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Pay with Your iPhone? Bad Idea

I'm all for smart ways to enhance our personal finances through the use of technology. From online bill pay to automatic deposits to coupon apps and online budgeting tools like Mint and Bundle, technology can help make our financial lives incredibly more efficient.

However I'm a little worried about a new technology that, despite some potential conveniences, could entice us to spend more than we should. It's called Near Field Communication, or NFC, and it's a chip that allows you to pay for items directly with your cell phone. It already exists in Japan and will soon be entering the U.S. market.

AOL's DailyFinance reported a couple of months ago that Google's upcoming "Nexus S" Android phone will have the chip. And just this week, reports said Apple plans to introduce NFC in the next-generation iPhone, as well as the upcoming iPad 2.

What this means is that one day, not too far in the future, those of us with NFC-enabled smart phones will be able to make purchases by touching or waving our phones near a payment terminal. Some even predict people will be less likely to carry wallets once they have NFC-enabled smart phones. (Though I'm not sure where we'd put our driver's licenses, transit passes and change for the vending machine at work.)

Still another implication is that we'll use less cash for day-to-day transactions. And you know what that triggers: more spending. Studies already show that paying with a credit card leads to higher spending than paying with cash. That's because credit card purchases are relatively painless, as behavioral economists say. You're not pressured to think twice before spending, since the cash isn't actually leaving your wallet.

And get this: Citibank ran a little NFC experiment in Bangalore and found that "the number of transactions by customers using the NFC-installed phone were about six times what they would make with a card, which suggests that the contactless payments were replacing either competitors' cards or cash transactions." Sure, that's possible - but it may also suggest that these participants were spending more money in general.

NFC is going to change the face of electronic payments, no doubt. I understand it's convenient and in Japan, where it's already commonplace, consumers love it. But for the love of saving, I'll stick to what's in my wallet. Not to mention, as fellow MoneyWatch blogger Carla Fried writes, paying groceries with cash increases my chances of weight loss. Yes!

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