How A Cashless Economy Could Cost You

by Catherine New

Easy, fast and lifting money right out of your pocket. The battle to own your digital dollars has been heating up as major technology companies, retailers and payment networks ramp up their mobile payment offerings.

Last month, both Google and Starbucks made announcements aimed at growing their programs. Google Wallet is now cloud-based and can be used with multiple credit and debit cards. Starbucks has partnered with Square to create a better way to pay directly from a smartphone.

But the rise in mobile payments may not be so good for the budgetary health of consumers, who could find themselves spending more as a result, academic research suggests.

"With credit cards, people don’t remember how much they have spent and they increase [their spending]," said Min Zhao, an associate marketing professor at the Rotman School of Management at the University of Toronto. "That should apply to mobile payments."

There is not much academic research on mobile payments and consumer behavior, since the technology is still only a few years old. Prior research on cash, checks and credit cards, though, has shown that people using credit cards are more likely to make more discretionary purchases because it's easier to ignore the impact on a personal budget.

And there are other, less obvious costs associated with mobile payments that add to your bottom line. The cost of a smartphone, data plan and fees, for example, all increase the cost of commerce for consumers.

Yet a cashless future is on the horizon. Within the next five years, less than a quarter of of point-of-sale purchases will be made with paper money, according to a recent study from Javelin Strategy & Research.

But there may well be a happy medium in the form of instant account balance feedback.

Zhao said mobile and electronic payment systems have the opportunity to help consumers' spending habit as much as they hurt it by using instant text messages or other alerts to check their account balance.

These alerts could help consumers make a more immediate connection between their spending and their available funds, ultimately leading them to make wiser budgeting choices. Many prepaid card programs and online budget management tools already offer the service.

The other part of the equation: Consumers are changing their own expectations. As one Square user told HuffPost Money earlier this year, paying a small transaction fee was worth the convenience of the mobile payment system.

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