Millennial Financial Literacy and Fin-tech Use: Fin-tech and personal finance outcomes

One might view fin-tech as a tool that provides convenience, but one that also has the potential to improve personal finance decisions and behavior. It could then promote better personal finance outcomes. But the dynamic is more complex and nuanced, especially when viewed at the level of separate fin-tech activities. One could readily develop a narrative where some fin-tech activities result in poorer financial outcomes, at least for some individuals. For example, consider the ability to make mobile payments at the point of purchase. This convenience creates another degree of separation from handing over cash (now an individual does not even need to open a wallet to remove a debit or credit card), and in doing so it could increase the likelihood that some individuals overspend. 

Two fin-tech activities—one transactional and one informational—were analyzed to provide insight into the connection between fin-tech use and personal finance outcomes. The transactional use is mobile payments. The informational use is tracking spending. As mentioned above, smartphone use to make mobile payments could hurt the personal finances of some individuals. On the other hand, using a smartphone to track spending would seem likely to improve financial outcomes by helping individuals to not overspend.  

Mobile payment users

The allure of mobile payment apps, such as Google Pay, Apple Pay and Samsung Pay, is that they facilitate and speed the point-of-sale transaction. Mobile point-of-sale payments totaled over $70 billion in 2017 and are forecast to reach approximately $370 billion in 2022. The number of users is expected to grow from almost 50 million in 2017 to 90 million in 2022.   

The 2018 P-Fin Index survey asked respondents whether they use their smartphone frequently, sometimes or never to pay for a product or service in person at a store, gas station, or restaurant. It cited as examples waving or tapping their mobile phone over a sensor at checkout, scanning a barcode or QR code, or using some other mobile app at checkout. As previously noted, 40% of Millennials with a smartphone used it (frequently or sometimes) for mobile payments. 

Overdrawing one’s checking account is a negative personal finance outcome indicating some degree of financial mismanagement. Almost 30% of millennials who use their smartphone to make mobile payments reported overdrawing their checking account. By comparison, 20% of millennials who do not use their smartphone to make mobile payments have overdrawn their account (Figure 9). Regression analysis finds that this relationship between mobile payment use and overdrawing one’s checking account holds even after allowing for the effect of other factors such as gender, income, education and employment status (Appendix Figure A6). This is consistent with previous research which found that millennial mobile payment users are more likely to engage in poor personal finance practices.   

This correlation does not necessarily mean that fin-tech use increases the likelihood of a poor personal finance outcome. It’s possible, for example, that individuals who are more likely to overdraw their checking account to begin with are also more likely to choose mobile payments. Nonetheless, this finding points to the importance of studying fin-tech use in more detail, in particular among heavy users such as millennials.

Millennial P-Fin Figure 9

Using mobile to track spending

As previously noted, over 70% of millennial smartphone owners use their device (sometimes or frequently) to track the amount they spend and what they spend it on. One would expect this fin-tech activity to improve cash flow management and thus personal finance outcomes. In particular, it should decrease the likelihood of overdrawing checking accounts.

However, millennials who use their phone to track spending are not doing better in this regard. More specifically, one-quarter of those who track spending with their smartphone report overdrawing their checking account compared with 20% of those who do not track spending via their smartphone (Figure 10). It should be noted that this difference is not statistically significant. Even after accounting for other factors, this finding does not change; i.e., those who use their smartphone to track spending are not less likely to overdraw their checking account (Appendix Figure A7). 

Millennial P-Fin Figure 10

The link with financial literacy 

Understanding the separate contributions of financial literacy and fin-tech to personal finance outcomes is of particular interest, as is understanding how they interact and impact outcomes. Fin-tech and financial literacy are likely best viewed as complements. Financial literacy has been shown to improve personal finance outcomes.  Here it appears that financial literacy also might mitigate the effect of mobile payment use on checking account overdrafts (Figure 11.) 

Millennial P-Fin Figure 11
Millennial P-Fin Figure 12

The ability to measure financial literacy across eight functional areas enables a more nuanced look at the interplay between financial literacy and fin-tech use, such as mobile payments and tracking spending. Interestingly, the functional knowledge that is significantly linked to the use of smartphones to track spending differs from the functional knowledge linked with mobile payment use. On one hand, the data show that millennials who are more knowledgeable about the earnings and savings questions are more likely to use their smartphone to track their spending. On the other hand, individuals who are more knowledgeable about borrowing are less likely to use mobile payment applications.

These findings again show that fin-tech services attract segments of users who have different needs and characteristics.

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