09/13/2013 02:39 pm ET Updated Nov 13, 2013

We Can Read, But Are We Financially Literate?

Many consumers have access to loans, mortgages, lines of credit and credit cards. But do borrowers really understand what they're signing? Do they read and understand the small-print fees? Do they view credit cards as the gateway to easy cash, or worse, easy credit?

Some argue that a toxic mix of institutional greed and financial illiteracy brought about the 2008-09 global financial crisis. They point to the confusion around "subprime" mortgages and the complex instruments used to trade them in secondary markets as the trigger for current global financial woes.

There's no question that financial illiteracy in advanced economies -- and the lack of consumer protection for those who suffered -- contributed to the global financial crisis.

But what about Asian economies?

Financial literacy means knowing what products and services exist and how best to use them. Consumer protection is at the core of financial literacy. Making the right decisions not only affects household welfare, it also contributes to greater economic stability in general. At all levels, the need to know even rudimentary finance is essential for daily life.

Online shopping and mobile and virtual banking are becoming the norm, but threats remain, especially from criminals who prey on the system faster than regulators can plug the holes.

That's why financial education must start early and continue through adulthood. A proper mix of financial access and education offers a foundation for better market conduct and prudential regulation.

As the finance system spreads, we will likely see more mobile and branchless banking, electronic retail payment systems, streamlined remittance structures, and deeper financial infrastructure in creating financial identities, data flows, and building legal frameworks for secured lending.

But underlying these innovations is the assumption that consumers trust them. Financial literacy and consumer protection instill that trust. Understanding the benefits and pitfalls of new financial products and services is vital because a financial product that is used but not understood ultimately cannot work. It is the core of financial stability.

The Asian Development Bank (ADB) emphasizes the three I's -- Innovation, Inclusion, and Integration -- as ways of moving the development agenda forward. This is central for financial literacy as well.

Innovation is in Asia's blood. In many cases, nonbank innovation has led the way in bringing new products to traditional financial vendors, leaving financial institutions playing catch-up. Policymakers face the challenge of how to regulate and guide this evolution so that it reaches the unbanked.

Inclusion means bringing financial services to the 70 percent to 80 percent of adults in ASEAN (Association of Southeast Asian Nations) who remain outside the formal financial system. Bringing banking to the unbanked must be accompanied by equitable and transparent consumer protection, such as "proportionate regulation" that tailors the regulatory burden to the risk characteristics of business, and creates incentives for future financial inclusion.

When it comes to Integration, in addition to many global and regional forums, there is the Alliance for Financial Inclusion and the Consultative Group to Assist the Poor. Financial inclusion is on the G20's agenda in St. Petersburg, the APEC Finance Ministers program later this month in Bali, and the ASEAN Financial Literacy Conference in Brunei Darussalem.

Financial inclusion cannot work without financial literacy. It is essential no one is excluded from the process, or left vulnerable to the subterranean world of phishing, spam and scam.

That is why ASEAN must confront the increasingly complex world of migrants, overseas workers, and remittance structures within ASEAN itself. The ASEAN Economic Community is fast approaching its 2015 milestone. And while the free flow of goods, services, investment, capital, and skilled workers are vitally important, ASEAN must deal with unskilled workers as well.

Both remittances and savings of migrant workers represent a huge untapped market. Regulators should promote shifting away from cash-to-cash to instead focus on account-to-account transfers.

Financial education, accompanied by regulation at both ends to increase awareness and strengthen financial literacy, will leave a healthier, more stable financial system, and a greater more inclusive circle of people better equipped to benefit from it.

Stephen P. Groff is the Asian Development Bank's Vice-President for East Asia, Southeast Asia and the Pacific. He was the keynote speaker at the ASEAN Financial Literacy Conference in Brunei Darussalam and this article first appeared in the Bangkok Post.