Mobile Payments: A Cautionary Tale

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.

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.”

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?

4 thoughts 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!


    1. 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.

    1. 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.

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