The Influence of Financial Literacy on the Use of Alternative Banking Services and Financial Inclusion

Abstract

Financial literacy is a pillar of determining financial behavior of individuals, and it is critical in setting up inclusive financial systems. The alternative services offered by banking institutions (in the form of mobile money, fintech solutions, microfinance institutions) have caught on in developing economies where conventional banking services are either difficult or impossible to access. This paper focuses on how financial literacy affects an individual to adopt such alternative banking services and the interaction as financial inclusion among the underserved. The mixed method of data collection involves the survey-based data that was complemented with structured interviews and regional level data on financial behavior were used and applied three diverse regions in India; rural Bihar, semi-urban Maharashtra and urban Delhi NCR. The maps of the Financial Literacy Index (FLI) designed employing the financial knowledge, behavior, and attitude modules of OECD were cross-related with mobile banking, digital wallets, and informal lending usage. The quantitative results indicate positive correlation (r = 0.78) between low financial literacy indicators and low usage of regulated alternative services, also showing heavier use of improper mechanisms by the rural population which lacks proper literacy. There were different preferred patterns of service aside literacy levels observed among women, youths and self-employed individuals. The paper has also used geospatial analysis to pinpoint both regional inequality and digital service coverage, implying that such areas tend to be those with low literacy and mobile contribution. Findings highlight the importance of specific financial education agenda and growth of digital infrastructure so that alternative banking services can indeed lead to financial inclusion and not to digitalization divates. This paper introduces a scalable model of alternative services to mediate the connection between literacy and inclusion that financial educators, policymakers and stakeholders in fintech can apply.