Mobile payments amplify financial overconfidence and risky borrowing

Mobile payments were identified as a statistically significant moderating factor in this relationship. Users of mobile financial services were nearly twice as likely (odds ratio: 1.90) to engage in high-cost borrowing than non-users, even after controlling for income, education, age, and other socioeconomic variables.

A recent study published in FinTech reveals that the growing use of mobile payments (MPs) significantly increases the likelihood of financially overconfident individuals turning to high-cost borrowing services, such as payday loans and rent-to-own agreements. The research, based on data from 26,017 U.S. adults in the 2018 National Financial Capability Study, highlights mobile financial technology's unintended consequence: it amplifies poor financial decisions among users who overestimate their financial acumen.

The peer-reviewed study by Isha Chawla of the University of Wyoming and Manouchehr Mokhtari of the University of Maryland found that individuals who rated themselves as financially knowledgeable, but lacked objective financial literacy, were 29% more likely to use alternative financial services (AFSs) than those who acknowledged having limited knowledge. Critically, when these overconfident individuals also used mobile payments, their odds of using high-cost borrowing options surged by 94% (odds ratio: 1.94).

Titled "Financial Overconfidence and High-Cost Borrowing: The Moderating Effect of Mobile Payments," study employed logistic regression modeling to assess how financial confidence, defined through combinations of subjective and objective financial knowledge, interacted with mobile payment usage to predict engagement with AFSs. Researchers categorized users into four groups: appropriately low confidence, appropriately high, overconfident, and underconfident. Overconfidence was defined as individuals who believed they had high financial knowledge but scored low on objective assessments.

Mobile payments were identified as a statistically significant moderating factor in this relationship. Users of mobile financial services were nearly twice as likely (odds ratio: 1.90) to engage in high-cost borrowing than non-users, even after controlling for income, education, age, and other socioeconomic variables.

The researchers attribute this effect to two behavioral finance concepts: bounded rationality and pain of payment. Bounded rationality suggests that individuals make suboptimal financial choices due to cognitive limitations. The “pain of payment” theory posits that digital and contactless transactions feel less painful than cash spending, leading to more impulsive decisions.

The study’s findings were robust across demographic groups. Young adults aged 18–24 were over four times more likely to use AFSs than seniors over 65. Non-white respondents and individuals with lower education and income levels also showed higher rates of AFS usage. Importantly, even after adjusting for these factors, the combined effect of overconfidence and mobile payment usage remained statistically significant.

Individuals with low objective knowledge but high self-assessed confidence, the overconfident, had a 1.29 times higher chance of using high-cost financial services. But when mobile payments entered the equation, that number rose to nearly 2 times the baseline.

The study suggests that app developers and FinTech companies could integrate real-time financial literacy prompts into mobile payment systems. For example, alerts or nudges could appear before completing a transaction, particularly for users frequently engaging with high-interest lenders.

The authors also recommend that policymakers consider regulating mobile financial platforms to increase transparency around AFS costs. For instance, disclosures on annual percentage rates and long-term cost estimates could be made mandatory within mobile loan applications.

The research highlights broader systemic issues. Disabled individuals, people without college degrees, and minority groups showed disproportionate use of high-cost borrowing, reflecting both access challenges and cultural attitudes toward mainstream financial institutions. This raises concerns about equitable financial inclusion, especially in an era when traditional banking services are retreating from lower-income communities.

While overconfidence increased AFS usage, the study also found that underconfident individuals, those who underestimated their financial knowledge, were less likely to engage with AFSs. This suggests that humility in financial self-assessment may be a protective factor against predatory lending.

The researchers caution that their findings are based on cross-sectional data and cannot establish causality. However, the strength and consistency of the observed relationships indicate a meaningful association worth further exploration.

Future research, the authors say, should examine the impact of the COVID-19 pandemic on mobile payment behavior and financial vulnerability. Additionally, expanding the dataset to include international comparisons could uncover whether similar dynamics exist in other cultural and regulatory environments.