How Finance Apps Can Boost Savings

A new four-year study shows evidence of lower consumer debt among finance app users.

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Based on research by Bruce Carlin, Arna Olafsson, and Michaela Pagel
Photo by drew_dslr/Flickr

In the decade since the launch of the iPhone, personal finance apps from Mint to Wally have become ubiquitous, offering speed and convenience while promising to improve our overall financial well-being – but with little evidence to prove that users are really better off.

Until now. According to a new study from assistant professor Michaela Pagel, consumer finance apps can have a positive effect on our financial health. By spurring users to more closely monitor their credit and debit accounts, these apps can measurably reduce both financial fees and consumer debt.

“It makes sense,” says Pagel, co-author of the study published in May as part of the National Bureau of Economic Research Working Paper Series. “People pay more attention to their consumer debt, and therefore, they care more about reducing it.”

Pagel and her co-authors, Bruce Carlin of the University of California and Arna Olafsson of Copenhagen Business School, analyzed data on 13,411 people in Iceland who used the smartphone app Meniga, a software platform that lets people aggregate and manage all their financial accounts in one place. By comparing consumers’ financial data in the two years before and two years after adopting Meniga (which was introduced to Iceland in November 2014), the researchers could infer the app’s impact. 

The benefits were clear: Logging into Meniga at least one more time per month was associated with a decrease of $19.62 in bank fees and $15.47 in overdraft interest, which turned into a reduction of 5 percent in short-term unsecured high-interest debt. Each additional login was associated with approximately $2.24 lower bank fees per month and $1.77 lower overdraft interest.

“The effect we document represents a small but economically meaningful change, especially for lower-income households,” according to their paper, called “FinTech and Consumer Well-Being in the Information Age.”

The researchers found some differences in app usage between generations and genders, but without clear implications. The results stand in contrast to studies that have exposed a negative side to some finance apps; a recent report from George Washington University found that millennials’ usage of mobile payment apps was associated with overspending and higher credit card fees.

Pagel and her co-authors focused on Iceland because it’s virtually a cash-free society, which makes it easier to track consumer spending than in a country such as the US, where a third of all financial transactions are in cash. The authors say the study’s takeaways still carry over to the US, which has similar levels of per capita consumer debt.

“There may be a psychological mechanism whereby accessing info about your consumer debt more frequently changes your spending and savings patterns.” Pagel says. As an analogy, think about physical health: Obesity researchers and dietitians often recommend stepping on a scale frequently to reduce or maintain one’s weight.

In a previous paper, Pagel found that people who frequently monitor their retirement portfolios end up less happy, agonizing over each market up and down. She suspects something similar could be happening here: after all, in a related study, Olafsson and Pagel found that individuals log in less after spending heavily or when they hold greater consumer debt relative to their own histories.

However, “the app isn’t making people log in,” Pagel says. “It’s just making accessing the information about personal finances less costly. Nobody is forced to look at their consumer debt. But because people log in more in response to the app, they reconsider some of their spending habits and try to reduce their consumer debt, and that seems like a helpful thing rather than a harmful thing.”

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