Will 'pay pain'-free mobile wallets make us poor?
Experts argue convenience might lead to overspending
Exploring the cultural impact of credit cards
As sure as self-driving cars will soon rule our roadways, mobile wallets and apps such as Apple Pay, Venmo and Zelle will one day relegate cash, checks, credit and debit cards to the dustbin of payment-method history.
And little wonder: Mobile wallets are convenient, simple to master, full of helpful features and often packed with tasty incentives.
Unfortunately, if the evolution of payments throughout human history holds true, smart wallets left unchecked may also leave us broke.
Why? Because when it comes to managing our money, the problem is not what’s in our wallet – it’s what’s in our head.
Enter 'the pain of paying'
The unseen hazard of mobile wallets is they eliminate the “pain of paying,” a psychological phenomenon/gut check triggered when we physically part with bills and coins to make a purchase.
“A lot of this happens on a subconscious level,” explains Manoj Thomas, associate professor of marketing at Cornell University and the co-author of “Why People (Don’t) Buy: The Go and Stop Signals.”
“The pain of paying is caused by feeling and not necessarily by attention to price. In the very long history of mankind, all of a sudden this is the first time where that concrete form of payment has completely vanished. That has broad implications that most people don’t appreciate.”
No (payment) pain, no (self-control) gain
The most problematic outcome, based on numerous studies of the psychological effects of the shift from physical cash payment to the symbolic hand-over-the-dough payment gesture of a card swipe or dip, is that without payment pain, we subconsciously tend to overspend.
There are psychological studies that show that given $10,000 to spend on a credit card instead of cash, people may spend 20 percent more on plastic because it doesn’t feel like real money, observes Victor Ricciardi, assistant professor of financial management at Goucher College and co-author of “Investor Behavior: The Psychology of Financial Planning and Investing.”
What’s wrong with that, you ask? Maybe nothing, on an individual basis. But Thomas says research suggests that the reduced pain of paying that accompanied the shift from cash to cards, and how that extra money was spent, may have, for example, served as a catalyst for America’s obesity epidemic.
“The statistics are scary,” Thomas writes. “In 1990, there was not a single state in which the proportion of obese people was more than 20 percent. But in 2010, there was not a single state in the United States where the proportion of obese people was less than 20 percent.”
Research is just beginning on whether mobile wallets and other new payment forms, including contactless cards, will have a similar – or possibly even greater – impact on overspending by eliminating the gut-check payment gesture altogether.
Pessimists fear that not even having to open our wallet could further remove us from the pain of paying.
Optimists, however, predict that, unlike non-interactive cards, our interactive phones and tablets could be programmed with customized features we could use to return the pain of payment and self-check our subconscious overspending.
Tips to bring back the 'pain of paying'
- Identify your spending weaknesses.
Acknowledging what typically busts your budget is the first step toward preventing it.
- Pick an e-wallet with pain controls.
In addition to the ability to set spending limits, find one that issues warnings before you overspend on a purchase. Ask your issuer if its mobile tools offer such options.
- Impose spending parameters.
These curb your tendency to overspend on certain products or at certain venues, dates and times.
- Crank up your spending limit alert settings.
Reduce the amount threshold on your “large expense” and/or “approaching balance limit” alerts if your card issuer offers these options – and make sure to enable push notifications from your bank!
- Include the family.
Setting individual spending limits for authorized cardholders in your family can benefit everyone.
- Go immobile. If you simply can’t rein in your e-wallet, go old-school – unlink your cards and stick with plastic and/or cash.
Can mobile payments help us keep spending in check?
“Economist Richard Thaler just won the 2017 Nobel Prize for his theory of ‘nudging,’” Ricciardi notes. “People suffer from inertia and status quo bias. The concept is that rather than have people voluntarily decide to put money into their 401(k) plan, you automatically nudge somebody to get into a 401(k) plan, and once they do, because of the status quo bias, 95 percent of people will stay in their retirement plan. All these mobile apps can nudge people if used properly.”
Such nudging plays to mobile’s strengths. “Mobile pay would have the flexibility to create visual, audio and vibration responses,” says Thomas. “Like [the activity tracker] Fitbit, if you can create a demand for that and increase public awareness for that, I can see where somebody will be motivated to serve the consumer’s needs.”
Can you imagine? Picture yourself at your favorite payment terminal. You’ve scanned and entered more than you were shopping for and on your phone up pops a video of your toddler sobbing: ‘Mom, what about my college fund?!?’ Or your car loan balance transposed over the image of that beast getting towed. Cause to pause for sure.
Just don’t expect that frugal Fitbit to suddenly spring forth from all card issuers. “Their revenues come from people spending more,” Thomas notes. “Why would they want to create an intervention that curtails people’s spending?”
What would a financial Fitbit look like?
So far, it’s been veteran financial services technology leader Fiserv that has nudged the financial Fitbit trend forward with its 2015 introduction of CardValet.
The mobile card management app allows you to set your own painful spending limits to alert or deny yourself payment based on preset purchase caps, phone GPS locations, date and time, and even merchant types, such as restaurants, gas, hotels, groceries, travel, etc. Transactions also can be monitored and controlled for specific payment types, such as in-store purchases, e-commerce transactions, mail/phone orders and ATM transactions.
Not all cards will work with CardValet, however. Your financial institution needs to be associated with the app in order for you to use it – currently 1,500 financial institutions in the U.S. offer CardValet, many of them regional banks and credit unions.
Spending alerts: The pay pain-inducing tool you can use now
A growing number of card-issuing banks and credit unions also include pain controls – most commonly in the form of spending or balance alerts – in their mobile suites, though purchase cap features are typically touted as a way to check the spending of other authorized cardholders in your household (i.e., kids) rather than yourself.
While the major card networks have also weighed in with their own e-wallet solutions for self-inflicting payment pain, the availability of that mobile functionality varies widely by issuing banks and credit unions.
Randy Smith, founder and inventor of MyCreditVault and a serial entrepreneur based in California, predicts the benefits offered by apps such as CardValet will soon be a standard feature of all mobile banking.
“At the end of the day, I think the smart people behind the really good smart wallets are going to give all the controls that consumers want to have,” he says.
Smart wallets can't replace self-control
In fact, Smith also sees it as a good sign that the card networks jumped in to offer consumers the option of dialing up their payment pain.
“The member banks and startup companies are going to figure out ways to get and keep spending going as much as possible, so the networks could play the good guys on this, and they probably will,” he predicts.
That said, Mastercard spokeswoman Beth Kitchener acknowledges that even the smartest wallets can only do so much.
“Mastercard’s Masterpass digital wallet allows users to set spending limits,” she says. “The wallet provider can offer that functionality and the consumer either uses it or not.”
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