The Importance of Understanding Financial Risks and Literacy for Millennials
The Importance of Understanding Financial Risks and Literacy for Millennials
As financial technology advances, the potential risks involved also increase. Before the advent of financial technology or fintech, people still had to conduct transactions traditionally, limited to banking industries such as payment transactions, loans, or investment products. Typically, the risks were the full responsibility of the transaction manager, whether it be the money recipient or banking institutions.
However, nowadays, the risks also lie with the users, such as how users configure their account security or how the public understands the financial products they use.
To reduce risks when transacting using financial products, understanding, skills, and confidence in financial management are required. This concept is better known as financial literacy. Although not a new term, financial literacy is increasingly urgent as trends develop among communities.
One of these trends is the increasingly dynamic financial environment, generally influenced by technological developments. For example, electronic trading that speeds up and destabilizes the financial market. This ultimately leads current society to face more complex financial product choices, such as online investment or financing products.
Financial Transaction Risks Online
When discussing transactions, it's not just about how party A sends money to party B. It also includes data transactions and other activities involving users with banking institutions or other financial entities.
One common risk is shadow banking practices, where there is an entity that provides banking services from fund collection to credit distribution that is not subject to applicable regulations. Although this practice has been around for a long time, the presence of shadow banking is increasingly common with the development of the fintech industry. Many shadow banking players hide behind fintech companies, posing a threat to financial product users. The consequences of shadow banking include theft of money and customer data.
In addition to shadow banking, there is latent risk, namely consumer ignorance of the financial products provided by fintech companies. Consumer ignorance about financial products results in them not understanding financial products according to their needs, which can be detrimental to prospective users.
A simple example is the issue of compound interest rates on loan repayments, which borrowers often overlook. Due to this ignorance, borrowers often get overwhelmed and trapped in larger debts.
This is where financial literacy comes in. The greater the financial literacy, the greater the awareness and knowledge of the public about financial products.
Are Millennials Most at Risk?
Looking at Indonesia's literacy rate recorded by the Financial Services Authority (OJK) in 2019, which has not yet reached 50%, it can be concluded that every layer of society has the potential to be affected by financial risks.
However, if we also look at data from AFTECH (Indonesian Fintech Association) in 2020, fintech users are dominated by millennials (aged 25 to 34), accounting for 39%. This figure indicates that millennials are the most vulnerable generation to financial risks.
As known, technological advancements hold a special place in the eyes of millennials, which fintech players take advantage of to introduce their products. However, the introduction of fintech among this generation does not align with an awareness of the importance of the benefits and risks of financial products. Many young people are interested in the latest fintech products without considering the usefulness of these innovations from all aspects, such as security and long-term effects. This results in their use being limited to certain segment products, and other types of financial products remain unexplored.
This phenomenon reflects the relatively low financial literacy rate among millennials. According to the OJK in 2019, the financial literacy rate among millennials was only 33.5%.
This condition is also reflected in the Indonesia Millennial Report 2019, where financial products used by millennials are still limited to non-cash transactional financial sectors such as e-wallets and e-money, which tend to lead to consumptive activities. This consumptive behavior is driven by the Fear of Missing Out (FOMO) lifestyle pattern, which is increasing with the presence of social media.
According to the Organization for Economic Co-Operation and Development (OECD), 1 in 3 millennials is financially insecure. This financial condition is reflected in individuals who do not have reserves when they lose their jobs or when their living expenses increase.
However, when it comes to financial products, there are various products that can help millennials improve their financial performance. One of them is personal financial planning applications that can help millennials manage their financial assets. With these applications, they can obtain comprehensive information covering income, expenses, and future planning in the long term.
When talking about financial literacy, it's not just about financial knowledge itself but also about how financial products used can provide a sense of security and trust. Thus, the lack of financial literacy also impacts the increasing risks of data security.
For example, public ignorance about Financial Services Authority (OJK) regulations and financial products results in people often falling into harmful financial transaction practices, such as phishing or data theft, Ponzi schemes, or scams by irresponsible individuals.
The Importance of Financial Literacy and How to Improve It
In understanding the importance of financial literacy, there are two main points that encourage people to have a comprehensive understanding of financial products and how to manage them.
Firstly, information data security. The more open information is through technology, the greater the risk to data security. Many financial criminals take advantage of fintech development opportunities as part of their criminal modus operandi.
To prevent illegal practices like this, people can find information about the fintech company they want to use. In Indonesia, fintech companies registered and licensed by the Financial Services Authority (OJK) usually have regulatory guarantees in managing customer data and can be held accountable.
Additionally, people can ensure that the fintech service has implemented information security management standards, meaning the fintech service has guarantees in protecting consumer data.
The second point is financial management. Without good financial literacy, people tend to lack good financial planning, resulting in ignorance about their financial expenditures and income. If not controlled, money can be lost without realizing it, making people more vulnerable to financial instability when faced with emergency situations.
Additionally, people may fall into wrong investment practices or even Ponzi schemes. Because, in essence, investment should align with the investor's character and financial planning. If wrong, instead of profit, investors end up losing.
As prospective users, people can find out about financial products that suit their needs. Nowadays, fintech products are not limited to payments or financing access. They also focus on financial planning and investment.
Realizing how important financial literacy is to prevent risks within it, people are encouraged not to hesitate to use financial services or products, starting from personal financial management. Additionally, people are expected to increase their knowledge and awareness of financial management and its products through financial articles, podcasts, seminars, or even direct consultation with experts.
