Financial Literacy Overconfidence, Mobile Financial Service Use, and High-Cost Borrowing

Abstract

This study provides theory and evidence on the relation between financial literacy overconfidence (FLO) and high-cost borrowing and its mediation and moderation through mobile financial services (MFS). We investigate whether MFS carry the effect of FLO on the household demand for alternative financial services (AFS), such as payday loans. Using the 2018 National Financial Capability Study, we show that using MFS both mediates and moderates the effect of FLO on the use of AFS. We find that unbanked households, who make up around 5% of the sample, are twice as likely to take out payday loans and three times as likely to use AFS than households with access to the banking system. Estimates show that 4% of the total effect of FLO on using AFS and taking out payday loans is mediated by using MFS. We find that households who use MFS are two to three times more likely to access AFS and take out payday loans than those who do not use MFS.