Story Highlights

• The mode of payment affects the so-called “pain of payment” that we experience
• Consumers tend to spend more money while swiping credit cards than while spending cold hard cash
• Since the demonetisation, you may be swiping your card more as your pain of paying has been reduced

Recap: This is Part 2 of a three-part mini-series on money that I am writing on the connotations of money. Last week, we spoke about how money is much more than a fungible economic resource. In today’s article, we will discuss the pain of paying, and its implications on consumer behaviour.

Have you ever wondered if your behaviour at a large supermarket is different from that at a small kirana shop?

Here are some obvious differences: The supermarket probably has a large floor area, and employs modern display methods, where you can browse your favourite brands, picking up stuff and loading them in your shopping cart. On the other hand, the kirana store has no such facilities. But here a friendly old trader welcomes you, and usually pulls out the items and brands you are looking for.

The supermarket is air-conditioned, while you stand outside the kirana store (usually not air-conditioned). The supermarket may have a computerised catalogue to help locate all pieces of merchandise; the kirana store owner’s brain performs the same function just as efficiently. The supermarket usually has a long checkout queue, while the kirana store owner has mastered the art of juggling multiple customers at the same time.

Finally, the supermarket is more likely to accept credit cards than your friendly grocer. So, keeping other differences aside, does the mode of payment affect your choices?

Cash versus card: The pain of paying

Coined by Ofer Zellermayer in 1996, a concept called the pain of paying continues to fascinate marketing researchers today. The idea is simple — we mostly do not like to spend money. Thus, we feel some mental anguish while parting with hard-earned cash.

However, the mode of payment affects this so-called “pain” that we experience; it is greater when the money is closer to us (as in hard cash), and lesser when the money is further away from our person (credit cards ensure that we not only do not immediately see our money being parted from us, but that the actual bill is settled well after we have spent the money).

Thus, consumers tend to spend more money while swiping credit cards than while spending cold hard cash, because the pain associated with the former is lesser than the latter.

The willingness to spend more on credit cards than while paying in cash is not the only effect of the pain of paying. Recent research by Promothesh Chatterjee and Randall Rose has uncovered more surprising effects of credit card purchases. Using controlled experiments, they demonstrated that consumers performing simulated tasks using credit cards were more likely to incorrectly remember price-related information about products than those performing the same tasks using cash.

Further, people making purchases with credit cards correctly remembered more words related to the benefits of the products being purchased than those paying in cash.

Thus, not only are people using credit cards likely to spend more, they are also likely to be less finicky about prices of individual goods, and more likely to look at products or brands positively while using credit cards than if they were to buy the same goods with cash.

So, how do the above insights affect you? As a consumer, you may have started swiping your card more since demonetisation. Your spending habits may thus have suddenly changed from a previous status quo when you were using cash.
Without you even knowing it, your pain of paying has been reduced; you would be well advised to watch your spending a lot more closely now.

Credit card companies, online wallets, online food delivery companies, taxi aggregators and retail portals probably know this, and thus often incentivise you to swipe your card rather than pay cash on delivery. So do high-end retail stores and restaurants — the transaction costs associated with swiping a credit card are usually offset by increased spending and other benefits to the seller or the brand, thanks to the reduced pain of paying associated with credit cards.

Next week, we will conclude this column by discussing the relationship between time and money, and how we discount the future over different time horizons.

 

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