Mobile Payments: A Cautionary Tale

by Diana Drake

Within seconds, the Venmo receipt arrived by email. Transfer date and amount: May 15, 2018 — $80.00. And with a mere tap of her cell phone, high school student Julia Smith had used the Venmo app to transfer cash from her bank account directly to her classmate’s Venmo account to help pay for a group prom house in the Poconos.

How simple. How convenient. How long until one easy click left Julia with a negative bank balance?

Mobile payments are payment transactions done with the help of a mobile phone. Think Venmo, Square Cash and Google Wallet, used to transfer money and even to shop at participating retailers – all with the tap of screen. According to a recent global study on mobile payment transactions, the mobile payments market was worth $550 billion in 2015 and is expected to grow more than 39% by 2020. That is explosive growth by any calculation.

Mobile payments are a significant part of the boom in financial technology — a.k.a. Fintech – the broad term for handling money with the help of technology that is experiencing incredible innovation from start-up companies around the world. For example, Greenlight Financial Technology, an Atlanta-based creator of a smart debit card for kids, teens and college students, announced in March that it had reached 100,000 customers after raising $16 million in financing from several investors.

But within all the buzz and investment that is flowing into this industry lies a cautionary tale, one that AnnaMaria Lusardi, director of the Global Financial Literacy Excellence Center (GFLEC) at George Washington University in Washington, D.C., explains like this: “We can make payments with the touch of a button, but the impact of this rapid innovation is not being examined.”

Adds Lusardi: “Fintech is not a substitute for financial literacy.”

In April, Lusardi and two of her colleagues released a study (see related links) that suggests that young people, specifically millennials (age 18-34), who engage in mobile-payment transactions at stores, gas stations or restaurants, are at a higher risk of financial mismanagement. Specifically, the survey involved people who wave or swipe their mobile phones over a sensor at checkout or use some other mobile app at checkout. The practices of millennials provide important perspective for current Generation Z high school students.

“I want young people to know that it is not just technology but the smart use of technology that matters. In other words, you need financial literacy to make the best use of technology.” — AnnaMaria Lusardi

Getting into the numbers, the research found that compared to non-users, millennials who use mobile payments are more likely to report that they occasionally overdraw their checking account (33% vs. 19%); they paid fees on their credit cards in the past 12 months (58% vs. 45%); they made withdrawals from their retirement account (37% vs. 9%); and they used alternative financial services such as pawn shops or payday loans in the past five years (50% vs. 23%). All of these suggest poor financial management practices.

These findings, says Lusardi, show how important it is for young people to understand their finances, how to manage their money, and the consequences of money mismanagement. “Young people today have grown up using technology and are technology savvy,” notes Lusardi. “I want them to know that it is not just technology but the smart use of technology that matters. In other words, you need financial literacy to make the best use of technology. Our findings should not be interpreted to say that Fintech causes millennials to manage personal finances poorly. It could simply be that those who use Fintech are also those who do not handle their finances well. Again, it is important to handle finances with care, and to make sure one understands the costs associated with the use of financial instruments, even simple ones, like checking accounts.”

So, before you make your next mobile payment, here are three important financial truths to help you make smarter choices. Consider these basic money tips a starting point as you become more focused on handling your finances with care and your technology with ease:

  • Mobile payment apps can make it easier to spend money that you don’t have. Be sure you are aware of your bank balance before you are tapping, swiping or waving your phone to make a mobile payment. If your balance is low, you may have to hold off on that transaction. Negative bank balances, also known as overdrafts, can cost as much as $35 per infraction. The last thing you want is to have to pay more money to repair your poor money management decisions.
  • Understand debt, which basically means that you owe money to someone for a product or service. Fall too deeply into debt, and it becomes very difficult to dig yourself out. The most recent GFLEC study found that millennials who use mobile payments are more likely to hold nearly every form of debt noted on the surveys, including auto loans, student loans and home-equity loans. A loan is a type of debt, typically a sum of money that is borrowed and is expected to be paid back (in most cases) with interest. A loan involves a lender, who provides the money, and the borrower, who uses the money and then pays it back to the lender over a specified term or period of time. The initial amount of money loaned from the lender to the borrower is the principal. Banks or other entities do not usually lend money for free. They charge interest on loans, which is how they generate revenue, or income. However, different types of loans are structured in different ways with different interest rates and payment plans. Be sure that you study all aspects of a loan before you make a commitment to it.
  • The ease of use associated with mobile payments and other types of Fintech underscores the importance of budgeting, which is arguably one of the most vital support beams of strong money management. The goal of good budgeting is to spend less than you earn – and to know what you’re saving for. Learning to budget is a key way to avoid being saddled with debt, and allows you to be more in control of your finances. At its most basic level, a budget starts with a record of money earned, versus a record of money spent. If this exercise reveals that more money is spent than earned, conscientious individuals must find ways to reverse the trend. Check out the sidebar with this article for Related KWHS Stories about budgeting and other important links to set you on the road to financial wellness.

And as you improve your money management skills, innovators and lawmakers will also be improving the world of financial technology. “In a digital economy,” stresses Lusardi, “we need new forms of financial education and also new consumer protection.”

Related Links

Conversation Starters

What does AnnaMaria Lusardi mean when she says, “Fintech is not a substitute for financial literacy?”

Describe the last time that you made a mobile payment. Do you agree with the premise that you must first understand the basic lessons of managing your money well as you use more types of financial technology? How do you safeguard yourself against making financial missteps?

It’s important to note that the GFLEC research does not suggest that FinTech causes poor money habits. Why is this a critical observation? What exactly is the research saying?

10 comments on “Mobile Payments: A Cautionary Tale

  1. With more than 56 percent of business executives citing technological disruption as a component of their business strategy and around 59 percent of senior financial services executives believing that they will see an increase in the use of digital solutions to improve operations, the FinTech revolution is unfortunately unable to foster the much-needed financial literacy in today’s rapidly modernizing world.

    The article, “Mobile Payments: A Cautionary Tale” is a comprehensive article discussing the rampant usage of FinTech for the purchase of goods and services, often resulting in negative bank-balances, especially in the case of the millennial age-group. Throughout the article, the author draws a fine line between being “technologically savvy” and “knowing how to use technology smartly”, which I completely agree with. After having read a research study conducted by Ms Annamaria Lusardia titled ‘Numeracy, Financial Literacy, and Financial Decision-Making’, it is evident that the statistics say it all! According to the study, which was conducted in 2012, only 13% of the sub-prime borrower group surveyed was able to answer all 5 numeracy questions posed at them. This clearly doubts the credibility of such borrowers who are questioned to have indulged in excessive borrowing in the preceding years of the ‘Global Financial Crisis (‘08-‘09)’. In addition to this, a study conducted by the OECD (Organization for Economic Co-operation and Development) shows that on average, across the OECD countries, 29% of the 15-year-old students do not reach the PISA (Programme for International Student Assessment) baseline level of proficiency in mathematics, an age bracket that will soon be entering the financial world. These numbers are in direct correlation with the fact that a large proportion of the young and middle-aged population is in dire need of being financially literate. And with the unfathomable technological advancements, a basic financial skill-set is imperative to survive.

    According to the GFLEC (Global Financial Literacy Excellence Center) insight report, data and analysis show that users of online payment methods are at a “much higher risk of financial distress and financial management than non-users”. Although the research suggests that the ‘FinTech’ users are from the educated and high-income bracket (indicating better financial security and prosperity), the data surprisingly shows a negative association between the two factors. The primary reason for this case is that users require such payment methods not only for simple monetary transactions but also for tackling monetary issues like fees minimization and debt owing, thus leading to higher risks of defaulting and portfolio mismanagement.

    Another important concern that the report raises is the ‘Alternative Financial Services’ (AFS), a method of short-term borrowing which have reported to been excessively availed by FinTech users in order to pay off their preceding debts. At first glance, these methods seem to be innocuous, but the reality is that these methods of borrowing tend to charge APR rates at 400% or even higher! This further leads them to be buried by the undercurrents of debt and the cycle continues.

    Having initiated a social service club (‘FundVisor’) back in school, aimed at promoting financial literacy across all sections of society, I have had the opportunity to talk to a number of financially illiterate individuals who aren’t even aware of the basics of setting up a bank account! It is through these discussion forums that I can truly correlate with the ill effects of being trapped in this vicious cycle of debt-owing, which permanently jeopardizes an individual’s long-term financial security.

    The aforementioned arguments and research studies clearly indicate that although individuals are availing ‘FinTech’ services, they are, at the same time, unable to manage their credit portfolios and avert any financial risks.

    In my opinion, the government should constantly supervise online payment methods in order to maintain a check-and-balance system before we witness the next Global Financial Crisis!


    • Hi Rajveer! I appreciate how deeply you drilled down into the GFLEC research. It shows that you have a sincere interest in understanding financial literacy in our society or the lack thereof. Academic research is so fundamental to helping us all understand the motivations and realities fueling the broader issues. We’d love to hear more about FundVisor if you’re interested in sharing your story on KWHS. Contact us here if you would like to develop an essay on the topic.

  2. This article, although essential to the Fintech discussion without a doubt, reminds me of a much bigger battle that’s vehemently punching today’s society in the face, hard. And that battle is one of instant gratification.

    This is the day and age where, as Facebook engineer Jeff Hammerbacher said, “The best minds of my generation are thinking about how to make people click ads. That sucks.” In an age where we’re expressing ourselves with our thumbs, ditching physical toys for video games, driving cars without our hands, it seems like adding “paying with a tap” to that list would be valid.

    But in my opinion, the smartest financial decisions are made with a set of strong personal values, moral character, and genuine intentions of bettering the long-term happiness of one’s self and family. I remember when I earned my first few dollars — $32, actually — for playing the sax with my 4-man middle-school jazz group at a wedding gig. I was 13 years old. The bride and groom, who were incredibly pleased with our performance, physically handed us each $32 in cash, followed by a handshake and sincere “Thank-you.”

    Although just a simple gesture, physically receiving those shining green pieces of paper, from my own team’s hard work, really changed the way I handled money from then on. There was something about the texture, the feel, the smell, and just the overall feeling of holding money in my hand. I had EARNED it. Putting those Hamilton’s in my drawer felt nothing less than a sublime experience. In fact, that $32 is still there, in that same drawer, to this day.

    Now, imagine me working hard to prepare a great performance, and then leaving, only to have my phone buzz a day later, with simply a dry, single-sentence message at the top: “$32.00 has been processed in your account.” Sure, it’s still $32, but the feeling I get is different. It’s just on a screen, almost as if it’s a video game where I have to spend it instantaneously and get some kind of virtual reward. The urge to spend that money on, say, Amazon, to buy something I wouldn’t need, is incredibly higher than actually holding that money in my hand.

    I have a feeling that apps like Venmo will counteract much of the Marshmallow Test philosophies of hard work and delayed gratification. Although convenient, and oftentimes useful, I think that digital processing should only be used when absolutely necessary, such as when doing business overseas, in rural areas, or through strictly-online interactions, where lack of alternatives can be a problem.

    But on a more realistic note, I think our upcoming bright minds would be incredibly benefited and inspired financially if they were first exposed to real, physical money. Whether that money come from chores, side hustles, or running a business, it doesn’t matter — what matters is the underlying principles and valuable lesson that it can teach us.

    See, there’s this overlooked beauty in physically using money; it does a splendid job of promoting responsibility, mindfulness, and awareness of one’s financial situation. After all, how easy is it to use someone else’s money and fall into debt when impulsively tapping “pay now” or swiping a card? How easy is it to surf the web and just “tap” or “click” for those flashy new headphones or sneakers you don’t currently need?

    With my own experiences with physical money at a young age, I’ve noticed that they’ve firmly molded me into a smart, mindful, and minimalist who hunts for promising value in investments, rather than short-term neediness and gratification. If we can encourage the youth of today’s society to physically earn their money, and spend it from their own pockets and wallets, then we’ve taken a giant, and very necessary, step forward in fighting this battle of instant gratification that’s taking a toll on humanity’s long-term happiness, fulfillment, and satisfaction. Financial literacy shouldn’t start with a constant commotion from pixels, taps, clicks, and “verified” check marks; it should start with an internal realization to improve one’s life through solidified control of one’s decision-making.

    • Great reflections and insights, Aneesh! I loved your narrative about your jazz band earnings and how you wove that into a broader discussion about the value of hands-on money and financial literacy skills. I agree that there is “an over looked beauty in physically using money.” It’s an important reminder for the digital age.

    • While reading through Aneesh Shinkre’s comment, I came across some points which I agreed with and others which I had different perspectives on. Yes, the feeling of physically receiving money is far more gratifying than getting a dull phone notification. Using real cash also reduces the temptation to mindlessly spend money on discretionary items because with cash, customers have to physically be at a store. However, for younger generations, I believe that earning paper money is not the cure for financial mismanagement. After all, mobile payments are becoming increasingly relevant and popular, so it is important that millennials and Generation Z know how to handle them properly.

      The path to a responsible mobile payment habit that the youth of today will take does not have to be filled with pitfalls and debt. There are multiple ways to prevent younger people from mismanaging their money, and some only require a little bit of tweaking to the platforms that are currently available. For example, parents can set daily or weekly spending limits on their child’s account. They can also choose to have their children connect their app to a debit card instead of a credit card. Mobile banking apps can send warning notifications to people’s phones when their balance is getting low. Mobile payments also have the potential to instill healthy financial practices in the youth. People will be able to monitor their income and expenses regularly, giving them a better sense of how to cut spending and manage their wealth. This will greatly benefit the half of Americans who live from paycheck to paycheck. If properly built, mobile banking can help transform our cash based culture to one with sound financial planning.

      While the technology is being perfected, people can also learn to improve their own financial behavior. My father currently has a perfect credit score. However, it was not always this way. When he first started using credit cards, he was frequently hit by late fees and interest payments. A disciplined person knows to learn from his or her mistakes. The usage of mobile payments is not the cause of irresponsible spending; it is only a facilitator to those with less control.

      Financial technology is the future. It allows us to pay for things or services without the hassle of carrying paper money around, paving the way for a potentially cashless society. Mobile banking enables users to virtually transfer their money to other people’s accounts, providing a convenient method to pay or send gifts to others. People can comfortably spend their money overseas without the burden of having to convert into the foreign currency. We are able to do everything from buying to booking in just a matter of seconds with a tap of a finger. It is also a good tool for record keeping. If you do not have a good memory, you can easily find out if you paid your friend back after splitting the lunch bill. Financial technology is making life easier and more efficient, saving precious time and allowing us to enjoy life more.

      Recently, my father and I went to a boba tea shop. After browsing through the menu, I decided to order a cup of matcha green tea. We headed to the counter to pay, noticing that the shop allowed its customers to pay through the Chinese social media and mobile payment app, WeChat. I watched as my father opened the app on his phone and went to a screen that showed a barcode. The woman behind the counter scanned my father’s phone, and in just seconds, the transaction went through. My father was able to pay for my tea without the inconvenience of having to fumble through his wallet.

      As we digitize everything from music to social interaction, it is only logical that money follows this trend. Gone are the days that people stash cash under mattresses. So, embrace the future, but keep improving it. Think how far we have gone in airplane safety over the decades. If people were not afraid to fly in the early days, why should we fear a few mistakes with mobile payments today?

  3. This article is so accurate that made me want to share the same problem in my country. I am from the United Arab Emirates and a student in high school. Even having less experience in finance and business, it is still easily recognized that this is a problem. The citizens of the UAE also face the same problem (financial problems). We all must think that technology makes our lives easier when used properly. The article “Mobile Payments: A Cautionary Tale” clearly points out the problems of using mobile payment methods. The idea first came from debit cards, debit cards are very easy to use, just swipe and you are set to go. They wanted to make things more easy and safe for the environment , so they invented an app that does the same thing. I personally think it is very useful for those who are able to control themselves financially. The problem in my country is that people say it is just 10$, it won’t do harm. Then they wake in the morning with a negative bank balance or not enough money to actually spend on food and other priorities.
    I personally think that having money in your hand is more better than having it in your debit card or phone. Even though it isn’t the best way, it still helps you to not spend money on unnecessary items. I personally never tried mobile phone payment and I will never even try it because of the problems people face of just using it. Another problem is that if we tell them to do this and that, they won’t listen because they are addicted to using it. I hope my comment is relevant to the articles point.

    • Hello, Ghanem. Thank you for your thoughtful comments! I appreciated learning about your perspective as a citizen of the UAE. I agree completely with the notion that technology could lead to bad financial habits. If you read the KWHS article Conquering the Negative Bank Balance, you will see that lots of students in the U.S. also have a problem with swiping too often and going into the red financially. I am pretty old-school when it comes to money and agree that holding those bills and coins in your hands is the best kind of financial security. But I also recognize that it is sometimes easier to resist change than to embrace it, especially when it comes to technological advances. As financial technology or fintech explodes on the scene, I feel we all must accept that this will impact how we handle our finances, no matter how much we want to fight it. Soon enough, new safeguards and strategies will emerge to support fintech innovation and help us make smarter decisions with our money without risking financial missteps.

  4. I totally agree that teenagers are easier to get out of control spending money via online apps than via cash.

    True, FinTech apps like Venmo, Paypal, and even WeChat pay and Alipay (the sole two oligarchs in mobile payment in China) have promoted convenience in an Internet-connected society, but they bring problems such as credit card debts and debts in lending apps. In fact, not only here in China, but also around the world where FinTech is available, people suffer from the negative effects that FinTech brings them. A friend of mine is a devout follower of fashion and enjoys buying sneakers and outfit that are worth over 300 USD (in fact, he owns three pairs of sneakers that are worth 700, 900, and 1200 USD, respectively ). However, he had no income (since he was in 12th grade now, just as I am) and, in order to make ends meet, he had to borrow from a lending app developed by Alipay (see above). this signals that misuse of money via FinTech is abundant among everyone in a FinTech-equipped society. There are intimate reasons connected to this:

    Firstly, FinTech apps have dissuaded the use of cash in real life. With the development of 3G communication technology, the mobile phone is becoming an increasingly important platform and terminal for trade and shopping. China alone has closed 25.7 billion online transactions and boasts a staggering 157 trillion CNY (approximately 22.43 trillion USD) in online transaction scales by the end of 2016. The number of mobile payment users in China has reached just over half a billion and the percentage of Internet users who also use mobile payment has reached 69.4% by June 2017. When mobile payment reaches a lion’s share in the payment market, the need to assimilate to such a trend is urgent, which is true for most contemporary teenagers who seem to lack financial wisdom. Also, since FinTech apps are much more convenient than cash and requires a mere smart phone with battery left instead of a burdensome wallet with all your important ID cards and bank cards in it, FinTech apps have become more preferred than cash in the contemporary society.

    Secondly, paying via FinTech apps, especially in large amounts, does not evoke awareness that money is being spent. Money used to exist in the form of cash for contemporary teenagers; cash exists as tangible matter which we feel the sense of loss and exhaustion when we spend it. With that sense of loss, it’s relatively easy for one to run a budget surplus on their personal account. Then money came out as credit cards. There is no need to bring tons of cash to the car retail anymore and people’s wallets lost a significant amount of weight. But here’s the drawback: since money’s tangible from, cash, is abandoned, the surviving form of money is digital and intangible; the sense of loss that accompanies the expenditure of cash is also abandoned along with cash, so money is spent more recklessly. Then came the FinTech apps. What didn’t solve but adversely affected the problem with credit cards is that FinTech apps have made reckless spending even more available to reckless teenagers, allowing them to spend without reckoning the least of outcomes. Hence the innate properties of FinTech have caused reckless spending among teenagers: the intangible form of money as mere digits and insanely convenient ways of approaching these apps just with the click of a screen.

    All in all, there are two major factors that led to reckless spending via FinTech apps among teenagers: the frantically widespread FinTech apps due to the transaction revolution on the mobile phone and money existing as an intangible form that won’t let the ones spending it notice it being spent. As more teenagers (and even preschoolers and elementary students) join the Internet brigade every minute and FinTech infiltrating every possible corner of our daily lives, it’s mandatory that rules and changes be made to help the financially unwise, including teenagers, manage their “digits”. First, FinTech apps should make each user’s balance/expenditures visible after every transaction. This will give them a sense of loss just as spending cash does. Second, tutorials on how to govern their digital balance should be offered to teenagers. This will act as a prevention of reckless spending.

    • Dear Zhang. Thank you for your thoughtful perspective on FinTech. I especially love your suggestions for helping the situation. We promise to do our part in helping students govern their digital balances, and I agree that the more students can see their decreasing balance flash before their eyes, the more impactful the financial lesson. I believe that rules and practices governing wise use of financial technology will catch up with fintech innovation — let’s hope that it happens before too many people get deeply into debt.

  5. Eyal Nachum (Fintech expert) says the arrival of e-commerce brought a wide range of new payment facilities and financial services to the vanguard. In order to meet the demand for better user-friendly payment experiences, banks now have become the most practical adopters of these thrilling developments across functions. They should be quickly partnering, supporting, and promoting professionals in the fintech world and accepting software, programmers, and applications.

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