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What drives financial inclusion in emerging markets—lower banking costs or improved financial literacy?

A recent paper by CID Faculty Affiliate Shawn Cole and co-authors investigates whether financial literacy or pricing plays a larger role in shaping demand for formal financial services in emerging markets. Using survey data from India and Indonesia and a randomized field experiment in Indonesia, the study examines the impact of financial education and small price subsidies on individuals' decisions to open a bank savings account. 

Key Findings:

• Financial literacy correlates with financial behavior but financial education has limited causal impact: While financial literacy is strongly associated with financial behaviors such as savings and account ownership, financial education alone does not significantly increase the likelihood of opening a bank account for the general population. However, it does have a modest impact among individuals with low initial levels of education and financial literacy.
• Price sensitivity is a stronger determinant of demand: Small financial incentives have a much larger effect on account openings. Raising the subsidy from $3 to $14 nearly tripled the probability of opening a bank account, from 3.5% to 12.7%.
• Persistence of banking behavior: A follow-up survey two years after the intervention showed that accounts opened due to subsidies remained in use, with individuals continuing to make deposits, withdrawals, and transfers. However, among the least educated participants, those who opened accounts due to financial incentives were more likely to let them lapse over time. 

Policy Impact and Relevance:

This study challenges the assumption that financial literacy training alone can drive financial inclusion. While knowledge is correlated with financial behaviors, cost remains a more immediate and influential barrier to accessing financial services. Policymakers seeking to expand financial inclusion in emerging markets should focus on reducing transaction costs, minimizing account fees, and offering incentives rather than relying solely on education programs. 

The research also provides insights into the long-term sustainability of financial access initiatives. While price subsidies effectively increase initial account openings, they may not be enough to ensure continued engagement for financially illiterate or low-income individuals. Complementary policies, such as simplified account structures, behavioral nudges, and digital financial services, may be necessary to maintain participation in the formal financial system. 

On a broader scale, the findings contribute to ongoing global discussions about financial inclusion and economic development. Many governments and international organizations invest heavily in financial education, yet this study suggests that direct cost reductions and well-designed incentives might be more effective. These insights can help shape strategies aimed at integrating unbanked populations into formal financial markets, ultimately fostering economic stability and growth.