Financial Literacy and Self-Control in FinTech Borrowing
Background and research questions:
Advances in technology have transformed the way individuals access credit and make purchases. Only a decade ago in China, deferred payments, installment loans, and personal credit cards were rare or used sparingly. Today consumer credit is commonplace and increasing. Outstanding consumer loans grew by 40% from 2017 to 2018 and online lending is one of the most rapidly growing segments. The speed at which the country has transformed payment and credit norms is unparalleled.
In our recent working paper, “Financial Literacy and Self-Control in FinTech: Evidence from a Field Experiment on Online Consumer Borrowing” we focus on one specific form of consumer financial technology: Consumer credit on e-commerce platforms. In China, this source of borrowing has grown rapidly not only because of its ease and convenience, but also because the segment of the population that it often targets has a limited credit history, making other sources of credit difficult to obtain. As opposed to traditional sources of credit which require an established credit score, proof of employment, and regular income, e-commerce platforms such as Alibaba and JD.net determine loan eligibility and create credit-rating profiles using individuals’ purchase history and account data within their own network of sites and products (e.g., Alipay, Alibaba’s mobile payment app).
Online credit is often marketed to university students, who contribute to a large and at-risk group for online borrowing. Surveys suggest 53% of college students had used loan services for purchasing products such as Apple laptops and iPhones and spent a large fraction of their income to debt repayment. Almost 50% of students had recently used online lending and more than 20% stated that these loans were a source of constant stress for them. Online lending provides fast and easy credit to those who may need it, but individuals lacking financial literacy or prone to excessive spending and self-control issues may be harmed by their ease and immediacy.
In our study we designed a longitudinal intervention study with university students in China spanning from November 2016 to February 2019. Our approach was to investigate the uptake of online consumer debt before and after students receive substantial financial literacy or financial self-control counselling. Our hypothesis was that if individuals are misinformed about borrowing, improving financial knowledge with education may affect subsequent field behavior. On the other hand, if online borrowing is driven by impulsive or behavioral factors, budgeting and self-control training may be more suited to improve borrowing outcomes.
Study design and main findings:
To understand how financial literacy and self-control affect the demand for online borrowing we randomly assign students into literacy and self-control training courses alongside a control group. One novel element is that we have subjects monitor their spending with a Personal Financial Management (PFM) mobile app. Students register with the app and in self-control training sessions discuss in detail their specific transactions, motivations, and feelings about purchases with a counsellor in attempt to improve on their financial goals. While our education treatments aimed to improve knowledge in key areas of financial literacy, the self-control sessions aimed to increase individuals’ self-reflection, budgeting, and spending skills to help subjects reach their financial goals.
While we find large improvements on the financial literacy test, we do not find a significant effect of the financial education treatments on reducing online consumer loan take-up. Participants in the self-control treatment on the other hand, reduce borrowing by 14 percentage points compared to the control group, more than twice the size of the effect of the literacy treatment. They show no improvement in objective measures of financial literacy, suggesting online borrowing may be driven by more impulsive behavior, and skills such as budgeting and planning may be relevant in reducing online-based consumer debt.
If students are able to perfectly smooth consumption, online borrowing presents a source of liquidity for current consumption. However, our analysis of PFM data shows a large and statistically significant reduction in late-fee payments on delinquent online loans after self-control sessions for subjects who are liquidity constrained and those who provide survey responses indicating high levels of ‘stress’ associated with online debt, i.e., subjects indeed incur non-negligible financial and non-pecuniary costs associated with online borrowing.
University students and young-adults are a particularly at-risk group for credit which is costly, often used for entertainment and conspicuous-consumption, and offered based on purchase patterns directly at point of sale. These products are designed to be easy to use, instantaneous, and likely catered to those with somewhat impulsive spending habits. Individuals who lack financial sophistication or the budgeting skills associated with good financial practices, may become easily indebted. On the bright side, our study finds that this may be remediable through individualized training.
Di Bu - Macquarie University
Tobin Hanspal - WU Vienna University of Economics and Business
Yin Liao - Macquarie University
Yong Liu - Wuhan University of Science and Technology