The Perils of Mobile Payments

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It’s been hard not to miss the steady stream of news suggesting that some time soon the U.S. will catch up with the rest of the world when it comes to using mobile phones and other devices as digital wallets. If you don’t know what we’re talking about, the idea of mobile payments is pretty simple: You go to a store, and rather than whipping out cash or plastic, you offer up your cell phone, which pays for your purchase and charges a credit card that you’ve used to open your mobile phone bank (as it were). As mentioned, this is already a common practice in large swaths of Africa, Asia and Europe, and for obvious reason. What some refer to as “contactless payment” makes spending remarkably easy, which is why the two of us, progress lovers both, are at least a little nervous about the implications of this technology. Our concern is based on an ur-principle of behavioral economics — mental accounting.

Broadly, this is the idea that we treat money differently depending on where we get it (say, salary vs. bonus vs. gift), where we keep it (college fund vs. checking account vs. retirement nest egg) or how we use it (large buys vs. small purchases or lump sums vs. installment). Mental accounting can be useful if it keeps you from touching your kid’s college account, less useful if it causes you to pony up for an optional sun roof simply because you’re already spending a lot of dough to buy the car it will make that much cooler.
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The relevance to mobile-payment systems is that there is considerable evidence to suggest that the farther away we get from spending money that’s actual money, the more likely we are to spend it more easily. The classic research in this area came from MIT professors Drazen Prelec and Duncan Simester, who organized a sealed-bid auction for tickets to a basketball game. Half the auction participants were told that whoever won the bidding would have to pay for the tickets in cash (with a day to come up with the money), while the other half understood that the winner would have to pay by credit card. And wouldn’t you know it, the average credit card bid was roughly twice as large as the average cash bid.

That makes sense. The human brain is always looking for shortcuts, for simplicity. And one useful rule of thumb is that an original or authentic item (in this case, cash) is typically more valuable than a copy or proxy (plastic). What we worry about vis-a-vis contactless payments is that the ability to spend money with a simple wave of your cell phone will make people, first, more likely to spend; and, second, weaker bargainers when they do. Anyone with a “1-click” account on Amazon knows exactly what we’re talking about.

Is there an easy fix for this? Not really, although in later posts we’ll take a look at some smart strategies for fiscal restraint (see also our previous post). But this also feels like the right time to ask a question we’ve been pondering for a while: Why aren’t more U.S. financial firms cooking up more technologies to make socking away money as easy as spending it? Putnam Investments just came out with a savings iPhone app that’s pretty nifty, but we’re looking for something even more piggy-bank friendly, a 1-click feature on digital devices that lets you direct money on a whim into a savings account from which it takes, like, three clicks to get your money back out! Something like the Impulse Saver app developed by New Zealand’s Westpac. Consider the possibilities: You’re walking down the street, you see an awesome pair of shoes in a store window, and just as you’re about to walk in and lay down your debit card, a thought washes over you like a virtuous wave: No, I’m already wearing shoes. I don’t need new ones. I’m gonna send that cash into my retirement account.
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What’s not to like, right? Actually, some people regret having saved, but “impulse saving” has a lot to commend it, and if anyone wants to ask us about it, we have theories. We always have theories.