Apple Pay could make you poorer

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Apple Pay could make you poorer



Cass R. Sunstein

The new Apple payment system has extraordinary promise. With Apple Pay, you might not need a wallet, and you can leave your credit and debit cards at home. In terms of ease and convenience, payment cards represented a big leap from the era of cash. Apple hopes its system will be a comparable leap from the era of cards.

Skeptics have focused on questions of security and privacy, but prospective users might want to pause over a different problem: When payment becomes easier, and when people don’t see the money they’re handing over, they tend to spend a lot more. And as payment becomes more automatic, people become less sensitive to what they’re losing. Apple Pay users might find that their thinner phones are making their bank accounts thinner as well.

A little social science: People who use credit cards tend to give bigger tips at restaurants and spend more at department stores. They are also more likely to forget, or to underestimate, the amounts of their recent purchases.

A study in 2001 by the Massachusetts Institute of Technology’s Drazen Prelec and Duncan Simester found that people pay a substantial “credit-card premium,” meaning a higher expenditure for a given good simply because they are using a credit card rather than cash. Their experiment showed that the premium may be as high as 100 percent, at least when the market price of the good is uncertain (such as tickets for a sold-out sporting event). Even for ordinary goods, where market prices are easy to find, they found a credit-card premium of as much as 36 percent.

You might think that credit cards are special, because people are essentially borrowing money. Maybe the credit-card premium is a product of the time lag between consumption and payment. But a study in Denmark, made public this year, finds that when university students use debit cards rather than cash, they are willing to spend significantly more on coffee and beer.

Might electronic payments affect pricing decisions by sellers as well? MIT’s Amy Finkelstein found in 2007 that when toll facilities use electronic collection, toll rates end up significantly higher. Adoption of electronic collection produces a 20 percent to 40 percent increase in rates, apparently because payment is less salient to drivers.

To be sure, electronic tolls are even more automatic, and less visible, than what Apple has in mind. But it is a safe bet that there will be an “Apple Pay premium.” And if payment-by-phone turns out to be as convenient as Apple hopes, or even fun, that premium might be even higher than the credit-card analogue.

Of course, convenience matters, and all things considered, Apple Pay will probably be a great boon. But a warning for prospective users: When consumers don’t use cash, and when payment is simple, they often ending up spending a lot more than they otherwise would - and regretting it later.

* The author, the former administrator of the White House Office of Information and Regulatory Affairs, is the Robert Walmsley university professor at Harvard Law School and a Bloomberg View columnist.

BY Cass R. Sunstein

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