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New research into the psychology of spending indicates consumers appear more likely to overspend when using credit or gift cards than when they pay with cash.
Two business professors–Priya Raghubir of the Stern School of Business at New York University and Joydeep Srivastava, associate professor at the Robert H. Smith School of Business at the University of Maryland, College Park–undertook four experiments to examine how subjects react to paying with cash versus credit, gift cards and cash-like coupons.
The researchers found consumers less willing to part with cash than to pay with a credit card or stored-value forms of payment.
Card payments lessen the "pain of paying," or the anxiety one feels when parting with cash, and can cause consumers to spend beyond their means, Rahubir and Srivastava conclude in "Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior," published this month by the Washington D.C.-based American Psychological Association.
"That's why we labeled it Monopoly money," Srivastava tells Prepaid Trends via phone from India, where he is on Sabbatical. "People act like they are playing Monopoly and throwing money around. It doesn't seem real, so they're much more likely to spend."
The authors consider cash the most "transparent" form of payment, and "the more transparent the payment outflow, the greater the aversion to spending, or higher the 'pain of paying,'" they conclude.
"I liken it to a taxi meter running, and if you're idling and you see it ticking up, you may opt to pay and walk the rest of the way," Srivastava says. "With a credit card, you don't see the meter running, so you just let it tick up and up."
Consumers should pay attention to their spending regardless of the form of payment they use for a transaction, Raghubir tells Prepaid Trends.
"If they are overspending, learning about the ways in which the form of money they use could exacerbate their overspending may allow them to curb it strategically," Raghubir says. "For example, they may decide to use cash instead of credit cards/gift certificates during situations where they wish to control spending."
MasterCard Worldwide research on PayPass–its contactless technology that requires no personal identification number or signature for purchases of less than $25–shows a similar trend in consumer spending, says MasterCard spokeswoman Erica Harvill.
"The data were able to show merchants why this technology works is that people do actually spend more," Harvill says. "This technology allows people to go beyond the $5 they have in their pocket. That's what merchants are getting out of it."
MasterCard launched PayPass in 2005. It enables consumers to tap a card, key fob or mobile phone to the PayPass icon to pay for transactions. The technology is available globally at 122,000 merchant locations, including CVS, McDonald's and various professional football and baseball stadiums, according to the company's Web site.
"Merchants see a great uptick," Harvill says. "Not only does it help speed people through the line faster, but that people are actually spending more."
To reach their conclusion that cards increase spending, Raghubir and Srivastava studied 329 individuals to gauge the psychology behind paying with cash or other payment forms.
In the first study, the researchers asked 114 participants to estimate how much they would pay for meal out; results showed people spent more on the meal when paying with a hypothetical credit card instead of cash.
In the second study, researchers asked 57 participants to estimate how much they would pay for a meal, this time estimating cost item-by-item for an imaginary Thanksgiving dinner. Results of the study showed consumers spent about the same when using cash or any other payment form.
The authors conclude consumers are less likely to overspend when they forecast the real cost of the food before making purchases.
The third study found 28 participants, armed with a detailed shopping list, spent more when paying with a $50 gift certificate than with $50 cash.
And the fourth study found 130 participants more likely to spend a $1 gift certificate than a $1 bill to buy candy. Participants in that study, however, were less likely to spend the $1 gift certificate after holding it in their wallets for one hour, suggesting they assigned more value to it when they treated it like cash.
"If you think back to grandma or even great-grandma's way of managing finances, they had separate envelopes for groceries, for bills, for household items, etcetera, and they manage the budget based on what cash they have physically in front of them," Srivastava says. "With cards, you don't see the outflow of money, so the pain of paying is somewhat removed and distant–something to deal with later–and that's where a lot of people get in trouble."
