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FUTURE OF FINANCE FRIDAY

People who use mobile fintech apps tend to make worse financial decisions

Reuters/Eddie Keogh
Maybe just use it for calls instead.
By John Detrixhe

Future of finance reporter

This article is more than 2 years old.

One of the wonders of the modern life is all of the whizzy technology available to help us manage our money. But does it mean we make better financial decisions? Maybe not.

A study of mobile-payment using millennials (ages 18-34) in the US found they were less likely to be financially literate than others of the same age who didn’t pay for things with their phones. They were also more likely to make other bad financial decisions, like overdrawing checking accounts, racking up credit card fees, borrowing from payday lenders, or dipping into their retirement accounts early, according to research by the Global Financial Literacy Excellence Center at the George Washington School of Business.

Paradoxically, this is the case even though mobile-payment users tend to have more assets, make more money, and be better educated. Research also found (pdf) that one-quarter of people who use their phones to track spending reported overdrawing their accounts, compared with 20% of those who didn’t use their phones for this.

What gives? One possibility is that electronic payments make spending too easy and budgeting more difficult. It lacks the tactile, heart-sinking experience (for some) of seeing a $50 bill return as smaller notes after a purchase. ”In the data we do not have information about what explains that behavior, but making payments easy and mindless may induce people to spend more,” Annamaria Lusardi, a professor at George Washington School of Business, said in an email.

Mobile payments at the point of sale—think Google Pay or Apple Pay—tallied $70 billion in the US last year and are forecast to increase to around $370 billion in 2022, with the number of users increasing from 50 million to 90 million during that span. (China, meanwhile, has more than 500 million mobile wallet users.) Around nine out of 10 American millennials have smartphones and half of them use the devices for payments, according to a 2016 survey.

BehaviorMobile-pay usersNon-users
Occasionally overdraws checking account21%18%
Charged an over-the-limit credit card fee17%8%
Withdrew from retirement account37%9%
Took out a payday loan22%9%
Took out an auto title loan16%5%
Source: George Washington University School of Business

The good news for tech entrepreneurs is that technology can present solutions to the problems that tech itself creates. Imagine if your phone vibrated more violently when you made bigger purchases. Perhaps the home screen could flash a warning when you buy a pair of jeans identical to all the other jeans you’ve added to your closet recently. (That could be annoying enough to drive people back to cash.)

In the end, though, technology isn’t a substitute for basic financial education. The research suggests that people with a basic level of financial literacy made better decisions, whether or not they used fintech apps on their phones.


The future of finance on Quartz

  • Kenya’s biggest mobile money service is going global. M-Pesa signed a deal with Western Union that will allow users to send money all over the world.
  • The 401(k) is forty and fabulous. The “Julia Louis-Dreyfus of saving vehicles” is just getting started.
  • Missouri and Arkansas have embarked on a bold experiment: The states voted for big increases in the minimum wage in the US midterm elections.
  • What happens when lifestyle reporting crosses into crypto journalism? You get a fact-checked Gwyneth Paltrow Q&A featuring Quartz’s travel and crypto reporters.
  • US businesses are getting old. A lack of startups means half of companies have been around more than a decade.

The future of finance elsewhere

  • Plaid could reportedly be worth as much as $3 billion. The company’s technology connects banks with third-party apps.
  • Square’s latest quarterly earnings guidance disappointed traders. Square CFO Sarah Friar, seen as a vital sherpa for the payment company, is leaving to run Nextdoor.
  • Ant Financial swung to a loss. The company is in a battle with Tencent for customers and is reportedly (paywall) spending on overseas expansion.
  • Personal finance company Credit Karma acquired Noddle, a free credit reporting and monitoring service that’s based in the UK. Credit Karma says it counts nearly half of US millennials as users.
  • Online lender LendingClub beat analysts’ earnings expectations and raised its forecast. The company originated $2.9 billion of loans in the third quarter, the most ever. The online small business lender OnDeck Capital also beat estimates.

Previously, in Future of Finance Friday

Oct. 5: Elon Musk had a radical, revolutionary idea for finance in 1999 — it’s finally being realized

Sept. 28: A booming Stripe shows digital payments aren’t about to be replaced by blockchain

Sept. 21: The godfather of crypto has a plan to keep digital payments and messages private