MasterCard Financial Literacy Index Report (2014H1)

1. INTRODUCTION

The ongoing drive to equip consumers with essential financial skills and inculcate a culture of effective financial learning throughout life is manifested through various financial knowledge enhancement strategies and programs that have been initiated across many countries. Although the issue of financial wellbeing has progressively gained recognition as a vital and important life skill, many are still finding it challenging to deal with financial complexities on a daily basis. This is reflected in MasterCard’s latest 2014H1 Financial Literacy Index results which underscore that progress towards improving financial well-being remains stagnant in the majority of markets in Asia Pacific.

Conducted for the 4^th time between July 2014 and August 2014 on 8,087 respondents aged 18-64 in 16 countries across Asia Pacific, MasterCard’s Financial Literacy Index serves as a useful tool for educational and financial institutions and businesses to assess and track the progress of financial wellbeing within their countries and benchmark themselves against their regional peers. The Index comprises questions covering three major components: Basic Money Management (50% weight) which examines respondents’ skills with regards to budgeting, savings, and responsibility of credit usage; Financial Planning (30% weight) which assesses knowledge about financial products, services, and concepts, and ability to plan for long-term financial needs; and Investment (20% weight) which determines respondents’ basic understanding of the various risks associated with investment, different investment products and skills required. A Financial Literacy Index Score for each market was calculated out of the weighted sum of the 3 components.

2. ASIA PACIFIC

Taiwan regains lead, India improves the most, Singapore & New Zealand lose traction

The Top 3  
The latest 2014H1 Financial Literacy Survey showed a marginal pull back in Asia Pacific’s¹ progress towards financial wellbeing. With 12 out of the 16 markets recording lower scores, Asia Pacific’s composite financial literacy score retracted slightly from 66 to 65, the fourth consecutive decline since the survey started in 2010H2. There has been quite a notable reshuffling in rankings from the previous survey. With an overall Financial Literacy Score of 73, Taiwan’s advancement of 2 points places it in 1^st place, allowing it to regain its reign after dropping to 3^rd place in the previous survey. New Zealand’s loss of 3 points to 71 sets it back to 2^nd place.  Hong Kong’s advancement from 5^th place to 3^rd place overall is due to the decline in scores for the top few markets: Singapore (down -4 points to 68, with the biggest drop regionally regressing from 2^nd to 6^th place), Australia (down -2 points to 69) and Malaysia (down -1 point to 69). 

Chart 1a: Asia Pacific - Financial Literacy Index:  Ranking 2013H1 vs. 2014H1

The Best & Worse Performers
Among the emerging Asia Pacific markets², India advances the most, gaining 3 points to 62, placing it at 12^th place in the region, and nearly at par with the advanced economy³ of South Korea (62 points, rank 13^th regionally). Emerging Vietnam also made some progress, gaining 2 points to 65, placing it at 11^th place. Indonesia is up 1 point from 60 to 61, remaining in 14^th place. Of the seven developed economies, Taiwan is the only market making progress with its score increasing from 71 to 73. Hong Kong advances from 5^th to 3^rd place with a score of 70, while developing Malaysia moves up one spot from 6^th to 5^th place with a score of 69. 

The survey shows disappointing results in developed Singapore, Australia, Japan and Korea.  With the score down by 4 points to 68, Singapore’s ranking retreated from 2^nd to 6^th, and is the island’s lowest ranking since the survey started in 2010.  Although Australia’s ranking remained unchanged at 4^th, the overall score edged downwards from 71 to 69. With its score declining by 2 points to 55, Japan remains in the last spot at 16^th for the 3^rd consecutive year. This is also the lowest score recorded in the region since the survey started in 2010.  The results for Korea show its ranking and score remaining unchanged at 13^th place and 62 points, respectively.

2.1. BASIC MONEY MANAGEMENT

The Asia Pacific score for Basic Money Management skills remained largely unchanged (63.0 in previous survey to 62.6 points). For the 3^rd consecutive year, New Zealand, Australia and Hong Kong are the top 3 markets in Asia Pacific. They are also the only 3 markets with scores above 70 since the 2012H1 survey. Although New Zealand continues to hold its reign in money management (retaining 1^st place for the 4^th consecutive year), its score actually declined from 77 points to 73. A similar observation is made in Australia: the component score decreased by 2 points from the previous survey to 73 points with the ranking unchanged at 2^nd place.  Hong Kong’s result is slightly more consistent with the score relatively unchanged (70.9 to 71.5), placing it in 3^rd place. 

With the exception of developed Taiwan, markets that advanced in their ability to budget, manage credit, save for big item purchases and track expenses are mostly emerging, including India, Indonesia, Vietnam and Myanmar. In fact, Indian consumers are making the most notable progress with the score advancing 6 points from the previous survey to 56, placing the country in 14^th place. Indonesia also shows commendable progress with the score gaining 3 points to 59, placing it in 10^th place.

The largest decline in Basic Money Management is evident among Singaporean consumers with the score declining to below the 70-point mark for the first time since 2010H2 from 73 points to 67, similar to the score for emerging Philippines (66), Taiwan (69) and Malaysia (66).  Korea (57), Myanmar (57), Japan (55) and Bangladesh (54) have the lowest scores with rankings of 12^th, 13^th, 15^th and 16^th, respectively.

Chart 1b: Asia Pacific - Basic Money Management: Ranking 2013H1 vs. 2014H1

What is causing Japan’s Lack of Progress in Basic Money Management?
The latest results indicate further deterioration in money management skills among the Japanese. As shown in the diagram below, Japan’s score has been steadily declining since the survey was first launched from being quite acceptable at 61 points in 2010H2 to being hardly adequate (55) in the current survey. With the exception of “Saving for Big Purchases” (59) and “Keeping up with Bills” (65), Japan’s scores for all Basic Money Management sub-components are among the lowest and below the regional average: (i) Budgeting Ability 51 against regional average of 85; and (ii) Tracking Expenditure at 57 versus regional average of 68. 

This is likely attributed to the country’s aging population and stagnant income growth.  Currently the world’s oldest country, Japan’s aging population –once among the world’s biggest savers – are now  the biggest spenders of their savings and retirement funds as they are no longer actively in the workforce, a predicament that makes it even harder for them to save for big item purchases. OECD figures show that compared to its G7 peers, Japan’s household savings rate is astonishingly low at 0.6% of disposable household income, a stark contrast to other countries such as Australia (9.3%) and South Korea (5.3%)⁴.

Source: OECD 2014 Forecast, MasterCard Financial Literacy Index 2014H1 Survey Results

Secondly, not only has the growth in real wages been fairly stagnant, the implementation of the April sales tax hike from 5% to 8% would have inevitably make it more challenging for consumers to save and keep up with costlier bills and living expenses.

2.2. FINANCIAL PLANNING

As an assessment of consumers’ level of knowledge about financial products, services, and concepts and their ability to plan for long-term financial needs such as retirement and unexpected events, Financial Planning continues to be the strongest among the 3 financial literacy components with the regional average score consistently above the 70-point mark since 2010H2. However, the latest survey results suggest a slight deterioration in financial planning know-how across the region. With the exception of Taiwan (up 1 point to 84) and Vietnam (up 1 point to 81), the score for all other 14 markets declined, bringing the regional average score down 2 points from the previous survey to 75.

After remaining in 1^st place for the previous 2 years, Myanmar retreats to 3^rd place in the region with the score shedding 7 points from the prior survey to 81, effectively putting the two strongest markets Vietnam (81) and Taiwan (84) ahead at 2^nd and 1^st place, respectively. A marked deterioration in financial planning acumen is also noted among Bangladeshi consumers with a score of 69 (down 7 points), downgrading its ranking from among the top 10^th to 14^th place in the region. The scores for China (76) and Singapore (77) both declined by 3 points, while that for Japan (64) and Indonesia (70) are down by 4 and 5 points, respectively.  Australia retreats to below the 70-point mark at 68 points (down 2 points), placing it in 15^th place for the 3^rd consecutive year.

Chart 1c: Asia Pacific – Financial Planning: Ranking 2013H1 vs. 2014H1

Taiwan: Financial Planning Savviness Shines
After remaining in 2^nd place in Asia Pacific for 3 consecutive years with scores consistently above the 80-point mark, Taiwan outshines all its peers in the latest survey in the ability to use skills and knowledge to make informed and effective financial decisions. Moving up to 1^st place with a 1 point increase in score to 84, Taiwan is one of only two markets (other being Vietnam) whose financial planning score has increased. There are two reasons that may explain Taiwanese consumers’ prudence and active role in financial planning. First, data suggests that the country’s life insurance market has been experiencing robust growth with total gross written premiums of USD72.6 billion in 2012, a CAGR of 6.6% between 2008 and 2012 with the rate forecast to accelerate to CAGR of 7.8% for the five-year period 2012-2017⁵.  This trend appears to be reflected in the Financial Literacy 2014H1 survey results whereby the score for “Insurance is important” is high at 89, suggesting that the rising recognition for insurance protection may be a contributing factor to the growth of the life insurance market in Taiwan.

Second, results from a recent research conducted by Manulife suggest that 7 out of 10 Taiwanese investors are not confident that their mandatory pensions will be sufficient to cover their retirement expenses. The study also reveals that one in four (26%) feel that they will need to draw down on their savings to fund their retirement⁶.  This is reflected in MasterCard’s Financial Literacy results for the “Retirement Funds Needed” sub-component whereby the score for Taiwan is only 41. This lack of confidence and know-how may be prompting Taiwanese people to be active savers (score for “Save Regularly” is very high at 95) and prudent savers (score for “Emergency Savings” is very high at 95). In fact, data from Directorate General of Budget, Accounting and Statistics Taiwan (DGBAS) show personal savings in Taiwan to have increased by 9.96% (1424600 TWD Million to 1582300 TWD Million) from 2011 to 2012⁷.

Myanmar: Prudent Savings, Growth of Insurance Sector Earmarked to Accelerate
The survey results show that Myanmar continues to score consistently higher than most of its regional peers in the savings and insurance-related categories of Financial Planning with a score of 81, placing it among the top 3 markets.

This could be due to the lack of social security benefits in the country, which has in turn inculcated a practice of prudent savings for costly essentials like healthcare, education and emergencies that are unforeseeable.

The results also show the people of Myanmar to have high regard for insurance, with “Insurance is Important” being among the highest for the last 3 consecutive surveys. We expect this trend to remain strong in the coming years, especially in view of the recent ending of the government-owned company Myanma Insurance’s 60-year monopoly of the country’s private insurance industry⁸.  This significant milestone in market reforms will not only allow private and foreign insurance companies to enter the market, but will be beneficial to Myanmar consumers through heightened awareness of both life and general insurance concepts and products.

2.3. INVESTMENT

Asia Pacific’s progress in the Investment component remains the weakest among the 3 components measured in the Financial Literacy Index with the score unchanged at 58 points from the previous survey. Little shifts in rankings across the 16 markets are noted, with China retaining 1^st place for the 3^rd consecutive year with a score of 68 points both regionally. Taiwan (66, up 3 points, rank 2^nd) and Hong Kong (65, down 2 points, rank 3^rd) have a swap in rankings while New Zealand remains in 4^th place with a score of 62 (down 1 point).  Indonesia improves surprisingly by 8 points to 55 points, moving ahead from 14^th place to 12^th in the region, and from 24^th to 15^th. Slight improvements are also achieved in Japan (41, up 2 points) and Korea (49, up 1 point).

Chart 1d: Asia Pacific – Investment: Ranking 2013H1 vs. 2014H1

As with the previous survey, questions from the Investment component are not asked of Myanmar respondents as Myanmar does not have a functioning stock market. Myanmar will set up a security exchange by 2015 with the help of the Tokyo Stock Exchange and Daiwa Securities Group.

China: Top in Investment Know-How but Among Worst in Basic Money Management
It is interesting to note that although the Chinese top the rankings in the Investment component (score of 68, rank 1^st), they fare comparatively worse when it comes to Basic Money Management matters (score of 58, rank 11^th). We also observe China’s Investment scores to have plateaued over the last 3 surveys at around 68 points, suggesting muted progress being made.

The scores for the 5 Investment sub-component questions also underscore some degree of literacy weakness in relation to understanding of diversification and inflation concepts as shown in the table below. In fact, the results show this to be apparent across all markets.

2.4. FINANCIAL LITERACY INDEX: DEMOGRAPHIC ANALYSIS

A. By Age

A demographic analysis by age breakdown shows consumers aged 30+ from New Zealand (73) and Taiwan (73) to be the most financial literate in the region, followed by Australia (72) and Hong Kong (71).  The results show that in general, consumers 30 years and above from developed markets such as Australia, Hong Kong, New Zealand, Singapore and Taiwan to have progressed further in financial literacy than those in emerging markets such as India, Indonesia, Thailand, Vietnam and Bangladesh.

Chart 2a: Asia Pacific – 2014H1 Financial Literacy Index: Comparison by Age

Considerable differences in financial know-how are observed between the young (aged <30) and more mature (aged 30+) cohorts in Australia, Japan, Korea, New Zealand and Myanmar.

Myanmar: Rising Opportunities Set to Augment Financial Know-How
It is encouraging to note that Myanmar people above 30 years old are making considerable progress in their financial know-how with a score of 69, bringing them close to or at par with those from the developed economies of Singapore (69) and Hong Kong (71), and surpassing developed Japan (57) and South Korea (63). This progress is likely to accelerate in the future amidst accelerated new market reforms initiatives, including: (i) recent financial aid of USD55 million received by the country from the World Bank, Australia and the UK in April 2014 as part of the country’s effort in modernizing its public financial management system, and (ii) the Asian Development Bank (ADB)’s pledged assistance in infrastructure development in technology, finance and communication⁹.

B.  By Work Status

With the exception of India and Bangladesh, consumers who are “Working” exhibit more superior financial literacy skills than those who are “Not Working”. This is also especially apparent in the developed markets where working Taiwanese (74) and Kiwis (73) are the most financial savvy, followed by the Australians (71), Hong Kongers (71), and Malaysians (70). This may be explained by various reasons: (i) working people tend to be more accustomed to budgeting and managing their expenditure as a part of their working life, and (ii) working people are more knowledgeable about financial products and concepts such as investment, diversification, retirement planning, and insurance due to the greater exposure and experiences associated with their working life (e.g. corporate insurance, mandatory pension funds, investment in stocks, financial risks, opportunity to attend career courses and seminars).

Conversely, those that are not working and/or in emerging markets gain less exposure to financial products and concepts, perhaps due to the undeveloped financial systems and institutions in the market they live in. The lack of a regular stream of income also means there is less likelihood of ownership of investment products such as stocks and shares, and insurance products such as life and general insurance, in turn leading to less awareness and understanding of such financial concepts.

Chart 2b: Asia Pacific – 2014H1 Financial Literacy Index: Comparison by Work Status

C.  By Household Income

The findings show that consumers from developed countries commanding higher than average household income are better equipped with financial know-how than those who earn the average or less than average income from emerging markets.  This is evident across all 7 developed markets.  With scores of 80, consumers from New Zealand and Taiwan are tied in 1^st place, followed by consumers from Australia (74), Hong Kong and Singapore (72), South Korea (71) and Japan (66).

Chart 2c: Asia Pacific – 2014H1 Financial Literacy Index: Comparison by HH Income

A breakdown of the top 3 markets’ component scores reveals the following observations:

• Kiwis earning more than the average household income have the best Basic Money Management skills and knowledge (82), surpassing the regional average score by 15 points.
• In terms of Financial Planning acumen, Taiwanese consumers have a clear lead with a score of 88 ahead of New Zealand (79) and Australia (75).
• Consumers with higher earning power from Taiwan (73) and New Zealand (74) are nearly equally knowledgeable when it comes to understanding of financial concepts, products, and investment risk management.  

There are a myriad of reasons why higher income earners have higher financial literacy aptitudes as Illustrated in the diagram below.

D.  Gender Gap (Female/Male)

With the exception of Taiwan, the financial literacy gender gap between female and male consumers has widened marginally in Asia Pacific, with the disparity score declining by 1 point to 98. Across the 16 Asia Pacific markets, the gender disparity gap is most pronounced in the 6 developed markets (excluding Taiwan), suggesting that women in these economies have not made as much progress in financial literacy as compared to their male counterparts. In contrast, gender parity in financial literacy is not only more prominent within emerging markets, women in these countries have also been able to remain nearly at par with their male counterparts in literacy proficiency. This is evident in countries such as China, India, Indonesia, Malaysia, Vietnam and Bangladesh where the difference in scores between female and male is only slight.

Chart 2d: Asia Pacific – 2014H1 Financial Literacy Index: Gender Gap (Female/Male)

As shown in the table below, the gender parity gap in South Korea is the widest (97 for 2013H1 vs. 91 for 2014H1), followed by Hong Kong and Australia. In Japan, we observe that compared to the other 6 developed markets, Japanese women are the closest to their male counterparts in terms of parity in financial literacy.

The gender gap between female and male in financial proficiency within developed markets could be due to the interplay of various factors:

• The proliferation of increasingly more sophisticated and complex financial instruments and systems in developed markets with which women are less familiar.
• For women in developed countries who are working, married and/or with children, the time afforded to day-to-day budgeting and tracking of expenditure may have diminished.

In contrast, the reason why women in emerging markets are able to make more notable progress towards gender parity could be due to the following reasons:

• The financial systems, institutions and instruments such as credit facilities, online banking and payments, purchases of bonds, shares and stocks in emerging markets are likely to be at an infancy stage and much less sophisticated. Under these conditions, women and men are more likely to be equally aware and informed about financial matters such as insurance and investment.
• Women in emerging markets are likely to reside in households where the income level is low, making it necessary to judiciously set aside money and track expenditure on a daily basis ahead of plans for big item purchases such as education, health and entertainment (e.g. holidays)

CONCLUSION

The latest scores for the 2014H1 Financial Literacy Survey show a slight pull back in the progress towards financial wellbeing in Asia Pacific (down 1 point from previous survey to 65). Developed markets continue to take the lead in financial know-how, with Taiwan advancing 2 spots to 1^st place (73), followed by New Zealand (71) and Hong Kong (70) in 2^nd and 3^rd place, respectively. Asia Pacific’s decline in score is mainly weighed down by the drop in scores across 12 of the 16 markets, placing the region on a downtrend for the 4^th consecutive time since the survey commenced in 2010H2.

In Asia Pacific, the scores for Basic Money Management (63) and Investment (58) remain unchanged, while that for Financial Planning is down 2 points to 75.  In money management matters, emerging markets continue to make forward strides, while Taiwan is the only developed market that made some progress. Japan’s performance in money management remains disappointing, declining for the 4^th time in a row from 61 points the previous survey to 55 – a trend that may be attributed to an the aging population which is making it hard for elderly consumers to save and keep up with bills, as well as stagnant wage growth which has been further compounded by the April sales tax hike. A demographic breakdown of Asia Pacific reveals that consumers who earn higher than average income levels and are working possess more superior levels of financial literacy due to greater exposure to and experience with financial products and concepts such as investment and financial and retirement planning. With the exception of Taiwan, the gender disparity gap is most pronounced in the 6 developed Asia Pacific markets, a factor that could be attributed to the proliferation of increasingly more sophisticated and complex financial instruments and systems in developed countries with which women may be less familiar.

[End of Report]

[1] There 16 countries in Asia Pacific are: Australia, New Zealand, China, Hong Kong, Taiwan, Japan, Korea, Bangladesh, Malaysia, Philippines, Thailand, Indonesia, Singapore, Vietnam, India and Myanmar. Bangladesh and Myanmar are new additions to the list of countries. As coverage of these two countries only began in 2012 H2, all references to 2012 H1 data for these two countries are actually 2012 H2.

[2] Emerging markets include China, India, Indonesia, Malaysia, Philippines, Thailand, Vietnam, Bangladesh & Myanmar

[3] Advanced economies include Australia, Hong Kong, Japan, South Korea, New Zealand, Singapore &Taiwan

[4] “Life Insurance in Taiwan”, Report Buyer, Jan 2014, [Online] https://www.reportbuyer.com/product/171675/life-insurance-in-taiwan.html

[5] “Life Insurance in Taiwan”, Report Buyer, Jan 2014, [Online] https://www.reportbuyer.com/product/171675/life-insurance-in-taiwan.html

[6] Manulife Investor Sentiment Index in Asia, 2014

[7] DGBAS, 2012, Directorate General of Budget, Accounting and Statistics - Taiwan

[8] “Private Insurance Industry Finds Its Feet”, The Irrawaddy News, Nov 15 2013, [Online] http://www.irrawaddy.org/lifestyle/private-insurance-industry-finds-feet.html

[9] Myanmar Business Network, “Myanmar gets more support from world financial institutions”, May 2014, [Online] http://www.myanmar-business.org/2014/05/myanmar-gets-more-support-from-world.html