Successful companies aim to make payments as easy as possible and increase consumer satisfaction at the same time. Paying with debit cards and credit cards supports both these goals, because they reduce the pain of payment. However, research shows that a cashless society is detrimental for your personal money management at the same time. In order to improve your personal money management you need to find the right balance in your experienced pain of payment: not too much since you might be worrying about money constantly and not too little because you may spend too much.

Golden Behaviors

– Nudges for a Healthy Lifestyle –

Reading time: 9 minutes

I raised my daughter’s pocket money from half a Euro to a full Euro on her 7th birthday. I wanted one Euro coins so I could pay my daughter each Saturday, so I went to the bank where I retrieved a couple of rolls of 50 Eurocent coins from an automated coin machine (ACM) about a year ago. However, when I arrived at the main branch of my bank in the center of Haarlem, it turned out they had retired the ACM. They directed me to ACM at the local hardware store to retrieve Euro coins. There I could indeed retrieve rolls of 1 Euro coins from an ACM with a minimum of 10 rolls of 25 coins each. I would have enough Euro coins to pay my daughter’s pocket money for almost 5 years, so that seemed excessive. I felt disheartened, so I went to several stores to ask for ten Euro in coins, but the stores needed these as much as I did. So it turned out to be rather difficult to get my hands on coins.

So, why not just deposit one Euro on my daughter’s bank account each week? That would be so much easier for everyone. It would be easier for me, because I can automatically transfer the money and will never forget to do it. It would be easier for my daughter, because when paying with a debit card she does not have to do any calculations. However, is it detrimental for teaching and learning about personal money management, because of lack of payment transparency.

Payment transparency explained

Forms of payment that are further removed from physical currency are less salient. The more tangible payments are, the more psychologically painful it is for customers to spend. First, when using cash, it is easier to see that money is being spent (physical form) and second, since cash has to be counted and given, the amount is relatively memorable (amount). This pain of paying refers to the negative emotions we feel when making a purchase. This happens because as humans, we are loss averse: we want to avoid losses whenever possible, and losses are perceived to be more powerful than equal gains. With debit and credit cards, the salience of both the physical form and the amount is weaker.

Behavioral Scientist Dilip Soman had participants make photo copies either with a library photocopy card with $20 credit on it or $20 in the form of dimes that were rolled in four rolls of 50 dimes each. People using the photocopy library card made significantly more copies than people in the cash condition. He found similar results when he investigated people paying for their laundry. The laundry rooms of two major apartment complexes previously accepted coins, but had recently moved to a prepaid laundry card system. People spent more when apartment laundry rooms used laundry cards instead of coins. So if you are trying to reduce your spending, then physical money promotes better personal money management.

Drazen Prelec and Duncan Simester (2000) asked people to bid for a pair of tickets to a sporting event. These people were randomly assigned to buy the ticket the next day using either cash or credit card. The subjects in the credit card group bid up to 72% more for the tickets than those who were told they’d be paying with cash. They suggest to leave leave your credit card at home to reduce your spending.

Physical money is necessary for better personal money management

Payment transparency is why people on a budget find it easier to track their spending when they use cash instead of credit cards. The more painful it feels to pay, the less people will spend. In the Dutch television show Dubbeltje op zijn kant (a Dutch expression that indicates that something has only just gone right) that was aired from 2009-2019, the program makers came to the rescue of families who get into more financial problems each month. They search for the cause of the financial concerns and then look for solutions. One of the solutions was often that these families had to withdraw their weekly budget for groceries from their bank accounts, so it is easier to see how much money is being spent and how much is left for the rest of the week.

This is supported by research by Dilip Soman, that showed that people spend more money on treats and luxury in supermarkets when they paid with credit cards compared to when they paid with cash. The amount paid for groceries was the same for both payment methods, showing that people were more likely to be tempted by treats and luxuries when the paid with credit cards. Thus, physical money is necessary for better personal money management.

Companies reducing payment transparency

So it is no surprise that many companies want to reduce payment transparency to make it easier for people to spend their money. They do this by reducing friction in the payment process and encouraging the use of debit cards (in The Netherlands this takes the form of IDEAL payments). Preferably, these companies reduce the pain of payment and improve the overall experience at the same time. Amazon, for example, reduced both friction in the payment process and encourages the use of credit cards, with their one-click ordering. You are asked for your default payment method and shipping address once. Then you can order any item on Amazon with one click, reducing the pain of payment and improving our overall experience at the same time. Thus, improving payment transparency when shopping on Amazon would likely reduce your spending.

Casino’s also prefer chips over cash. The primary reason is because chips add a mental separation between the gambler and his valuable money. It’s a little easier for gamblers to place a big bet because it’s just chips. Therefore, players may already consider since it’s simply casino chips, it’s a little easier to place a larger bet. Players are also more likely to give tips to waiters bringing them free drinks in the casino’s of Las Vegas. Although the recommended tipping amount is one dollar, it is easy for gamblers to give them a poker chip instead. However, poker chips may easily represent five or ten dollars, which may seem small compared to other poker chips of 20, 25, 100, 500 dollars that a gambler may have. Thus, physical money would be better for personal money management in casino’s.

In The Netherlands, public transportation recently deceased both friction in the payment process and improved the overall experience at the same time. Up until January 2023 you needed to use a Chipcard to travel on the Dutch public transportation system. You needed to apply via the website, where you enter you name, address, birth of date, e-mail, telephone number, and a photo. You then need to pay the cost of 7.50 euros. After a couple of days you receive your Chipcard and have to transfer money to your Chipcard at the ticket machine at the train station (or you can enable automatic transfer on the website). From February 2023 onwards, you can also pay with your debit card, which most Dutch citizens already have. Travelers do not have to remember to recharge their Chipcards. This change makes it easier to use public transport, because paying with your debit cards reduces friction, increases satisfaction, and thus may increase your use of public transport.

Finding the right balance for your balance

So whether you are teaching your kids to handle money or want to improve your own financial skills, you want to increase payment transparency. You want to make it easier to see that money is being spent and make the amount relatively memorable. This is easiest if you pay with bills and coins, but other methods may also be helpful.

One method you can use is maintaining a low balance on your checking account. If you are aware of the low balance, you will be more likely to be aware of expenditures you make from this account. You need to find the right amount. You don’t want your balance on your bank account to be too high that large expenditures never exceed your spending limit. Not worrying about money would be detrimental to your personal finances. On the other hand you don’t want your balance on your bank account to be too low that you worry when shopping for your daily groceries. Because worrying about money would be detrimental to your health. So you find the right balance for your balance.

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Niels Vink (1975) is author of Golden Behaviors and behavioral designer. He uses insights from the behavioral sciences to explain why people often act against their own interests. As a behavioral expert, he explores how you can nudge your behavior for a healthy lifestyle. He has Master degrees in Social Psychology (Leiden University) and Industrial Design Engineering (Delft University of Technology) and holds a PhD in Consumer Behavior.

When you have been inspired to start and maintain your Golden Behaviors, reach out to me.

Source of top image: Photo by Cottonbro studio via Pexels


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