The Pain of Paying and the Perfection of Consumption

Debit cards. Credit cards. Loyalty cards. Cash. The modern wallet contains more and more means that help us to spend money easily. This is supported by innovations that aim to make the traditional wallet redundant, sooner or later – ultimately driven by the idea that spending money should not only be relaxed and easy, but also fun. Learn how the pain of paying can affect your spending.

You wouldn’t necessarily think that the way we buy and pay for products and services is significant. After all, most of us consciously make purchase decisions and keep our expenses under control. Many economists, however, consider the “how” very significant:  they have found that when we pay by card, we often spend more money in shops than we had planned. And that’s not all: even our purchasing behaviour can change to a certain extent, leading us to make impulse purchases. But why?

If you keep an eye on yourself whilst shopping in-store, you will realize that 100 euros in cash is more tangible than 100 euros that you pay with a debit or credit card. In 1998, scientists at the Massachusetts Institute of Technology’s Sloan School of Management (MIT Sloan) observed this effect for the first time and found in comprehensive studies that paying in cash triggers activity in the insula, a brain region associated with negative feeling and pain. Paying with credit cards actually reduces this activity, or even keeps it silent. The pain of paying, as the American economist and psychologist George Loewenstein puts it, is thus visibly influenced depending on the payment method: the physical act of spending money, i.e. handing over the money from one’s own hand and separating from it, has a much stronger psychological effect than cashless payment, where this pain only begins much later. However,  the strength of this negative feeling does not depend on the absolute amount of the purchase sum, but rather much more on the benefit associated with the purchase. In a nutshell, the less useful the purchase was, the more intense the sense of loss and the greater the pain of paying.

“There’s something schizophrenic about credit cards.” (Drazen Prelec, MIT)

“There’s something schizophrenic about credit cards. On the one hand, people seem to feel better if they buy something with a credit card, but they feel much worse when they have to pay the bill. Credit cards really disconnect your mental accounting systems,” said Drazen Prelec, Professor of Management Science and Economics at the MIT Sloan School of Management.

Despite its apparent routine nature, payment is far from being a dispassionate affair. According to Knutson, Professor of Psychology and Neuroscience at Stanford University and Director of the Symbiotic Project on Affective Neuroscience, the less visible or tangible the consumption of resources is, the more likely the pain of paying will vanish. Although the precise feeling of this pain varies from person to person and does not occur with every payment, the phenomenon is basically an important self-regulating mechanism and can help us avoid living beyond our means. Nevertheless, in several European countries there have been discussions about abolishing cash for some time, due to advancing digitisation. What changes could occur to consumer behaviour if the only payment forms accepted at checkout are plastic money or mobile? Will a penny-pincher become a spendthrift as soon as the pain ebbs away?

Our payment methods have been in a state of continual flux since the earliest times. However, in the last two decades the payment behaviour of customers has changed dramatically with advancing digitization. Today, both consumers and merchants expect processes that enable faster and easier payment for goods and services. Smart payment, where payment is handled by contactless mobile apps, has become a standard, especially for the technology-savvy generation, and is also gradually gaining the trust of older generations. Cashless payment is therefore becoming more and more popular. Despite numerous payment methods that have already been fully digitized, the trend will continue to develop one step further in the coming years. What awaits us in the future of payment? Eye scans and fingerprints? Further integration of payment methods into portable technology should not only further digitize, accelerate and simplify payment processing, but also offer customers a consistent, seamless experience throughout the entire purchasing process.

Consumers may pay more attention to the benefits of the purchased product than to the actual costs when paying through smart payments. According to Dilip Soman, Canadian Research Director for Behavioral Sciences and Economics, payment methods and their transparency actually influence consumers’ purchasing behavior, so that the number of impulse purchases increases and budgets are more frequently overrun (Soman, 2003). In view of the future direction of technological development, there will presumably be more and more means of payment that make the consumption of resources less tangible. Thus, the pain of paying is more likely to be numbed and may lead to overstraining one’s budget without directly triggering negative feelings.

It is common knowledge that creating budgets and installing guardrails for oneself, for instance only using cash and carrying just the amount one wants to spend, are good ways to resist impulse buying and are ultimately worth the payoff. Yet they often remain just a plan. A set of guesstimates. With today’s advanced financial technology and innovation, the pain of paying is continually diminished, and the topic of saving can quickly recede into the background. So what is the best way to reduce the competition between saving and spending and make the most of one’s money?

To answer this question, it is worthwhile to look again at behavioural science and in particular at the theory of “nudging.” A term stamped by the economist Richard Thaler and the legal scholar Cass Sunstein in their book Nudge: Improving Decisions About Health, Wealth, and Happiness, “nudging” refers  to gently prompting someone to move in the right direction to achieve a desired behavior, whether conscious or unconscious. It is comparable to a little push in the right direction. The “nudge” principle thus supports a kind of beneficent manipulation of consumer decision-making processes and the change of their economic incentives. Although Thaler was awarded the Nobel Prize in Economics in 2017, his “nudge”concept has encountered much criticism. Should people really be pushed, especially by the state, to behave in a particular way? Is that too intrusive and infantilising ? Do we really even always want to adjust our behaviour to follow a scientist’s advice? The debate about Thaler’s implications is still ongoing.

As far as saving is concerned, the “nudge” principle suggests that strict conditions, such as picking a certain percentage of your income to set it aside, may not work. Instead, we should find specific solution to change our undesirable spending behaviours in a way that it feels unobtrusive and natural.

Saving must thus be just as convenient as consuming. Deposit platforms like Raisin.ie are a first step in this direction. With only one registration savers can view interest-rate offers on the pan-European market and select their preferred savings account from one or more of now 16 banks. This is the kind of market liberalisation we are familiar with: since Amazon launched, consumers have been able to consume and spend money without any hurdles, with the pain of paying reduced to a minimum — dangerously, as we have seen. Raisin.ie aims to offer savers a similar experience. Only that with painless savings, when your term deposit matures, your account balance won’t be ever lower, it will be higher than before.

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