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Consumer penalty charges are rampant in many service industries, including banking and mobile phone services, and account for billions of dollars in “junk fees” that eat away at consumers’ wallets like termites each year.
These fines are typically the result of consumers being forgetful or underestimating their own forgetfulness, and spending-tracking technology, such as mobile banking apps that help monitor spending, has been a major advancement for people struggling to avoid these fines.
But a new study from experts in digital marketing and behavioral economics at the University of Illinois at Urbana-Champaign finds that the bottom line is mixed for consumers.
On the one hand, consumption-tracking technology offers the hope of providing consumers with an early warning system for potential fines. On the other hand, its availability may lull consumers into a false sense of security or “complacence” if they are only partially aware of their own forgetfulness, says Ying Bao, a business professor at the Gies School of Management.
“Consumers may be forgetful about past spending and have little understanding of their future forgetfulness; these characteristics make them more susceptible to fines,” she said.
The paper, published in the journal Management Science, investigated the impact of advances in consumption tracking technology.
The paper found that in many cases the availability of spending-tracking features helped consumers to the detriment of companies.
“Our analysis shows that availability of spending-tracking technology could directly help consumers by allowing them to use the technology to track their spending and therefore avoid fines,” Bao said. “Availability of spending-tracking technology could also indirectly help consumers, including those who don’t have access to the technology, by forcing companies to reduce or eliminate fines.”
But when consumers have only a partial understanding of forgetfulness, the availability of spending tracking may lull them into a false sense of security, making them “particularly vulnerable” to fines, Bao said, as they hope to use the technology to avoid fines but ultimately decide not to bother.
“In particular, if consumption tracking was not available, these consumers would have been more cautious to avoid penalties by refraining from spending in the first period in our model,” she said. “Thus, the illusion of security created by consumers’ access to technology may ironically make them more vulnerable to penalties while allowing companies to increase their profits through fees.”
Bao said the findings highlight the potential value of giving companies the means to accurately identify or measure how forgetful or savvy consumers are.
“We show that a company’s optimal service contract when consumers have access to consumption tracking depends on the consumer’s level of forgetfulness and their own self-perception of forgetfulness,” she said. “But even without precise measurements, companies may be able to roughly dynamically adjust penalties or subscription prices if they find that consumers are initially successful in avoiding fines when new consumption tracking technologies become available.”
Bao said companies’ ability to effectively adapt their service contracts and penalty clauses to these technologies will likely be enhanced by a better understanding of the forgetfulness and sophistication of consumers in their markets.
“Despite the relatively low costs of using consumption tracking, our analysis suggests that consumers may not adopt consumption tracking apps because companies strategically set the penalty fees low, leaving consumers with insufficient incentives to use the technology,” Bao said.
Another potential drawback, the researchers said, is that the use of spending-tracking technology could raise concerns among consumers about data security.
From a policy perspective, it makes sense to promote new spending-tracking technologies as a way to help forgetful consumers remember their past spending and reduce unnecessary fines. However, the paper finds that the effectiveness of such measures may not be so straightforward, considering both the costs of using such technologies and companies’ strategic responses.
“Overall, we see that consumers have to overcome many hurdles before they can adopt apps on a regular basis,” Bao said. “The potential benefits to consumers from advances in spending tracking technologies are limited until the costs of using these technologies drop significantly.”
Further information: Ying Bao et al., “Forgetful consumers and consumption tracking,” Management Science (2024). DOI: 10.1287/mnsc.2023.00522
Courtesy of University of Illinois at Urbana-Champaign
Source: Study: Consumption tracking technology is a mix of good and bad for consumers (July 15, 2024) Retrieved July 15, 2024 from https://phys.org/news/2024-07-consumption-tracking-technology-bag-consumers.html
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