Thought Leadership & Community


The Uncomfortable Relationship Between Mobile Payments and Financial Literacy.

By Annamaria Lusardi Wall Street Journal

Rare today is the practice of rolling up to a highway toll gate with coins ready to hand to a toll-booth operator or toss into a basket. With the convenience of electronic toll-collection systems, such as E-ZPass, I-Pass or FasTrak, we now drive in express lanes and move past toll booths quickly. No need to collect and stash coins in your car anymore.

System like E-ZPass and phone apps are mirrored in another chore we all face: making payments. The latest survey of Consumers’ Use of Mobile Financial Services of the Federal Reserve Board found that 28% of respondents with a smartphone made payments through their mobile phones.

Normally, we would cheer innovations that provide ease and convenience. But are these payment innovations coming at a price for consumers?

When Amy Finkelstein, a professor at the Massachusetts Institute of Technology, looked at the data for E-ZPasses on the Mass Pike, she found that people who use the pass are less aware of how much they pay for the toll than are those who use cash. Since our financial decisions should be based on prices and cost comparisons, this is a concern—and it prompted our research team at the Global Financial Literacy Excellence Center to take a closer look at mobile-phone payments.

We defined mobile-phone payments as waving or tapping a mobile phone over a sensor at a checkout, scanning a barcode or QR code with a mobile phone, or using a mobile app at a checkout. We focused on heavy users of mobile payments—millennials ages 18-34.

Some of the findings are what we expected: Ease of payments attracts those who are comfortable with technology and have a busy life. Users of mobile payments are most likely to work full time, have higher education and be male. They are also more active financially.  For example, they are more likely than nonusers to have bank accounts, retirement accounts and own homes. They are also more likely to use debt instruments, notably credit cards. If they own cars or houses, they have auto loans, mortgages and home-equity lines of credits.

However, troublesome findings emerge when we examine how these financial obligations are managed.

Millennials who make mobile payments are much more likely to use credit cards in expensive ways, such as paying only the minimum due or incurring fees. They are also much more likely to overdraw their bank accounts (33% of mobile-payment users do it vs. 19% of nonusers) and to make withdrawals from their retirement accounts, if they have them. Some 37% of mobile-payment users take money from their retirement account vs. 9% of nonusers.

And here’s one more crucial finding: Those who use mobile payments have much lower levels of financial literacy than nonusers.

We have plenty of research showing the strong link between financial literacy and savvy financial behavior. For consumers who are not financially aware, can the ease that fintech brings to making payments also lead them to buy more and save less? When we look at our data, we found a strong correlation between using mobile payments and spending that exceeds income, even after we account for demographic characteristics, including education and income.

In spite of that, there is potential good news tucked in these results. Our findings suggest that mobile-payment services are attracting segments of customers with a range of needs beyond simple monetary transactions. These needs—such as help managing short-term debt or minimizing fees—offer opportunities for fintech innovators.

We must be careful, though. Fintech is not a substitute for financial literacy. When employing payment methods that are easy to use and accessible to all, financial literacy becomes even more indispensable.

Meanwhile, there is a final warning from the earlier research of Dr. Finkelstein: Once an electronic toll-collection system like E-ZPass is installed, you can expect tolls to rise.

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