In a new working paper for the National Bureau of Economic Research, Gies Business Professor Jialan Wang examines the extent to which autopay affects payment behavior for customers of a credit card serviced by a fintech company. Her study – one of the first rigorous studies of autopay and its impact ­– demonstrates that a small nudge to consumers can increase autopay enrollment. This enrollment could have an important impact on consumers’ credit outcomes.

Developed over two decades ago, autopay technology has become ubiquitous for use with credit cards, and many companies nudge customers to set up autopay. These nudges are messages sent to card customers encouraging them to set up autopay, often with streamlined processes for setting this up.

Wang found that these types of messages are very effective. “Human beings are very subject to nudges,” said Wang, an associate professor of finance. “If you are nudged – a small reminder that puts another screen on your cell phone – these nudges will double the rate of enrollment in autopay, going from 20% of the population to 40%.” 

In her paper, "To Pay or Autopay? Fintech Innovation and Credit Card Payments," Wang wanted to examine why people may or may not choose to enroll in autopay, and what impact this technology could have on their finances. Autopay does have benefits for the consumer. A primary one is to help ensure that consumers do not miss a payment – and avoid the late fees that could accompany these missed payments.

While eliminating missed payments and late fees is certainly a benefit for consumers, the autopay systems usually offer only two options: make the minimum payment or pay off the entire amount. Wang found that the vast majority of consumers in her study who used autopay fell into one of these two camps: the minimum or the full amount. A much smaller percentage were found somewhere in the middle of those two extremes – which would require an additional manual payment on the part of the consumer.

This is where autopay can become a double-edged sword.

“If you use this convenience feature, it makes it less likely for you to pay your credit cards late,” Wang said. “But the research shows that you are more likely to just pay the minimum payment. And if you’re not paying off that full amount every month, you are going to accumulate interest and potentially rack up more and more debt over time. So essentially, it shows that there are pros and cons when it comes to this technology.”

But because this technology has been around for so long, it has become fairly entrenched in people’s financial activities. As Wang explains, it may not be top of mind for consumers or the credit card companies to update their autopay settings. But perhaps now is a good time to change that and start looking at ways to improve this service.

“This is a technology that was invented decades ago. Let’s see how we can improve the technology to help consumers. Let’s not just offer minimum and full payment options. Let’s offer an intermediate option. More features and more interactivity.”

It could be as simple as offering more options for autopay beyond just the minimum payment or the full payment. Or perhaps financial institutions could develop technology to remind consumers when they have extra money in their account and may want to pay more on their credit card to pay down the debt more quickly.

“That’s one purpose of my research – to nudge banks,” Wang said. “To say, ‘Hey, consumers are really impacted by this technological feature. We invented this decades ago. Let’s revisit this technology and make it better.’”

Wang has been doing some nudging of her own – trying to make the case to industry for the need bring potential improvements to autopay technology onto their radar. She does this at conferences where she is able to discuss her research and results with people from financial institutions. She has had positive responses to her work and has been invited to present her research at banking institutions and financial regulators.

As a practical suggestion for consumers, Wang said, “What I found in related work is that pretty much anyone with a credit card can change the due date of the credit card at any time. If you make your due date on your credit card the same day or a few days after you’re paid – e.g., if you get paid once a month or twice a month – you’re going to be paying fewer late fees and may be able to pay down more of your balance over time. Your finances are going to be better off, and it helps with your budgeting.”