Personal finance apps centered around budgeting and spend tracking have been rising in popularity since software such as Mint was made available in 2007. With the goal of helping consumers increase the amount of money on hand for emergencies by creating budgeting goals and consciousness around daily spending, these apps set out to improve the financial standing of users. However, recent studies have found that people alarmingly tend to save less when engaging these apps.
In 2017, the ‘Report on the Economic Well-Being of Households’ found that only 55% of American households were able to cover one month of income with money saved, while 41% would not have $400 on hand in case of emergency. As a result, the number of fintechs and financial management services provided by banking institutions grew to quickly resolve this issue. The number of consumers intending to use these services in the future grew to 65%. But what was found afterwards went against the good intentions of these financial management apps.
Research by the Think Forward Initiative shared that these apps elevated a person’s perception of their perceived spendable income after budgeting. In conjunction with the ability to see the amount of money left over after budgeting, is the fact that people tend to spend more when they see that they have excess cash on hand. As a result, spending increased from people whose apps gave them a visible amount of money they had on hand after monthly expenses. In fact, 25% of people who used their phones to track daily spending were found to have overdrawn accounts. This is in comparison to the 20% of people not tracking spending on their phone.
Speaking on this phenomenon, Assistant Professor of Marketing at the Eller College of Management at the University of Arizona said, “Presenting users with a specific amount of money left to spend, frames it as a spending ‘goal’ which users feel they can ‘reach’. In simple terms, people tend to spend more when they are confident there is money left in their budget.” The Think Forward Initiative conducted an experiment that validated this observation, proving that people who used fintech to manage their finances would often increase spending.
However, the study did provide a proposed solution. Of the three test groups (used a fintech, didn’t use a fintech, and used a fintech that offered a reminder to roll over excess money), it was found that users of fintechs who were reminded that they could roll over their money to increase their savings did so successfully.
The study raises a clear responsibility for fintechs within this space to build in gentle reminders and design functions that encourage saving against the natural inclination to spend what’s left over at the end of a budgeting period.