If you want to spend less, pay cash…or with a mobile phone

A well-known result in the behavioural finance literature is that people spend more when they purchase things using a credit card rather than cash. Similarly, when we shop online, we are inclined to spend more than when we shop in stores. But things may be changing with Gen Z.

A study by the Dutch Central Bank tried to figure out how the transition to online and contactless payments influences our consumer behaviour. And while nobody was surprised to learn that people paying contactless or with credit/debit cards would spend more, the study is interesting for two reasons. First, it asked consumers how painful (on a scale from 1 to 7) they thought purchases were. The chart below shows that the key driver why we spend less when using cash rather than contactless or debit card payments is because paying by cash hurts us more. The very feeling of bills and coins leaving our wallet makes us aware of the emotional pain of parting with out money. Parting with money from a separate mental account (i.e., our bank account) hurts less.

Pain of purchasing goods with different payment methods

Source: Broekhoff and Cruijsen (2022)

But note something surprising in the chart above. Paying via mobile phone causes more pain than paying with a debit card or via contactless payments. And indeed, people who pay via mobile phone tend to spend less than when they pay with debit card or via contactless, but more than when they spend cash.

At first, I thought this was because it often takes forever for contactless payment via mobile phone to work. It is so irritating to queue behind someone fiddling with their stupid phone for hours until they get that thing to work. Go use some real money, for heaven’s sake. But I digress…

It seems the real reason why people feel more pain when paying with their mobile phone is twofold. First, in many cases, when paying with your mobile phone, the bank will either show you the new balance of your bank account on your phone or send you a text message reminding you of the expenditure. Psychologically, this creates a more salient feeling of having spent some money than with a debit card payment but obviously, it feels less salient than cash.

Second, the observed effect is also driven by who uses mobile phone payments. Let’s face it, if you are stuck behind someone unable to get a simple payment done because their mobile phone is on strike, it is very unlikely to be a sane middle-aged or older-aged person. Rather, it is going to be some freaking hipster or Gen Z kid who thinks that the newest technology is always the best technology no matter how inconvenient and catastrophically slow it really is. Probably the same morons who think that cryptocurrencies are the solution to all our ‘problems using cash’ despite cash working just fine for thousands of years are also the ones who pay by mobile phone and make me miss my train. But I digress…

When examining the emotional pain felt by spending money with different technologies the researchers found something interesting. Older people experienced more pain when using cash than when using contactless or mobile phone payments. Younger people, especially teenagers, experience more emotional pain when paying with a debit card or mobile phone than when paying with cash. The reason is that older people grew up with cash. For them, most forms of electronic payment are a new technology they adopted at some point in their life.

Teenagers today, on the other hand, were given a prepaid smartphone the moment they were potty trained, and they had to be artificially introduced to these strange pieces of paper and metal their parents carried around in their ‘mini purses’. For them, paying electronically is the natural way of doing things while paying with cash is artificial. As a result, checking their savings via the phone is second nature and paying electronically or via mobile phone is not only the most common form of buying things but also the natural mental account in which to think about the pain of spending money.

Hence, as people like me get older and eventually die, the consumption behaviour of households changes as well. The habit of spending more when using credit cards or debit cards will gradually disappear on an aggregate basis and eventually, it won’t make any difference if you sell stuff online or in shops, if you let people pay with cash or digital money. And hopefully, by that time they will also have figured out a way to speed up payments by mobile phone. But I digress…