The psychology of paying

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A wad of cash – once cherished by some as the ultimate symbol of wealth – is losing favour as we move to an increasingly cashless society.

In 2006, 62% of all payments in the UK were made with cash, but that was down to 40% by 2016 and is predicted to fall even further – to 21% – by 2026, according to the trade association UK Finance. It said that, in 2018, debit cards overtook cash as the most frequently used payment method.

Contactless cards were introduced in 2007 and these payments have subsequently become increasingly prevalent – but does a different payment choice affect the way people spend money?

This has been studied by Hong Kong-based academics Eric See-To and Eric Ngai, who considered four main areas: spending behaviour; the psychology of consumption; perceptions of payment technology; and the payment mechanism. In their empirical study, they looked at spending among people in supermarkets across three types of payment: cash, credit cards, and stored-value, contactless smartcards.

In previous research, the source of money (cash, bank account and so on) and the payment process have both been shown to influence spending. For credit cards, it’s not clear whether it is the payment process – the absence of cash – or the source of credit card money – the credit factor – that affects spending. In their paper, the authors point to real-world data showing that the mere expectations of a specific payment by credit card can elicit significantly higher spending than an expected cash payment.

The researchers chose supermarket purchases for the study because they are frequent and, invariably, for ‘lower involvement’ items. Infrequent and/or high-price items complicate the purchasing process.

The research involved real transaction and survey data collected through six large supermarkets in Hong Kong. In total, 1,200 people took part in the survey, with the data collected based on their receipts post-purchase.

People’s perceptions of security and convenience are central factors in what method of payment is chosen. See-To, who is research assistant professor at the Department of Computing and Decision Sciences, Lingnan University, Hong Kong, says: “All things being equal, people will choose a payment method with higher security, especially for higher-value items.

“The effects are not as strong for lower-cost items, and perceived convenience may overcome security concerns. Our research shows that the contactless payment process has a negative effect on perceived security and a positive effect on perceived convenience. The credit card payment process – as people are already very familiar with it – has no effect on perceived convenience, but does make people feel more secure with a signature required.”

They found that people tend to spend more when they pay with a method that postpones payment (cards), than when they pay immediately (cash). “The delayed payment will lower the subjective painfulness of the payment process, and so is associated with a higher willingness to pay/consume,” adds See-To.

The research also found that credit card payments result in a weaker memory of purchases made. So does that mean people are more reckless with credit card spending? “Yes, we think so. A weaker memory is one factor leading to more spending. The memory issue translates into a less accurate mental account of one’s wealth, and that may lead to less-than-optimal personal financial management.”

One factor that comes into play when paying for something is ‘memory error’ – the difference between the real amount spent and someone’s estimate – which measures the objective accuracy of the person’s memory of the transaction.

When it comes to the psychology of consumption, most people don’t like parting with their money, although the ‘pain of paying’ varies with the payment technology.

This research found that the payment mechanism doesn’t affect memory error, but it does affect preciseness – which is related to people’s awareness of spending. A lower level of either preciseness or memory error can decrease payment pain. The payment process can moderate payment pain, but the source of money can’t.

The source of money also doesn’t affect perceived payment convenience and is not related to spending behaviour.

As we move towards a cashless society, what are the implications for retailers and financial services organisations? “Retailers should be aware of the moderation effects of the cashless payment process on consumption when formulating their strategies towards different payment options. With the move towards cashless, as part of a bigger trend of fintech applications, financial services organisations should be aware that there may be additional and different credit risks to be managed.”

The study also has practical implications for banks, says See-To, who believes they should focus on simplifying the payment process, instead of giving more credit or lending (both are related to the source of money).

“While the source of money may increase the budget of consumers, it may also lead to overspending. The simplified payment process, instead, can stimulate spending without increasing consumer credit through the source of money.”

People may think that the source of money is what will most affect spending behaviour, but the payment process is more important, adds See-To, as it is that which moderates the pain of payment, and hence the willingness to pay.

‘An empirical study of payment technologies, the psychology of consumption, and spending behaviour in a retailing context’, Eric See-To and Eric Ngai, Information & Management, 2018

This article was first published in Issue 25 of Impact.