A Wallet full of Dilemmas
The past few years have ushered in an abundance of technological advancements such that even space tourism doesn’t seem like a far-fetched dream. From buying skincare to buying healthcare, one doesn’t even need to take out their wallets to pay for such amenities. While availing of these benefits might stretch most people’s budgets, how we choose to make the payment leads us to often spend more than we usually would. Hence, in our pursuit of trying to make our lives as comfortable as possible, oftentimes we forget the maxim that everything comes at a cost.
Let’s have a look at what the stats have to say!
It is estimated that by the end of 2022, the number of digital wallet users will hover around 3.6 billion worldwide, equivalent to almost half of the world population. At the same time, research suggests that the digital wallet market is expected to grow threefold from $5.5 trillion in 2020 to $15.69 trillion by 2029. While the cause of the surging adoption of digital payments could be partially associated with the pandemic. A study from Juniper Research forecasts that in 2025, contactless and e-payments will account for 50% of total wallet spending, marking a significant increase of 14% from 2020.
In addition to stats surrounding the proliferating popularity of the e-wallets, researchers from the University of Illinois at Urbana-Champaign found that once consumers began to use mobile wallets, their total expenditure rose by 23.5%, majorly spent on low-cost items, while overall spending increased by 2.4%.
All numbers and no explanation make an article a boring piece!
An increase in personal spending by 2.4% might seem like a marginal amount ONLY until the compounding factor comes into the picture. The average American Household expenditure is $5,112, an increase of 2.4% would mean a $122 rise in their expenses to $5234. Imagine if instead of increasing your expenses by $122 a month, you invest the same into a no-minimum Individual Retirement Account (IRA) paying a nominal 7% interest. At the end of 10 years, you will be left with an extra $20,467, and after 20 years, the money would become a colossal $60,489. This is why people say that every drop counts.
But what drives us to spend that extra $122?
It is not the first time we are experiencing the phenomenon of spending more when paying for it using means other than cash. It was first observed when people switched to debit and credit cards. The benefits that came with these cards complemented with the convenience of not carrying bundles of bills led people to consume more and save less.
Drazen Prelec and George Loewenstein, refer to this phenomenon as “coupling”. Due to the difference in time between the point of purchase and when the consumer has to pay for the purchase, the consumption feels less painful hence people tend to spend more using digital wallets than through cash.
Net utility derived= Total utility of the product - Price paid for it
When purchasing through a mobile wallet, the net utility equals the total utility of the product as no cash from your pocket needs to be taken out and your pockets remain as heavy as they were before and after the transaction. We only realise the price paid when we check our bank balance or go through the monthly bank statement which happens rarely. Thus, the coupling is weakened and utility increased. Analogously, when we use cash to make our purchase, there’s an immediate sense of pain which strengthens the coupling and decreases the net utility.
In addition to all this, one can’t ignore the role that convenience and comfort play in determining the choice of the mode of payment we use. It’s such a nuisance to get your hands into your clustered pocket, take out your wallet, then your cash, wait for the seller to return the change, count the change and keep the wallet back in your pocket when purchasing in cash. Contrary to the previous case, scanning a QR code or entering a few characters on your mobile screen hardly takes a few seconds. Thus, by the time your companion takes out his wallet, the payment’s already done and you have already left the shop.
To substantiate, a survey of 150 million Americans conducted by Finder, revealed that about 66%, i.e., more than 98 million of those surveyed use digital wallets because they are a more convenient option than carrying around dollar bills and credit cards.
The pandemic provided the trigger and what we are seeing now is just its effects. The ubiquitous economic principle of there being a trade-off in every choice we make prevails in this industry as well. It’s going to be extremely difficult to rewind the cassette and fight the urge not to use digital wallets for any purchase. The phrase,” Oops, I forgot my wallet”, a prevalent excuse in the earlier days has now become endangered because while one can forget their leather wallets, they rarely forget their mobile phones a.k.a. their e-wallets.
Authors: Neeraj Agarwal
Illustration by: Arab Kansal