Last month Apple Pay launched with a resounding ‘meh’ from me (as my Bank are not currently supporting it). Nonetheless, it got me thinking about how the almost inevitable spread of mobile payment will affect consumer spending — and I think it will encourage you to spend more money overall, and not in way you might initially suspect.
Whilst I pick on Apple Pay, as the hype surrounding the media launch started my grey cells rubbing together, my hypothesis is applicable for any of the mobile payment systems vying for market share. All of the systems promote themselves on the double whammy of speed of use and increased security. Apple’s promotion claims they want the service to replace consumers’ wallets, with quicker and more secure transactions; and Android Pay, Samsung Pay and Barclays bPay all extol a similar marketing patter.
Advert praising the ease and security of the Apple Pay system.
The current battle is over who can make the transaction as easy as possible whilst still maintaining security, and always trying to be simpler than just getting your contactless card out of your traditional wallet. This is where Apple have introduced Touch ID fingerprint scanning, Android Pay will use lockscreen security (with fingerprint scanning coming with Android M) and bPay requires you to top up a separate account with money for use with their devices*.
The change in effectiveness is something companies are happy debating, but another aspect is how this will change people’s behaviour.
Dan Ariely, James B. Duke professor of Psychology and Behavioral Economics at Duke University, is one of many who have investigated how the salience of paying affects our purchase decisions. His, and other, research has consistently found that paying by card feels less like spending, so we tend to spend more.
Originally, physical money was just a symbol of how much of the nation’s gold reserve we owned, and the exchanging of these notes signalled a contractual exchange of the bullion. Today we are so far removed from this original purpose that the contracts themselves are felt as the important part of any transaction.
When credit cards started to be adopted, it led to increased spending — between 1970 and 1995 average household expenditure in the US rose from $10,000 to $35,000 (Evans & Schmalensee, 1999). The more payment is decoupled from consumption, the more we will be happy to consume — this is why casinos exchange money for chips. Over time we have learnt that excessive plastic spending only defers the pain of payment and now handing the card across the counter is almost as painful as giving up the cash.
If consumers now associate card payment with spending, then what is the next step to ‘helping’ people decouple consumption from payment? If only we could attach the process to something that isn’t specifically made for the purpose of payment. What started out as a handy device for talking to each other, expanded to become our window on the world and a method to share our everyday life and thoughts with friends, family and anyone who’d listen — now our smartphones are becoming our mobile bank account.
Unsurprisingly, research has also shown that this decoupling of emotion from spending helps people to spend more on frivolous and less healthy options (Prelec & Loewenstein, 1998), which is something outlets are sure to latch onto when promoting that delicious cinnamon swirl to go with your latte.
Interestingly, how you define the moment of payment can also make a difference. If you regard the withdrawal of cash from the ATM as the key moment then you will likely spend that money more freely. After all, it’s out of your account and you’ve mentally allocated this money for spending, so from that point on it’s free money.
The Barclays system builds on this principle by separating bPay from your main current account, once you have transferred the money over, you are more likely to view spending as prepaid. Other retailers like Starbucks are also using the same principle with their loyalty apps, which had customers spending over $200 million via their mobiles last year.
So if the process underlying the new ways to pay could subconsciously lead us to spend more and spend badly, is there anyway we can defend ourselves?
One way to counter the effect is to use technology to monitor your spending. Apps such as Spendee, Dollarbird and SpendToday help by tracking what you spend, allowing you to bring your spending back into consciousness.
Some apps, like Urge, go even further by encouraging financial discipline. Describing itself as a ‘point of decision’ mobile savings platform, the app helps you to recognise the benefits of foregoing impulse purchases by moving the money you would have spent on that doughnut into a savings account so you can see your money building up (maybe towards a larger goal).
Only time will tell whether people will adopt the technology, which system will prevail and whether it will see another rise in consumer spending.
I’d be interested to hear how you feel about any of the new systems, if you’ve noticed a difference in your spending and if you have any adopted any personal methods of financial self-discipline.
Barclays bPay also charges customers for a wristband, key fob or sticker to be able to use the service.