A TFI research project by Anastasiya Pocheptsova Ghosh and Liang Huang
The FinTech industry is revolutionizing the way people manage their finances. Smart apps empower consumers to check their precise budget standing real-time: how much money was spent so far, and how much money is left? To curb spending and increase savings, financial advisors, consumer advocates and academics encourage consumers to keep a close eye on their expenses, implying that FinTech budget apps are a useful consumer tool. However, there is no empirical evidence proving that adopting budgeting apps is good for a consumer’s financial welfare.
We’re the first to empirically test how accessing budget standing information through FinTech apps affects consumer budget adherence. Through three field studies and two lab experiments, we show that having access to budget information (yes or no) can increase spending, particularly at the end of the budget period. We found out that consumers without access to budget information and tracked their expenses by memory did not overspend, whereas consumers regularly checking in with their budget apps ended up spending significantly more than the budgeted amount.
Having Access or Not, That’s the Question
We argue that this happens because having access to budget information increases consumers’ certainty about the money left in their budget. Their assessment of how much money is still available is an important factor in deciding whether to spend, and how much to spend. When it’s hard to remember, let alone calculate, expenses that have cumulated over time, consumers often feel uncertain about their budget standing. To deal with this uncertainty, they often build a “safety margin” to avoid overspending – and end up spending less than the budgeted amount.
Using FinTech to inform spending reduces the uncertainty about the money left in the budget. Consumers do not need to build a “safety margin” to stay within their budget, which allows them to spend up to the budgeted amount. This difference in certainty between budget app users and non-users is particularly obvious at the end of the budget period, when multiple expenses have accumulated over time, and the likelihood of breaking the budget is high. When consumers use FinTech apps to monitor their spending, increasing their certainty about the amount of money left, they spend more.
Six Interventions
To mitigate the acceleration of spending, we tested the effect of six interventions:
- The first intervention was to remind consumers that they can roll over the money left in the budget to the next budget period. Reminding consumers that they can do so, made the boundary of a budget period more flexible, decreasing their likelihood to increase their spending by the end of the budget period.
- The second intervention was to provide consumers with a range rather than precise spending information. For example, instead of displaying that consumers have spent €40 so far, we displayed a range (€20-€60). Decreasing the precision of budgeting information should decrease their certainty in money left in the budget. This in turn, reverses consumers’ tendency to increase spending at the end of the budget period.
- The next two interventions followed similar logic, making the budgeted amount rather than spending the amount less precise. In the third intervention, consumers were asked to add a small extra amount to their regular budget. In the fourth intervention, they were allowed to update the budget during the budget period.
- The fifth intervention empowered consumers to manage their budget over shorter budget windows. This may make the end of the budget period less salient, decreasing the room for spending.
- The sixth intervention tested if dividing one single budget into multiple small budgets will similarly decrease spending because there will be less money allocated to each individual budget.
Results and Implications
As expected, interventions (1) – (5) attenuated the spending acceleration. However, the last intervention – the one about breaking a big budget into multiple small budgets – increased total spending. We speculate that the last intervention did not work because consumers engaged in mental accounting by justifying overspending in one budget category, by optimistically thinking they will make up for it in the other categories.
Our findings have important implications for consumers, the banking industry, and FinTech app developers. From the consumers’ perspective, we show that, contrary to common beliefs, the use of budget apps can change consumer behaviour in unexpected ways. For example, it increases one’s certainty in money left in the budget, which actually leads to more spending over the budget period. We also show that the increase in spending happens when time progresses towards the end of the budget period. Consumers should realize this, and adopt FinTech more wisely. Perhaps they should consider strategically decreasing their usage frequency of FinTech devices later in the month, or using smaller budget windows to set aside bits of their budget.
From the FinTech sector’s perspective, we show that providing consumers with personalized information about their budget standing does not always help them achieve financial goals. We proposed five interventions to help FinTech apps better serve consumers’ financial needs, by changing the way personalized budget information is conveyed to consumers. Think of providing them with less precise budget information, allowing them to update their budget during the budget period, or reminding them that they can roll over the money left in the budget into next budget period.
Wider Implications
Our findings also have implications outside the contexts where consumers self-impose a budget to control spending. For example, banks may set a spending limit for consumers on individual accounts, and credit card companies have credit line limits. These limits are meant to prevent consumers from overspending, but may be perceived as the amount one is allowed to spend. Based on our research, if consumers treat these spending limits as their budget, they may end up spending more.
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