The problem of our financial ignorance
BarcelonaOn my last trip to London, I made two purchases on the same day, just minutes apart, using two different cards: one from my usual bank and one from Wise, an online bank. I was surprised to find that the exchange rate applied by Wise was 4.5% more advantageous. There was no error on the part of my bank; it simply applied a more unfavorable exchange rate.
This lack of awareness of the true cost when using my card abroad leads me to reflect on my own financial literacy and, more generally, on the potential losses when investing our savings without a full understanding of the different options available. A difference of just 1% in fees can represent a significant annual cost that will go unnoticed.
Ignorance of the differences in profitability and risk of financial products is, unfortunately, the norm. Financial illiteracy is the inability to understand and use basic knowledge to make informed decisions about saving, investing, borrowing, and using financial services. This deficiency is widespread: in an OECD/INFE survey (2023) in 39 countries, only 52% of adults correctly answered three out of five fundamental questions on interest rates, inflation, risk, and diversification.
The phenomenon particularly affects the youngest and oldest, more women than men, and more people with low incomes or lower educational levels (A. Lusardi and OS Mitchell, 2014). It is precisely they who will end up paying more for financial services, which resembles a regressive tax.
The implications are clear: those with less financial knowledge make less sound decisions, save less, take on more debt, and are less well prepared for retirement (Campbell, JI, 2006). A more financially literate citizenry would reduce its dependence on expensive credit (such as credit cards) and stimulate more effective banking competition by comparing products and demanding better terms. It would also have avoided situations such as the preferred share issue, which many savings banks issued in 2008 to uneducated savers, especially older people who were convinced they were purchasing a safe deposit box.
Regulatory frameworks such as the MIFID (Ministry of Finance and Investment) Regulation (MIFID), as well as the supervision of the Bank of Spain and the CNMV (Spanish National Securities Market Commission), limit the "perverse" incentives of institutions whose objective is—and will continue to be—to maximize profits. But these regulators can only act when regulations are violated. Their role is far removed from that of, for example, the Spanish Medicines Agency, which can ban products of dubious effectiveness. In contrast, an investment fund that consistently incurs losses and seriously harms the financial health of its investors will not be withdrawn from the market as long as it complies with current regulations.
Ultimately, financial education and access to clear information are essential for our economic decisions. We shouldn't discover the cost of financial services unexpectedly, whether by traveling abroad or examining the profitability of our investments when it's too late. An accessible, understandable, and independent information system should be a public priority and an indispensable complement to the 2022-2025 Financial Education Plan of the Bank of Spain and the CNMV.
