and effects that attenuate over time.
Is financial literacy education doomed to failure? One possibility is that programs aren’t always well-targeted towards populations that could benefit most from financial education programs – the less financially sophisticated, and those newly facing important financial decisions – and that the effects of financial education programs among these populations could be significantly greater. It’s possible that reaching the right people, in the right circumstances, could make all the difference.
First, initial levels of financial sophistication may matter for impact. There’s evidence for this premise in a comparison between two studies, one in rural India and the other in urban Mexico. In Uttar Pradesh, traveling agents provide branchless, “door-to-door” banking services to villagers, so they can bank on their doorsteps rather than having to travel to banks. In the study by Calderone et al, customers of this service in randomly selected villages received two days of intensive financial literacy training. The authors report that the training significantly affected savings, increasing them by 29 percent. In contrast, a new paper by Bruhn, Ibarra and McKenzie shows much smaller effects of financial literacy training on savings and financial knowledge among urban residents of Mexico City, and—most surprisingly—very low demand for financial literacy training, even with significant monetary incentives attached.
Relative to participants in the Uttar Pradesh study, participants in the Mexican study were significantly wealthier and more educated, and plausibly more financially sophisticated. According to the authors, about 40 percent of the Mexico sample had at least a bachelor’s degree, 60 percent were already saving monthly at baseline, and 40 percent had credit cards. To my mind, it makes sense that this relatively educated population would change their behavior less in response to financial literacy training than a population with a lower baseline level of financial knowledge, resulting in lower marginal impacts of financial literacy training for the more educated and sophisticated group. For individuals who may not understand how to calculate the cost of a loan, or that interest compounds on savings, on the other hand, it seems more likely to me that basic financial literacy training would change financial decisions. And in fact another recent review of financial literacy interventions by Zia and Xu finds exactly that: targeting individuals with lower levels of initial financial knowledge leads to stronger outcomes.
Second, as we’ve written in the past, approaching individuals at teachable moments or in teachable circumstances might also matter significantly for program impacts. A recent set of studies looking at migrant workers in several different countries generally finds more promising results. Migrants and migrant households receiving financial literacy training change their financial practices; reduce use of more expensive remittance products; and exhibit improved financial knowledge, behaviors, and savings. Why would training have more impact on this population? The authors hypothesize that migrants, as a population with greater disposable income, might therefore have a greater need for financial education and tools.
These findings, though heterogeneous, suggest to me that targeting matters, and that reaching individuals who have a lot to gain from better information on money management at the right time – such as migrant workers and the newly banked in the developing world – may be our best shot at improving savings and financial literacy.