Smartphones: Beware those payment apps

First, it was credit cards. Soon it will be smartphone payment apps.

Like cursive handwriting, paying with cash is practically obsolete due to
technological advances. A greater number of cellphone manufacturers are
now adding NFC (near field communication) chips to their handsets,
allowing consumers to use their phone like a credit card at various retail
stores.

Shifting to a system of virtual money is convenient, but it could have
significant consequences for consumers and their family budgets.

There seems to be a lot of excitement about making payments by simply
waving a smartphone in front of a reader. But this is an even easier way to pay than swiping
a credit card, and overspending can be the dark side of this convenience.

Consumers have certainly spent more with credit cards compared with cash.

According to a Consumer Reports study last year, consumers who used credit
cards for gift purchases during the 2009 holiday season spent an average of
$896 on gifts, 10 percent more than the overall average of $811.

Psychological studies and research papers compare the effects of credit
cards and cash payments. A series of studies published in 2008 by the
American Psychological Association examined the purchasing behavior
of consumers. The studies found that people spend less when paying
cash than using credit – cash discourages spending and credit cards
encourage it.

Other studies reach the universal conclusion that consumers spend less
with cash because cash is the most vivid and transparent method of
payment. The more transparent the payment, the higher the pain of
paying, and the greater the resistance to spending.

Here are several ways credit cards increase spending, according to
psychologists and researchers. These can also apply to smartphone payments:

• Credit cards are much less transparent and make it much easier to follow
through on a transaction. This reduces our psychological barriers and makes
it easy to ignore the warnings of our inner voice.

• Paying with a credit card separates the purchase from the actual payment.
Since actual payment occurs long after the purchase, it dulls the pain of
payment. The pleasant feelings you get from the purchase and immediate
gratification are almost disconnected from the reality of the payment.

• Credit cards combine a month of purchases into one payment. It is easy to
look at the final number and overlook how much you really spent on specific
purchases or categories like clothes, groceries, dining, or entertainment.

• An individual expense is viewed as much bigger on its own than when it is
part of a bigger payment. Adding a $50 purchase to a $1,000 credit card bill
makes the purchase feel smaller and can result in increased spending.

• No pain, no memory. If there was little pain or deliberation at the point
of purchase, it is easy to forget what you have charged on your credit card
and to underestimate past spending.

Retailers and credit card issuers understand this psychology and use it to
increase spending. It is the reason retailers are willing to pay credit card
companies approximately 2 percent of their revenues on credit card purchases (even
though they have fought many years for the regulations for lower interchange
fees). Many retailers offer and aggressively promote their own credit card
because the interest payments further increase revenue.

Here are consumer tips for managing spending with a credit card or smartphone:

• Consider each purchase paid with credit card or a smart phone. Think
of it as cash leaving your account or the hours of work it will take to pay
for the item.

• Set up account alerts for notification when preset spending limits are
reached.

• If you have a MasterCard, take advantage of InControl that allows you to
set up budgets and limits for particular types of spending and purchases
with your credit card. It helps give you discipline to manage your spending.

• Analyze your credit card bill. Group similar items together to follow the
real flow of your money.

• Test cash for yourself. Pay for everything with cash for a week. See if
you think more about every purchase. Do you remember more about the
purchases made during that week?

• Teach your children the pain and pleasure of money and use cash for
allowances. Make them spend their own money and actually count it out
when making purchases.

– Bill Hardekopf is founder of Lowcards.com, a credit -card information site.