Why the Evolution of Fintech Is Affecting Our Spending Habits
My credit card has seen better days. The blue plastic backing is peeling off, making it nearly impossible to swipe in machines. However, that hasn’t stopped me from spending over $4,000 in the past two weeks without even taking the card out of my wallet. How is this possible? Well, these transactions were all made online, where my card number is conveniently stored by various platforms like Uber, Walmart, and Google Chrome.
In today’s economy, frictionless transactions have become the norm. Whether it’s waving your cell phone near a cash register, making a purchase on Amazon without remembering which credit card you’re using, or sending money to a stranger via your phone, the convenience is unparalleled. In fact, there’s a company called McLear that even offers a ring you can use for payments.
But are these advancements in financial technology, often referred to as fintech, making us spend more than we realize? The evidence seems to suggest so. With multiple accounts to manage and merchants effortlessly debiting our owed amounts each month, we find ourselves spending money without considering whether we can truly afford it.
In the United States, consumer spending reached a record-breaking $19 trillion in December 2023. This figure represents a 6% increase from the previous year and a staggering 29% increase from February 2020. Despite economists warning that this spending spree cannot be sustained, it continues to persist.
There are several reasons for this surge in spending. Consumers saved money during the pandemic when they were confined to their homes. Now, they’re making up for lost time by traveling, dining out, and indulging in activities that were off-limits during quarantine. Additionally, government stimulus checks and paused student loan payments provided a financial boost. Finally, after years of stagnant wage growth, workers’ paychecks are finally outpacing prices, giving them extra disposable income.
However, one significant factor that has changed since the beginning of the pandemic is our increased reliance on fintech for payments. The convenience of these technologies encourages us to enjoy the shopping process without considering the potential consequences. Research has shown that the more frictionless the payment method, the more money people tend to spend.
According to a McKinsey survey, 73% of consumers had made online purchases through websites or browsers on their phones or computers by 2023, up from 46% in 2019. Mobile payment apps like Apple Pay, Google Pay, PayPal, and Venmo have also gained popularity, with over 53% of Americans favoring digital wallets over traditional payment methods.
The speed and convenience of paying with a mobile phone are undeniable. It takes an average of 29 seconds, compared to 40 seconds with a credit card. This swift transaction process has been found to accelerate spending. A study conducted in 2023 after the launch of Alipay, a mobile payment service, indicated that credit card transaction amounts increased by 9.4% once mobile devices were used, with transaction frequency increasing by 10.7%.
This cycle of tech adoption has gradually loosened our purse strings. As we become comfortable with mobile payments, we also become more inclined to make credit card payments on our computers, leading to more digital spending overall.
While increased consumer spending benefits the economy and boosts company profits, it has also led to many Americans living beyond their means. Household debt hit a record $17.5 trillion in the fourth quarter of 2023, with credit card debt increasing by 13% since the previous year. Furthermore, the number of credit card balances delinquent by 90 days or more rose to nearly 10% in the last quarter of 2023.
One reason overspending occurs with frictionless payments is mental accounting. Consumers perceive new payment options as separate budget categories, enabling them to justify additional spending. Research has shown that people tend to spend more when they have opened a new budget category.
To combat overspending, experts recommend several strategies. Avoid storing payment information on apps to create a psychological barrier before making a purchase. Set up notifications on your phone to receive alerts for every transaction, regardless of the payment method. This helps you remain conscious of your spending habits. Limit the number of accounts you use to make purchases, as having too many can make it challenging to keep track of your expenses.
In recent years, many apps that assist in tracking spending have disappeared. For example, Mint, a popular personal finance app, is scheduled to shut down soon. As a result, it’s crucial for individuals to take responsibility for monitoring their own spending.
The evolution of fintech has undoubtedly revolutionized the way we spend money. While the convenience is tempting, it’s vital to exercise caution and maintain control over our finances. By implementing simple strategies, such as limiting access to payment information and closely monitoring spending, we can avoid the pitfalls of excessive consumption enabled by frictionless transactions.