Independent Banker - December 2018 - 56

card premium. " Simply displaying credit card
logos in stores and on collateral is often enough
to boost spending. And then there's the payment
structure. Credit cards allow consumers to delay
the pain of payment, and when they finally
do pay, they make one large payment instead
of many small payments, which their mental
accounting translates into less pain, says Nelms.
Consumers also make poorer
choices when using noncash
payments. One 2011 study in the
Journal of Consumer Research
found that shoppers who pay with
credit or debit cards are more
likely to buy cakes, cookies and
other unhealthy foods impulsively
than those who pay with cash. This
boost in impulse vice spending
was surprisingly high in subjects
the researchers identified as " tightwads " -those
who were typically more reluctant to spend.
Tightwads more than doubled their junk food
spending when using credit cards instead of cash
(although " spendthrifts " still spent more). This
suggests that noncash payments can seduce even
the miserly into overspending.
Credit card shoppers are also more likely
to focus on the benefits of a purchase and
misremember costs than cash shoppers, who
focus more on price.
8%
Increase in
contactless
credit card
spending when
the consumer
didn't have
to enter a
PIN or add a
signature
Source: Journal of
Consumer Policy
The impact of impatience
According to the Federal Reserve, cash still makes
up 31 percent of U.S. consumer transactions,
though mobile, contactless and other noncash
payments are making inroads. While research
into noncash payments focuses mostly on credit
and debit cards, the concept of " friction costs "
suggests that these evolving digital payment
options are likely to goose spending further.
Nelms compares it to a website's user
experience. " Every field I have to fill out creates
a hassle, or friction, " he explains. " Research
shows every field decreases the likelihood I'll
carry through. The quicker they make [the
process], the more likely people will finish. "
This prediction holds true for contactless
payments, according to a 2014 study in the
56 Q ICBA Independent Banker Q December 2018
International Journal of Economic
Sciences. It found that contactless
credit and debit cards that don't require
signature or PIN entry lead to an 8 percent
increase in credit card spending and a 10
percent increase in debit spending.
Then there's the idea of mobile wallets and
devices. If using a credit card induces less pain
than spending cash, imagine what goes on in the
brain when using a device that isn't associated
with money at all.
" A phone or Apple Watch doesn't represent
money. It represents a communication device, "
explains Dr. Avni Shah, assistant professor
of marketing at the University of Toronto
Scarborough with a cross-appointment at
Rotman School of Management, and a research
fellow at Behavioral Economics in Action at
Rotman. " As a result, there is no reminder
of money. "
The importance of feedback
But as noncash payments increase in type and
frequency, it doesn't follow that consumers'
spending discipline has to go out the window.
There are ways to add friction and make
noncash payments more psychologically
painful, resulting in better spending decisions.
Instantaneous feedback is one thing that has
been proven to reduce credit card spending. A
study published in the Journal of Consumer
Policy found that customers in labs spent
almost 10 percent less with their credit cards
when their receipts displayed their cumulative
spending for the month, along with their
current credit card debt.
The Consumer Financial Protection Bureau
(CFPB) explored this concept in 2017 with a
small-scale study on how real-time feedback
influenced credit card transactions.
The bureau developed two prototypes. The
first was a payment card with an LED display
that provided real-time information on the
amount of money left in the consumer's budget
for the month, day and week. The second was
a budgeting app that consolidated information
from various accounts and synced with
payment card data to show graphically how
Independent Banker - December 2018

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