Buy now,

pain later.

Why we spend more in cashless sales

Have you ever wondered why hotels make charging expenses to your room so easy? Or why bar staff offer to open a tab for you? Or why retailers so keenly promote ‘buy now pay later’ deals? Underneath the advertising hype, there’s an area of applied science that studies the psychology of paying and seeks to understand why some payment methods make us spend more. In this article, we explore the science and suggest how to use it to your advantage.

Plastic is fantastic, if you’re a seller.

Imagine you order a sandwich in a deli and the cashier says to you, “That’ll be $9.50, please.” As well as the brain activity required to reach for the $10 note in your pocket, psychologists say that there is also a moment of mental pain triggered by the idea of parting with your money. What psychologists have observed, however, is that we experience less pain as the mode of payment becomes less obvious.

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Numerous experiments have demonstrated that people are willing to spend more when they pay with a credit card instead of cash. It has also been found that the same principle applies to fake money and casino chips, even when study participants are told that the tokens will be converted into real cash. It seems that the more abstract the notion of money is, the less likely we are to appreciate its proper value.
Now, imagine that same deli sandwich again, but instead of having a price assigned to it, buyers are asked to nominate its worth. When compared with people who pay with cash, studies show that buyers who pay with cards are 1) more willing to buy and 2) more willing to pay higher prices.

This is what retailers strive for when they refer to “frictionless” payments. We’ve already witnessed a flurry of new frictionless payment technologies in recent years, from Paywave at point of sale terminals, to Apple Pay on phones and smart devices, to PayPal on the internet. Some experts go so far as to predict that the future of frictionless payments is biometry, where our payment details are linked to our fingerprints, retinas or the unique pattern of veins in our wrists!

Use the psychology of paying to your advantage

The same ‘payment pain avoidance’ principle that applies to credit cards also applies to ‘buy now pay later deals’, such as Creditline interest-free offers and Afterpay. Retailers are willing to pay big commissions to the companies that finance these deals because they know that consumers will spend higher amounts and buy more often. Luckily, you don’t have to be a scientist to recognise this effect in your own life, but you do need to be mindful about using tactics to counteract it.

Firstly, a lot of us are so customised to paying with a card that we’ve become disconnected from the real value of money. To reconnect, it’s as simple as taking a break from your cards and using cash for one whole month. Withdraw your budgeted living expenses (groceries, petrol, bus tickets, spending money etc.) from the bank once a week and you’ll soon discover that the cash in your purse or wallet is a strong reminder about how far your money needs to go. When it means swapping a $10 note for a sandwich and 50-cents of change, it suddenly makes more sense to bring your lunch from home. Another helpful way to save is to set up an automatic system of depositing money into your savings accounts. If you don't see the money, it's easier to save. This system will help you to build up savings for birthday parties, holidays and Christmas without the stress.

Another good strategy is to set yourself financial goals to strive for. When we’re goal oriented, the value of money becomes more apparent and the temptation to impulse spend decreases because we have our sights set on bigger, more important dreams. For example, once you set yourself the goal of saving for, say, an overseas holiday, it helps to clarify that your Friday night pub habit is costing you $2,500 a year or the equivalent of a New Zealand ski trip.

When it comes to making big purchases, you may even be able to use your awareness of payment psychology to your advantage. Approach retailers with the knowledge that merchants are paying up to six percent commission on services such as Afterpay. (Afterpay allows shoppers to break down purchases into smaller installments) 22% of Afterpay's revenue comes from late payment fees. Instead of being lured into a ‘buy now pay later’ deal, save up for the things you want and then shop around for a cash discount. On a $2,000 fridge, you could save $120 or more, which would go a long way towards filling it with groceries.

Don't be a debt bunny

Psychologists also point out that some people are more susceptible to being lured into ‘buy now, pay later’ deals than others. Payday lending companies align themselves with Millennials and the Gen-Y demographic, which includes young consumers who are often inexperienced with credit. These companies promote themselves with cool, edgy ad campaigns and slick apps that potentially trivialise debt and its consequences. Some advertisements have people dressed up in a animal suit who turns up right when your electricity or mobile phone bill is due. The character refers to “smart little loans.”

Likewise, Afterpay is associated with the contentious “broke AF” campaign used by a number of their member retailers. As one critic of the campaign noted, if you have to google what “AF” stands for, you’re probably not in Afterpay’s target demographic. The essence of the campaign was to encourage young, broke buyers to spend money they don’t have or, as I like to call it, “buy now, pain later.”

And that right there is the crux of the matter. Payment pain is unavoidable, even more so if your payments come with interest charges or late fees. The more reliable way to reduce payment pain is to get financially fit through budgeting. Having an effective budget will help you determine how you intend to spend your money. When you get paid, you will know exactly where your money is going. It may not sound edgy or involve a grown man in a bad animal costume, but the simple principle of living within your means is the ultimate life hack. That’s when payment pain disappears!

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