How Apple Pay Could Become Consumers' Worst Nightmare

Source: Apple.

It's been a little over two weeks since revolutionary tech icon Apple (AAPL 1.27%) introduced a wide array of new gadgets for consumers. These include a newly updated iPhone 6 in two sizes, Apple's first wearable product, the iWatch, and perhaps the most intriguing announcement of all: Apple is finally entering the near-field communications (NFC) market with Apple Pay.

Apple Pay set to revolutionize payments?
What's Apple Pay? It's a method of potentially replacing traditional credit cards, which have antiquated security measures to protect consumers against fraud and are sometimes inconvenient to use. By utilizing an NFC chip and antenna, Apple will allow iPhone 6 owners to upload their payment information through iTunes and securely store it on an encrypted chip within their phone. To use Apple Pay, a user simply needs to hold their phone in front of an authorized payment device within a brick-and-mortar store and authorize the payment with fingerprint identification known as touch ID. For online transactions, touch ID is all that would be needed. 

Source: Flickr user Sean MacEntee.

Obviously, there are huge implications here for consumers, but it's nothing we haven't heard for the past five years from NFC chipmakers like NXP Semiconductors. NFC chips have the potential to make payments considerably more secure and convenient, depending on how many retailers and e-tailers jump on board. Considering that Home Depot (HD -1.77%) recently announced that about 56 million credit and debit cards may have been compromised due to subpar IT security, and Target (TGT -0.70%) confessed prior to the holidays last year that roughly 40 million consumers' credit/debit cards may have been compromised, the need for safer forms of payment is front and center. 

Yet as Apple Pay looks to set consumers up with a safer form of payment, it could simultaneously set them up for disaster.

Consumers' worst nightmare
According to NerdWallet, the assumption that consumers spend more when using plastic as opposed to cash actually has some merit. Because cash is a tangible item (once it's spent, you have less of it in your wallet), it induces a psychological effect on the user to be more cautious with their spending habits. Credit or debit cards don't have that same connection with the consumer, allowing for more frequent impulse buys.

Source: Flickr user John Henderson.

A study conducted by Dun & Bradstreet showed that consumers who paid with plastic spent an average of 12% to 18% more than cash users. Similarly, McDonald's reports that cash users spent an average of $4.50 per ticket in its restaurants, while debit or credit card users spent an average of $7.

Furthermore, a study conducted two years ago by Promothesh Chatterjee and Randall L. Rose deduced that consumers using plastic tend to place more emphasis on the benefits of a product than they do on its cost. 

While consumption is great for the U.S. economy, the introduction of Apple Pay could become a consumer debt nightmare if people spend more than they can afford because they're unable to make the same psychological connection that they have with cash in their wallet. And as fuel for the fire, in the fourth quarter of 2013 aggregate consumer debt increased by a whopping $241 billion to $11.52 trillion, the biggest quarter-to-quarter increase in more than six years.

But it gets worse...
On top of the fact that consumers don't have great restraint or understanding when it comes to their spending habits while using plastic, a majority of consumers can't simply be told to let their sense of financial literacy to guide them. Why? Because adequate financial literacy is sorely lacking in this country.

Source: Flickr user Helga Weber.

Based on the results (link opens PDF) of the 2014 Consumer Financial Literacy Survey, conducted by Harris Poll on behalf of The National Foundation for Credit Counseling, 32% of U.S. adults aren't putting any portion of their household's income into retirement savings; just 39% of U.S. adults adhere to a budget that keeps relatively close track of their spending habits; and, while a majority of respondents said they were saving the same amount as the prior year, just 29% said they were spending less. Translation: most people are doing a mediocre to poor job of managing their finances.

One of the biggest problems can be traced back to high school, where we should be preparing our youth for the real world. Part of the curriculum should be how to properly manage a bank account and develop a sustainable budget. However, studies by the National Endowment for Financial Education note that just 11% of teachers have taken a workshop on personal finance, with more than 60% commenting that they didn't feel qualified to teach students about financial management.

Is Apple Pay a gigantic debt domino?
To be fair, Apple Pay hasn't even been released yet. Therefore this is all speculation on my part that a device that draws on your bank or credit card could cause consumers to spend more than they would using cash. In other words, we should probably give Apple Pay some time to establish itself before making any genuine allegations one way or another.

However, it's still tough to overlook people's strong tendencies to spend more when it's convenient and to ignore the basics of personal finance. Nothing is a certainty, but it's possible that Apple Pay could turn out to be more of a burden than it's worth.