“Perception vs. reality: Analysing the nexus between financial literacy and fintech adoption”

Fintech has revolutionized the financial services sector, fundamentally transforming how individuals and businesses manage their finances. However, effective and responsible utilization of these innovative services may require a certain degree of financial competence. To explore this possibility, this study investigates the nexus between financial literacy and fintech usage in the Indian context, considering two distinct measures of financial literacy. Primary data were collected conveniently from 391 respondents through a cross-sectional survey. Probit regression was applied to analyze the relationship between the two dimensions of financial literacy and the adoption of fintech services across three segments: mobile banking, mobile payments


INTRODUCTION
The emergence of Financial Technology (FinTech) has transformed the global financial services landscape in recent years.Puschmann (2017) defines fintech as the innovative utilization of technology to deliver digital solutions and services within the financial sector.It encompasses an array of offerings such as mobile payment systems, investment platforms, robo-advisory services, crowdfunding, peerto-peer lending, blockchain technology, and various other digital solutions (Thakor, 2020).These technological innovations have not only increased the efficiency of transactions and reduced costs, but have also democratized financial services, making them accessible to a broader spectrum of society.This democratization has had a pronounced effect in developing countries, where fintech's transformative power has played a pivotal role in bridging financial gaps and providing greater access to previously underserved populations.India stands as an exemplar of effectively leveraging fintech's potential to enhance financial inclusion.Over the last decade, the country has firmly established itself as a global frontrunner in the fintech arena, boasting an impressive 87% adoption rate and an ever-expanding digital infrastructure (Business Today, 2021).Its fintech landscape rivals that of developed countries, encompassing various domains like neo-bank-ing, digital payment systems, alternative lending, digital wealth management, insurance technology, and regulatory technology.As fintech continues to reshape the financial industry, it becomes crucial to explore the underlying factors that drive its adoption.
Researchers have extensively delved into the adoption of fintech from the users' perspective, often drawing upon established theoretical models like the Technology Acceptance Model (TAM) and the Unified Theory of Acceptance and Use of Technology (UTAUT).Fintech, despite being a technological innovation, is primarily intended to facilitate and improve various aspects of financial management.As such, the decision to adopt fintech is contingent upon factors that extend beyond technology, potentially intertwined with one's level of financial literacy (Königsheim et al., 2017).Financial literacy, denoting one's proficiency in financial matters, is a vital factor in enabling individuals to make informed financial decisions and attain economic well-being.However, the exploration of fintech adoption dynamics frequently overlooks this vital aspect.Given India's burgeoning fintech industry and its diverse populace with varying financial competencies and needs, investigating the interplay between financial literacy and fintech usage takes on immense significance.Understanding this relationship can shed light on the factors that facilitate or hinder individuals' engagement with these innovative services, ultimately contributing to the development of effective strategies and policies to improve fintech adoption and, by extension, promote financial inclusion.

LITERATURE REVIEW AND HYPOTHESES
Financial literacy has been a focal point of research for decades, owing to its substantial impact on the economic well-being of individuals as well as societies (Lusardi, 2019).A fundamental requirement for making sound financial choices, financial literacy is aptly defined as "one's ability to process economic information and make informed decisions about financial planning, wealth accumulation, debt, and pensions" (Lusardi & Mitchell, 2014).Current literature in this area largely focuses on the relationship between financial literacy and financial behaviors or economic outcomes.Yoong (2010) identified a causal link between individuals' financial literacy and their inclination to participate in equity markets.Allgood & Walstad (2013) found that financial literacy had a significant effect on responsible credit card usage and prudent borrowing behaviors.It is also positively connected to having precautionary savings (Babiarz & Robb, 2014) and planning for retirement (Klapper & Panos, 2011).As a result of engaging in such healthy financial behaviors, the financially literate tend to accumulate more wealth over their lifetime (Behrman et al., 2012)  Fan (2022) examined the connection between financial proficiency in the investment domain and the adoption of mobile investment technology.
The results highlighted a positive association between subjective investment literacy and mobile investment decision-making and trading.On the contrary, objective investment literacy exhibited a negative correlation with these behaviors.Nguyen (2022) contributed to this discourse by emphasizing the pivotal role of SFL in influencing fintech usage.The findings underscored that individuals' perception of their financial knowledge held a more substantial sway on fintech adoption than their actual financial knowledge.Even in the case of technology-based novel investment options like cryptocurrencies, SFL emerged as a stronger predictor of investment behavior compared to OFL (Zhao & Zhang, 2021).These observations underline the prominence of individuals' confidence and self-perceived competence in driving their engagement with technology-intensive financial products.
Numerous studies have emphasized the greater explanatory power of SFL in understanding and predicting financial behaviors (Riitsalu & Murakas, 2019; Woodyard & Robb, 2016).However, it is crucial to acknowledge that the number of studies exploring fintech adoption within this context is relatively limited, restricting the generalizability of their findings.The dearth of studies and conflicting findings highlight a noticeable research gap in the field, indicating the need for further investigations to yield a more comprehensive understanding of the interplay between the dual facets of financial literacy and fintech adoption.As such, this study endeavors to analyze the intricate relationship between both dimensions of financial literacy and the adoption of fintech services.For this reason, the following hypotheses are proposed: Objective financial literacy is positively associated with fintech adoption.
H 2 : Subjective financial literacy is positively associated with fintech adoption.

RESEARCH METHOD
The study adopts a survey method to explore the nexus between financial literacy and fintech adoption.A cross-sectional survey was conducted online using convenience sampling to gather data. .
The dependent variable (F i ) is the adoption of fintech services by individual i, specifically in the areas of mobile banking, mobile payments, and digital lending.So, three alternative values of Fi are estimated.Adoption for each service was measured by a binary variable, coded 1 if respondents use that particular service, and 0 if they do not.OFL i and SFL i are the main predictors, representing the individual's OFL score and SFL rating, respectively.OFL was measured using a set of five questions on fundamental concepts of finance that have been previously validated in the literature.The extensive replication and adaptation of these questions have led to their collective recognition as the "Big 5" (Hastings et al., 2013).The sum of correct answers depicts each individual's OFL score.SFL was assessed by having the respondents rate the following statements on a 5-point Likert scale, ranging from "Strongly disagree" to "Strongly agree": 1. Compared to most others, I know more about managing personal finances.
2. Others often ask me for financial advice.
3. I feel very confident in my knowledge of financial matters.
An average scale was then constructed by taking the mean of the individual item scores for each participant.Ranging from 1 to 5, a higher value signifies a greater level of SFL.Reliability analysis demonstrated a strong internal consistency, as denoted by a Cronbach's coefficient alpha of 0.961.
X i is a vector of variables that could affect the dependent variable, such as respondents' gender, age group, place of residence, educational level, occupation, annual income, and whether they had received financial education at college or workplace.The variables age, place of residence, education, occupation, and income are coded as categorical variables.Gender and financial education are binary variables, coded 1 if the respondent is male and has received financial education, and 0 otherwise.ε is the error term.
Given the dichotomous nature of the dependent variable, Probit regression was deemed suitable for the analysis.

RESULTS
An overview of the sample's summary statistics is presented in Probit regression was employed to find the effects of OFL, SFL, and demographic traits on fintech adoption across three segments.The regression coefficients and standard errors from the Probit models are presented in Table 2.In the case of mobile banking (Column 1), both OFL and SFL display positive associations with the likelihood of usage.But SFL (β = 0.852; p = 0.000) has a more robust association with mobile banking usage compared to OFL (β = 0.185; p = 0.019).
Within the other segments (Columns 2 and 3), OFL has a negative association with the usage of mobile payments (β = -0.127;p = 0.132) and digital lending (β = -0.105;p = 0.301), but the relationship is not statistically significant.Thus, H1 is only partially accepted.On the other hand, SFL exhibits a significant positive association with the likelihood of using mobile payments (β = 0.886; p = 0.001) and digital lending (β = 1.344; p = 0.000).Hence, H2 is accepted under all three categories.This confirms that individuals who perceive themselves as financially capable, despite the potential mismatch with their actual financial knowledge, are more likely to use mobile banking and payments and engage in digital lending activities than those who are knowledgeable but not confident in their capabilities.In line with previous findings (Nguyen, 2022), SFL has a stronger association with fintech adoption behavior compared to OFL.
The findings also suggest that the adoption of mobile banking is more prevalent among the older generation and educated people, whereas mobile payments are mostly adopted by the youngest generation and those living in urban and metropolitan areas.Also, compared to the reference group, students are less likely to use mobile banking, and salaried employees are less likely to adopt mobile payments.Financial education has a weak influence on the likelihood of using mobile banking, while income has no notable effect on usage in both cases.In the last category, men and younger respondents exhibit a higher inclination toward using digital lending services.Metropolitan dwellers are also more likely to engage in digital lending activities, but the associated level of significance is weak.Those in the 3rd and 4th income brackets have a higher likelihood of using digital lending than those in the reference group.

DISCUSSION
The findings indicate that the perceptions of one's financial capabilities matter more in adopting fintech services than their actual competence.Previous studies have also consistently highlighted the superior explanatory power of SFL in understanding and predicting financial behaviors (Lind et al., 2020;Parker et al., 2011;Xiao et al., 2014).In the case of fintech, people who are generally more confident in financial matters are more likely to perceive the potential benefits rather than being skeptical or hesitant to embrace these technological innovations.Consequently, they display a higher willingness to adopt fintech services and capitalize on the convenience, efficiency, and accessibility they provide.This corroborates the findings of Shiau et al. ( 2020), who confirmed a positive connection between financial self-efficacy and users' perceived usefulness of fintech services.
The findings also reveal interesting patterns in fintech adoption across different demographic groups.Mobile banking is more prevalent among educated people and the older generation.In line with the findings of Niu et al. ( 2021), educated individuals have a better understanding of fintech and its benefits, leading to higher adoption rates.Notably, the data suggests a surprising trend -older generations, who might have been accustomed to traditional banking methods, are now readily embracing the convenience and accessibility offered by mobile banking.Also, compared to the reference group, students are less inclined to use mobile banking, which could be due to their limited financial needs.
In the case of mobile payments, the youngest generation is the predominant user group.This can be attributed to the tech-savviness of Gen Z and their familiarity with digital platforms (Turner, 2015).Those living in urban and metropolitan areas also display a higher propensity to use mobile payments, potentially due to the improved accessibility of digital infrastructure in these areas (Mahendru et al., 2022).An unexpected outcome was the lower likelihood of salaried employees adopting mobile payments, which warrants further exploration.In both cases, income does not have a very strong effect on usage.This suggests that individuals across different income brackets have similar opportunities and access to fintech services, highlighting the potential for financial inclusion through technology (Khera et al., 2022).
In the digital lending category, younger cohorts (Generations Y & Z) demonstrate a higher propensity for adoption, aligning with the perception of digital natives being more open to embracing technological innovations (Koroleva, 2022).Additionally, men exhibit a higher likelihood of using digital lending services, consistent with the observations of Chen et al. ( 2023) regarding gender gaps in fintech adoption.The analysis also reveals that financial education does not have a substantial impact on an individual's usage of fintech services.However, without knowing the specific curriculum and content of the programs in which respondents participated, it is challenging to draw a definitive conclusion regarding its influence on fintech adoption.
Recognizing these variations, it is imperative for fintech service providers to employ targeted approaches that cater to the unique needs and preferences of different demographic segments.Fintech companies ought to prioritize enhancing the usability of their applications by simplifying processes, ensuring intuitive navigation, and developing user-friendly interfaces.They could further improve the user experience by incorporating digital financial education components within their applications, such as interactive tools, educational resources, and personalized guidance.This approach not only reduces complexity but also builds trust and confidence among users, which in turn could promote wider adoption of these innovative services, as proposed by Roh et al. (2022).
In this increasingly digital world, the utilization of fintech services plays a pivotal role in facilitating a better life.Policymakers should prioritize the implementation of tailored educational programs that focus not only on enhancing individuals' objective financial knowledge but also on boosting their confidence, improving their self-assessment of financial abilities, and instilling positive attitudes toward fintech solutions.By equipping individuals with the necessary skills and confidence to navigate the digital financial landscape effectively, the OECD (2020) posits that barriers to entry can be minimized, making fintech services more accessible and inclusive.Moreover, efforts should be directed towards improving digital infrastructure in underserved areas to ensure equal opportunities for fintech adoption.Bridging the digital divide should be the top priority on the Government's agenda.This entails initiatives like expanding internet connectivity to disadvantaged communities, promoting affordable access to devices, and implementing digital literacy programs.By addressing these aspects and fostering an inclusive fintech ecosystem, individuals from all walks of life can fully leverage the benefits offered by fintech services, contributing to their financial well-being and overall economic empowerment.

CONCLUSION
The study delves into the intricate relationship between financial literacy and the adoption of three different fintech segments.The findings demonstrate that individuals' subjective perception of their financial abilities, as captured by Subjective Financial Literacy, has a notably stronger association with fintech adoption compared to their actual financial knowledge, as measured by Objective Financial Literacy.Moreover, the study reveals that demographic characteristics of individuals contribute to variations in fintech adoption across different segments.These insights hold significant implications for both fintech service providers and policymakers, shaping their strategies to enhance fintech adoption and accelerate financial inclusivity.However, there are limitations to consider.There is a possibility of biased estimation due to reverse causality, where individuals who have already adopted fintech applications may subsequently improve their financial knowledge and confidence.Hence, the present findings should be interpreted with caution.Another limitation stems from the restricted coverage of financial literacy.Reliance on the Big 5 questions offers only a limited assessment, highlighting the need for a more comprehensive approach in future research.In particular, including indicators that are relevant to digital finance would greatly enhance contributions to the field.12. Imagine that the interest rate on your savings account earns 1 percent per year, and inflation is 2 percent per year.After one year, would you be able to buy_____ ☐ More than today with the money in the account ☐ Exactly the same as today with the money in the account ☐ Less than today with the money in the account ☐ Do not know 13.A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.True or False?
☐ True ☐ False ☐ Do not know

Table 1 .
Summary statistics

Table 2 .
Probit regression results Education levels (reference group: high school)

The following questions are designed to assess your level of financial literacy and your experi- ence with financial matters. Please answer each question to the best of your knowledge. 11
. Suppose you have Rs.100 in a savings account, and the interest rate is 2 percent per year.After 5 years, how much do you think you would have in the account if you left the money to grow?