Saving in a world of Frictionless Payments

Why we need technology to protect humans from themselves (…and other technology)

The Pain of Paying

I remember that back in university, I would always make sure to bring cash with me to the bars. Over the course of the night, as I saw my cash dwindle, I would question whether I really needed that next drink. The physical nature of using cash provided a natural check for me on my spending. On the other hand, the nights where I didn’t have cash but only credit were the nights where I easily spent the most.

Why is it that it’s so much easier to spend with credit instead of cash?

Behavioral economists call this phenomenon the “Pain of Paying”. The idea is that when consumers make purchases, they feel both a pleasure of consumption and a pain of paying. Each time we make a payment, we make a specific calculation on whether what we’re buying is worth the financial pain. Because cash is tangible and physical, humans have more of an emotional connection to cash than they do to credit. Similarly, we have a deeper attachment to using our physical credit cards than to an automated payment through an app (e.g., Uber). As we get further detached from the payment, our threshold for the pleasure of consumption lowers.

The Rise of Frictionless Commerce

In recent years, startups and retail companies have invested millions of dollars in new technologies that reduce the friction in payments in order to encourage individuals to spend more. These innovations include new subscription models, sensor-based transactions, conversational commerce, and predictive payments.

For example:

Amazon publicly launched their Amazon Go concept in January of 2018, allowing individuals to buy their groceries without ever pulling out their wallets. This builds on Amazon’s extensive history of reducing friction from their dash buttons to 1-click ordering.
In May of this year, Instagram launched a payments feature, allowing you to make payments without ever leaving Instagram.
Starbucks initially launched their mobile payments app in 2011. Now, the app has more than 23 million regular users and well over $1 billion pre-loaded onto the app.

The trend towards more seamless payments is so powerful that a 2016 A.T. Kearney study predicts that frictionless commerce (including digital) will account for over 45% of US consumer spending by 2026.

Why Frictionless May Not Be So Good for Consumers

Lowering the inherent ‘pain of paying’ isn’t necessarily a bad thing. For example, you are much more likely to enjoy a resort vacation when it’s all inclusive vs. when it’s not, regardless of how much you spend overall. Similarly, for many financially healthy consumers, the benefits of convenient seamless payments can outweigh the increased spending.

The challenge comes when you consider that so many Canadians and Americans aren’t financially healthy. 27% of Canadians don’t save any money from month to month and more than 4 in 10 Americans aren’t able to cover an unexpected $400 expense with their savings.

I’m willing to bet that there’s overlap between individuals that have trouble saving and individuals that use Amazon, the Starbucks app, Uber, and other methods of seamless payments.

Traditional thinking puts the onus of responsibility on the individuals (i.e., the inability to save comes from a lack of financial literacy and self-discipline). Decades of behavioral economics research, however, demonstrate that humans aren’t rational and small factors can greatly affect one’s spending. When retail giants are so focused on leveraging data, design, and the latest technologies to encourage individuals to spend more, it’s no wonder why so many of us struggle with saving.

So what can we do?

My personal thesis is that in order to fight tech, you need tech. We need to build tools that utilize the same underlying concepts behind frictionless payments to help individuals manage their spending and increase their savings such as:

Making Savings Frictionless: Apps like Digit and Mylo are designed with making savings as easy as possible either by rounding up daily transactions and investing the spare change or automatically calculating and depositing a safe amount to save each day.
Simplifying Mental Accounting: Simple’s Safe to Spend feature leverages the fact that humans naturally separate money for different purposes by taking into account an individual’s cash flow, future bills and budgets to notify them of how much it’s safe to spend each month. Similar to seeing cash dwindle in your wallet, this feature serves as the mental check that helps you curb your spending.
Increasing the Pleasure of Savings: Frictionless payments has tipped the balance between the pain of paying and the pleasure of consumption. What if we can tip this balance again by increasing the pleasure of saving? Prized-link savings accounts such as Save to Win and WinWin do just that by providing regular lottery-based rewards just for saving.

The examples above are just the start. As technology continues to evolve to make spending more convenient and to encourage impulse purchases, we’ll need to continue to develop counteracting technologies that help protect individuals from these influences (…and from themselves).

This article is originally published by Elvis Wong, Co-Founder at Innovate Financial Health on medium.com