Financial Literacy, Internet Dependency, and Internet Finance

Abstract

Does the digital transformation of financial services make the financial system more inclusive? Utilizing the China Household Finance Survey (CHFS) data, this study explores the impact of financial literacy and the degree of Internet dependency on household financial asset allocation. The study finds that Internet finance mainly attracts investors with a lower financial sophistication, a stark contrast to my finding concerning participation in the traditional financial market. This result suggests that Internet finance can fill the funding gaps where investors traditionally face high participation costs and, thus, improve financial inclusion. Moreover, I show that one's degree of Internet dependency is positively associated with the participation in Internet finance, indicating that local Internet infrastructure can be an essential prerequisite for an economy to promote financial inclusion through the Internet finance. Meanwhile, a digital transformation of an economy may potentially result in an over-allocation of capital to risky assets, provided that Internet finance is often associated with high 'long tail' risks. My conclusion remains robust to investigating 'exclusive' participation in each financial asset class and using alternative measures of Internet dependency and financial literacy.