Can we really build financial understanding in a digital world?

HomeBlogCan we really build financial understanding in a digital world?

Digital money, digital transactions...

Like all good ideas, this one started with a conversation and a glass of wine… 

Because of the #TeenageTakeover when I’m out and about lots of people ask me how Luke is and tell me how very impressed they are with his work, maturity and understanding of money…

Now, as much as that makes me swell with pride because he is pretty awesome. He’s just a kid who has already clocked up a few financial faux pas…

His biggest one was in lockdown… he was merrily getting his £40 per month pocket money. The idea being that he earnt it for various chores and then was able to buy his own ‘extras’ and he would have to choose whether to spend or save.

As it was lockdown this grew into quite a healthy sum as he had nowhere to go and no way to spend it… or so I thought. Imagine my surprise when he asked me to pay for a new subscription for an online chess app he wanted! After a few questions, an open of the banking app it turns out he’d managed to spend in excess of £400 on online gaming… and no, not in small increments that built up over time and ran away with him. In 2 transactions! There is pretty much a novel in how that evening unravelled… but that’s not the key bit I want to talk about today…I want to dive into building financial understanding in a digital world.

A digital mirage

We live in a world dominated by digital transactions and virtual wallets, expediated by Covid, and it’s hard to deny the convenience of digital money. But as we seamlessly transition to a cashless society, should we examine the subtle, but impactful ways in which the digitalisation of money might hinder our financial awareness?

As a marketer (in the pensions world) I know only too well how hard it is to get people to feel connected to something intangible. When we don’t have cash in our wallets (that goes down once we spent it) it can obscure the reality of spending.

When I was young…

Many moons ago when I used to hit the town on a Friday and Saturday night my budget was set. I went to the cash point, took my £50 out (usually had a hidden tenner in a secret pocket from my Dad ‘just in case’), but that was that. I went to the bar, the chicken burger shop and the bus stop. Once it was gone it was gone. And at various points in the evening I’d be able to see at a quick glance how much (or little) I had left.

Youngsters today…

The kids of today don’t seem to go out as much, but without physical cash, leaving their hands, I wonder if digital transactions have the same psychological impact? Tapping a card or clicking a button to transfer money creates a disconnect between the action and its financial consequence. So it’s easier to overspend without immediate awareness.

The value of money

This disconnect between the action and consequence makes it harder to place a value on money. Let me give you an example, if Luke had forty £10 notes in his wallet and had to hand over half of them in one go, would he have been so quick to hand over the other half?

Yet, the effortless gesture of pressing a button (or tapping a card, or even your watch) doesn’t give the same mental association between the amount spent and its equivalent in goods or services weakens.

Keeping track

Then there is the very practical bit about simply keeping on top of what you’re spending and when. Automated payments, subscription services, multiple online banking apps and in-app purchases often operate discreetly in the background. Great from a personal admin perspective, but not ideal from a money management and budgeting view. 

Without the tangible connection of spending and a complex, app-led view of finances I worry we are creating the perfect situation for less control and more debt? 

Ultimately, the convenience of digital money also comes with the risk of losing track of expenditures which isn’t a healthy starting point for building financial understanding and resilience.

Blending behavioural science and digital money

When we look at behavioural science principles, (which I absolutely love to do) there’s a few areas where we see why the digitalisation of money might mean more people struggling with finances.

Loss aversion: This principle is why we tend to feel the pain of losses more acutely than the pleasure of gains. (Why volatility can cause negative behaviours in members and why many end up crystalising at the worst possible time.) With a digital transaction, the lack of physical cash leaving your pocket reduces the perceived loss associated with spending. When this ‘pain’ is reduced, it could contribute to overspending without the immediate awareness of financial consequences. Exactly what I think happened with Luke.

Psychological distance: Removing the physical transaction also creates psychological distance between the act of spending and its consequences. The more removed an action is from its immediate impact, the less likely we are to consider its long-term effects… it’s why seemingly easy to fix green issues like plastic pollution are still a problem. The impact isn’t immediate.  

Default bias: So many digital purchases come with default settings for automatic payments, suggested service amounts or length of commitment. Behavioural science tells us that we stick with default options – great for sales, less positive for consciously managing our money.

Choice overload: Whilst there are good budgeting tools available, there’s a lot of them, leading to decision fatigue. When we have too many choices we struggle to make any choice at all, especially an informed one. Another reason so many people remain in the default fund – even those who actively engage.

Delayed feedback: As a species we learn and adjust behaviour best with immediate feedback (or consequence). The pan’s hot – we usually only try it once! The delayed impact (feedback) of digital spending, which is similar to the psychological distance makes it hard for us to connect spending habits with financial consequences.

We learn from mistakes…

I know we all learn from mistakes, but we need to be in a position to recover from them. My worry is that there is potential for things to go very wrong with digital spending and very quickly. With so much data in the palm of our hands I would like to see the digitalisation of money become a tool of empowerment for us (our kids especially), rather than a veil that obscures financial reality and makes banks huge profits on borrowing and debt.

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