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7 ways smartphones will affect your money

January 03, 2012

| MoneyRates.com Senior Financial Analyst, CFA

The number of smartphones in the U.S. now exceeds 90 million. It's clear that these devices are rapidly changing the way Americans communicate, and it's likely they may soon change the way you handle money -- if they haven't already.

This may seem radical, but it's actually a natural progression. The way money is carried and transferred has evolved plenty of times before: from a coin whose value was carried in the amount of precious metal it contained, to a paper bill whose value was represented by a government's backing, to a plastic debit or credit card whose value was represented by a bank's willingness to honor transactions. In the information age, isn't it predictable that money should take on an increasingly electronic form?

Because of their popularity and ever-increasing capabilities, Smartphones are a natural medium for handling this electronic form of money. Here are seven ways these devices could change the way you handle your finances:

1. Increasing spending convenience

A smartphone can help you research a restaurant, make reservations for dinner, and then find your way there. It can perform similar functions when it comes to shopping for products. So why shouldn't paying for products or services be handled via the same device? Smartphone-based payment services such as Google's Wallet and ISIS, a cooperative effort by Verizon, AT&T, and T-Mobile, allow you to do just that by giving you quick access to your payment sources.

2. Making it more difficult to save

The commercial applications of smartphones are overwhelmingly geared towards helping you spend money, not save it. Increased access to your money or credit will make saving even more of a challenge, and Americans haven't exactly risen to that challenge as it is.

3. Empowering bank customers

While the saving discipline of smartphone owners will be challenged, those who are determined to use the devices to their advantage will find themselves with access to a critical tool: information. Already, smartphones can help you access websites such as MoneyRates.com, where you can compare CD, savings, and money market rates and shop for free checking accounts. Smartphones can also help you research a bank's regulatory standing on the FDIC's website. If smartphone apps progress to the point where they can allow customers to easily transfer bank accounts, the customers will be able to move their money freely to wherever the best banking terms are being offered.

4. Raising privacy concerns

Unfortunately, the more information you communicate via smartphones, the more personal details you will share with websites, Internet service providers, and telecommunication companies. This trade-off between convenience and privacy will become an increasingly significant matter.

5. Redefining currency

For years, local merchant communities have promoted regional currencies, such as Ithaca Hours in Ithaca, New York. Smartphones can further facilitate the use of alternative currencies, such as the wholly electronic Bitcoin. This will create new opportunities for people who choose to opt out of the mainstream system -- and new risks when they leave the protections that system provides.

6. Changing the risk of theft

The key word here is "changing." It would not be fair to say that smartphone-based payment systems either increase or decrease the risk of theft. They do, however, change the nature of potential theft. On the one hand, carrying around untraceable units of currency has traditionally made you vulnerable to being mugged. On the other hand, electronic fraud can occur without you immediately realizing it. Consumers will have to learn new precautions to protect themselves.

7. Creating regulatory challenges

It's not just that new ways of accessing and transferring money will require new regulation. Perhaps the biggest question is who will provide oversight when multiple industries converge into the realm of finance. When an Internet company such as Google, a telecommunications company such as Verizon, and a device-maker such as Apple all play a role in what were traditionally banking functions, who has regulatory jurisdiction?

Technologies such as smartphones have a way of drifting from expensive luxuries to lower-priced commodities as the technology behind them becomes more routine and competition takes hold. But telecommunications companies have a powerful incentive to avoid this transition when it comes to smartphone service, and incorporating money itself into those services may be a way of ensuring they won't be devalued.

So in the future, don't be surprised to find yourself reaching for your smartphone more often your wallet.

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