Frank William Abagnale Jr., whose name will sound familiar if you’ve seen Leonardo DiCaprio’s depiction of him in the movie Catch Me If You Can, gave a talk at Google in which he recommended using credit cards for all purchases. He listed all the pros, but not the biggest con (pun totally intended), which is that while credit cards provide strong protections against other people spending our money fraudulently, they may also lead us to spend more of our money unintentionally.
There is a rich body of evidence that the mode of payment has an impact on spending behaviour. In other words, whether we choose to pay with cash, debit, credit or cheque can influence how much we spend. This is partly because transactions have two general components: the pleasure of receiving a good or service and the pain of paying for it.
If we pay with cash, it feels more real and our money leaves us then and there. This temporal coupling of the pain and the pleasure can serve as a consumption regulator.
But if we pay with a credit card, we may not actually feel the same amount of pain. Not only is there a big gap between the transaction and the pain of money leaving our bank account, the transaction is lumped in with many others racked up during the month. The association with the original transaction is diminished.
Contactless payment – tapping your card or mobile device – increased sharply during the pandemic, and it’s standard in many countries around the world today. New research suggests these payment options may leave us even further out of touch with our spending.
In two studies conducted in the U.K., the first asked people stepping out of a store exactly how much they had just spent; their answer was then compared with their receipt. (Participants who looked at their receipt when handing it over were excluded.)
Those who had paid with cash more accurately remembered how much they had spent. As a group, contactless users had lower accuracy. There was an anomalous finding that credit card transactions requiring a PIN had the lowest accuracy, but the authors suggest that the act of recalling a PIN could interfere with memorizing and recalling the spending total.
In the second study, participants were randomly assigned three different payment methods for an upcoming shopping trip: cash, PIN-verified debit and contactless debit. The latter was again associated with worse expenditure recollection.
In addition to controlling for the number of items purchased, the second study also considered whether someone was a “spendthrift or tightwad.” As you might expect, the fewer items purchased, the higher the spending recall. Those leaning toward the tightwad category also had better expenditure recall. Since they are generally more hesitant to part with money, they may be more mindful of their spending.
With both studies, it was noted that spending recall was greatest when only one item was purchased. Keep in mind that in the U.K. the price you see on the shelf is the same one you’ll see at the point of sale, since all applicable taxes are included. So you see the same number twice.
For most purchases in Canada, you see one price on the shelf but know it’s likely going to be higher when you get to the checkout, after sales taxes are added. So instead of seeing the same price twice, we see two different prices. Is this an added wrinkle that further affects Canadians’ ability to remember how much we are spending?
As payment innovation continues, more convenience makes it too easy for us to spend money. Linking a payment card to your smartwatch means you don’t even need to reach into your pocket, and contorting your wrist to trigger the scanner may obscure the price on the screen.
But perhaps we can fight fire with fire. If making payments more convenient and frictionless increases spending, we may want to go out of our way to make paying for things inconvenient or more painful. It’s relatively easy to set up transaction and spending alerts.
I accidentally turned on two alerts for a new credit card linked to my smartphone – one from the bank and one from my phone’s wallet settings. Every time I make a contactless payment, I get two notifications for the same amount within a minute. It’s annoying, but that’s the point.
As the Catch Me If You Can world of modern payments becomes ubiquitous, it may be time to take a page from Mr. Abagnale’s playbook and master the art of evasion – this time, from excessive spending.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.
