By Michael Singh

THE PHILIPPINES has recently been plagued with fraudulent and unethical online lending behavior. This has prompted fintechs in the country to take much needed measures to combat issues related to financial literacy — like introducing industry standards for responsible lending following a circular by the Securities and Exchange Commission (SEC).

Industry players holding themselves to a higher standard is a drastic effort to address the mushrooming fraudulent organizations breeding in the Philippines, but it’s also a symptom to a problem that has long plagued the ecosystem.

Many Filipinos have low income. According to the World Bank, less than 10% of the population could be considered middle class in 2015 — a figure that has remained fairly stagnant since 2002.

Part of the reason the poor stay poor is a lack of financial literacy.

Even the most responsible Filipinos are placed at greater risk when attempting to access credit needed to rise above poverty or go up in social class, as the majority of Filipinos have or will take on debt. According to a survey conducted by the Bangko Sentral ng Pilipinas (BSP) in 2015, only 19.1% of adults do not borrow at all. And those who borrow greatly prefer informal sources over banks; 61.9% of them borrow from friends and family, and 10.1% borrow from informal lenders.

Furthermore, a World Bank survey in 2015 discovered that Filipinos who are knowledgeable about financial matters are more likely to report that they have money left after paying for basic necessities, and less likely to say that they’ve borrowed beyond their means.

Financial literacy, unfortunately, is a double-edged sword. One has to have disposable income to learn how to use it. But to have disposable income, Filipinos need to apply financial knowledge.

Breaking this cycle is, in parts, why BSP launched the “Economic and Financial Learning Program” (EFLP), a flagship initiative to introduce financial education to students, working adults, overseas workers, and unbanked populations.

That’s all fine as a first step, but as pointed out in a January column in the Manila Times, focusing solely on education won’t work to curb the underlying issues in financial literacy.

“Passing a financial literacy class does not make you a good money manager. The one major reason why so many of us are so bad with handling our finances is not because we are financially illiterate but because of the way we behave. So, ultimately, getting better with our money is about changing our behavior.”

While I agree with the premise, I would like to adjust that line of thinking slightly. The term “financial inclusion” shouldn’t just focus on imparting knowledge, but inoculating behaviors as well.

Marketing experts Daniel Fernandes, John G. Lynch, Jr., and Richard Netemeyer found that increasing financial literacy only had a measly 0.44% impact on subsequent financial behavior in their meta analysis looking at over 200 studies on financial literacy.

The results may be surprising at first glance, but they clear up upon critical consideration. Financial education is often imparted in courses and seminars covering multiple topics at once. When participants get back home, they face the herculean task of having to put all of these lessons into practice at once. It is much easier for them to fall back into poor habits that have been built over time. Without supervision, without immediate gratification, and without practice, people will forget what they learned in these courses and seminars.

Behavior change is exactly where fintechs shine. Fintechs are able to cultivate healthier financial education in a more practical sense, and without bogging down users with too much information in one go.

Teaching users as they go is the best way to encourage “stickiness,” and simultaneously teach users financial literacy in a more practical sense.

There are fintechs, for example, that enable consumers to pay for household goods in installments, which indirectly allows Filipinos to build the habit of honoring their short-term loans every month before they make higher-stake commitments like auto loans.

The experience of taking out a loan, receiving reminders about timely payment, and better products and repayment terms as a result of good repayment behavior are some ways fintechs help to set in motion a true financial education experience for users.

Fintechs can’t succeed in isolation, however. The ecosystem needs to play its part to bolster the fintechs’ role.

Policymakers and regulators need to mandate financial inclusion as a national interest and introduce policies with that vision. Activists and NGOs often serve the lowest income populations, and need to play a key role in financial literacy. Entrepreneurs and fintechs need to offer solutions with consumer protection at its core, and banks need to utilize modern advancements to open up financial services to underserved markets.

The magic happens when we talk to each other. All of these disparate voices need to be heard by all industry participants so that we can better service our particular piece of the financial education puzzle.

Contributing to their end of the puzzle, fintechs should place consumer protection at their core and implement an internal Code of Ethics. The digital lending industry needs to operate within a set of acceptable global standards, and advocate for upfront, transparent and responsible lending practices.

AsiaKredit, for example, adopts Code of Ethics standards such as the Smart Campaign for responsible lending by the globally recognized Center for Financial Inclusion (CFI) at Accion. In developing their own Code of Ethics, fintechs should look to the Smart Campaign’s Client Protection Principles such as prevention of over-indebtedness, need for transparency, fair and respectful treatment of customers, data privacy management, and complaint resolution mechanisms. We assign each of these principles to a specific member of the executive team, where he/she “owns” the principle and its execution. The team meets monthly to review the principles and report on the initiatives that have been launched, are in development, or are to be developed, with the end goal of reaching 100% execution of the principles, which are, not to mention, tied to their individual performance review.

I should note that these measures outlined for Philippine industry players aren’t set in stone. For example, the central bank and NGOs can always tweak their methods to exemplify more behavior-changing methods instead of just imparting knowledge.

However, I would like to highlight its importance.

According to the World Economic Forum, the Philippines’ middle class is on track to outspend Italy’s by 2030. We have a growing tech-savvy population, a snowballing digital economy, and a robust regional trading network. Financial literacy is crucial to ensure that those who rise in their economic status don’t slide back into poverty.


Michael Singh is the CEO and co-founder of AsiaKredit.