Card or cash: what makes you spend more

Many countries have begun to move away from using cash, with the UK and US not at the forefront of this change. But maybe the Americans and the British know something important about cash if they don’t want to completely switch to electronic payments? Or are citizens who still keep a wad of bills in their wallet clinging to the past? Lu-Hai Liang found this out in his article for with the BBC.

Фото: Depositphotos

Next - from the first person.

I remember how a child I tried to save at least a little, putting aside in a special box some of the money that my parents gave me for the day. Shiny pound coins were stacked in columns, although, I confess, such a column has never reached a dangerous height for itself.

I grew up in Hastings (UK), a small town in East Sussex famous for the Battle of Hastings (1066) and its charm as a seaside resort, a little run down but always with "prospects for development".

I got my first debit card when I was 14 years old. Then, to make money for a one-year hiatus after graduation, I worked in the lotto hall.

I opened a savings account in a bank (I avoided credit cards). In 2007, the percentage on deposits was at 5%, and I remember how I received 70 pounds ($ 91) a year later and felt very rich.

Now fast forward to 2018, when I already lived and worked in Beijing as a freelance journalist. Around me, the Beijing people paid for everything with smartphones.

In the restaurant, in the store, in the supermarket, they simply showed the cashier the QR code that he scanned. After that, the online system immediately deducted the exact amount of money from the payer's electronic wallet.

No fuss with paper bills, no waiting for change. No procedures with a plastic card. The transaction took seconds.

However, I was a stubborn renegade. My friends, both Western and Chinese, made fun of me, calling me old-fashioned for clinging to “dirty cash”—crumpled notes that had been in a thousand hands before me.

But I had a couple of reasons why I continued to use cash and did not want to switch to electronic payments.

Firstly, it seemed safer to me. I did not understand exactly how the system works using a smartphone, and was afraid that my money might just disappear.

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Secondly, I was afraid that by switching to electronic payments and losing the feeling of money in my pocket, abandoning the usual procedure for taking out a wallet, finding the right bill, and handing it over to the seller, I would no longer understand how much I actually spend. And start spending more.

Were my fears justified? All over the world, more and more people are refusing cash, and we need to understand where this will lead.

Before embarking on a discussion about consumer psychology and the conflict between classical economics and psychology that led to the birth of a behavioral economy, we think about what money really is.

Money is an abstract concept. Today we take this concept for granted, without even considering how a piece of painted paper or metal can have any value in itself.

But money is a relatively recent invention and represents fundamental changes in human society, says Natacha Postel-Vinay, who teaches a course on the history of money and finance at the London School of Economics.

“From the very beginning, they were very different from barter,” she says. - You no longer needed to look for complete compliance with the desires of two different people. If you wanted to buy bread, the seller did not require anything special from you in return - your coat or vegetables from your garden. Now all you had to do was have some coins in your pocket.”

Technically, money is a store of value; it should be a standardized unit of account, which is what a currency is.

The first recorded use of money in history was noted in ancient Iraq and Syria, during the Babylonian civilization, around 3000 BC.

In those days, people used bars of silver of a certain weight, shekels. We have reached records of Babylonian prices made by the priests of the temple of Marduk, and the first books of account, including notes on debts.

From the Babylonians we have inherited many concepts that are important to the monetary economy. For example, for currency hardness, a stabilizing force was needed in the person of a king or government, which people could trust and that could guarantee the purchasing power of money.

But, although money existed in ancient Babylon, it remained quite weighty and needed to be weighed. It hasn’t come to coins yet.

Around the year 1000 BC, the first coins were minted in ancient Greece, in the Lydian kingdom.

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The first paper money appeared in China during the Tang Dynasty (618-907) and initially existed as privately issued letters of credit or exchange notes. In Europe, the idea took root only in the XNUMXth century.

Today, money is in no way tied to either a precious metal or other physical objects of value.

We use money not secured by gold, which is simply declared by the government as legal tender, although it has no real value and is not backed up by reserves.

The concept of credit (and debt) existed long before credit and debit cards were invented. “To be money, you no longer have to be something material,” Postel-Vinay notes.

The credit card issued by the bank was invented by John Biggins of New York's Flatbush National Bank of Brooklyn in 1946.

Subsequently, credit cards were offered to salespeople so that they could use them, traveling around America.

In the UK, the first credit card was issued on June 29, 1966 by Barclays, and the first debit card only in 1987. Chip cards with PIN were introduced in 2003, and contactless payment cards four years later.

But back to modern China, where the payment system is generally accepted by scanning a QR code in a smartphone.

China's rapid transition to electronic payments can be attributed to the ubiquity of WeChat, a super app that combines e-wallet, instant messenger and social network functions, as well as the popularity of online stores such as Alibaba's Taobao. And also because in China there are relatively low interest rates on credit cards.

Among other states where the share of cashless payments is high, one can name Canada. It is considered normal to have more than two credit cards.

Sweden leads Europe: in a nationwide survey last year, only 13% of Swedes admitted to using cash on their last purchase. In 2010, there were about 40%.

Compare: around 70% of Americans still pay cash regularly, according to a recent Pew Center study.

Emeli Svensson, a Swedish journalist based in New York, says the United States and its homeland are very different in their use of cash.

“A lot of things here are based on tips, and many stores simply don’t accept cards or require a minimum purchase of $10,” she says of her experience living in the US. “But some things are still changing for the better.” Imagine: just five years ago I paid my apartment rent in cash!”

The United Kingdom is also not the most advanced country in this regard. Compared to Sweden, says Moa Karlsson, 20, a meat seller from Gothenburg, Britain looks old-fashioned.

“I think using cash is fun and almost weird,” she says, talking about her trips to Britain. - But in England it’s just the opposite - it’s strange not to use cash. The pound, it seems to me, occupies a significant place in the mentality of the British. Much more significant than the krona in Sweden.”

For those who live in countries that are less and less dependent on cash, the benefits of electronic payments are obvious.

"It is very comfortable. No need to carry £200 in your wallet or think about the ATM. Where is the nearest ATM? “Here it is, in your pocket,” says William Vanbergen, a British entrepreneur who first came to China in 2003 and has become a big enthusiast of electronic payments.

Like Karlsson, he says fiddling with cash is outdated. When Vanbergen's work takes him to Hong Kong, where cash payments are still more popular, or back to his native England, it's like traveling back in time, he says.

Well, what about the alleged flaws? Are cashless payments really a waste?

This is a difficult question because humans are fundamentally irrational creatures.

For example, psychologists have shown that the feeling of losing 100 pounds is much stronger than the feeling of gaining the same 100 pounds. The pain of loss stings more than it gains acquisition, although it would seem that we are talking about the same amount.

The discovery of this psychological phenomenon has led to incredible changes in the economy.

In the classical economy, scientists built their theories on the assumption that people behave rationally (so that the loss or gain of the same amount causes a person to have similar feelings of strength).

As the studies of psychologists have shown, this was not so. New disciplines have arisen: behavioral economics and consumer psychology.

One of the leading researchers in the field of behavioral economics is Drazen Prelec, a professor at the Massachusetts Institute of Technology.

Once he conducted an experiment with an absentee (tacit) auction. Students of the prestigious Sloan Business School participated in it, tickets for games of the National Basketball Association were played on it.

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The researchers told half of the participants that they could only pay with cash, and the other half that they could only pay with a credit card.

The results amazed scientists. It turned out that on average, those who could only pay by credit card made rates twice as high as those who were connected with cash.

According to Prelech, this means the following: the psychological value of the dollar spent on a credit card is only 50 cents.

Shopping with a credit card clearly affects how much people spend. This has been proven by many studies.

However, it was also demonstrated that the bills arriving at the end of the month cause intense mental suffering. So strong that behavioral economists believe: this is what explains the continued popularity of debit cards.

Well, what about e-wallets? The most important thing here is feedback, explains Emir Efendic, a psychologist and behavioral economist at the Catholic University of Louvain (Belgium).

“With credit cards, you don't get quick updates on your account status. But when you pay with an e-wallet, you see almost instantly how the money leaves your account, says Efendic. “When there is no feedback, yes, you start spending more.”

In the case of credit cards, the pain of reckoning is postponed (until a monthly bill arrives). Thus, credit cards manage a complex psychological trick of separating the pleasure of the buyer from the unpleasant feeling of parting with money.

But in the case of electronic wallets, users immediately see that the money has left the account. Emily Belton, a British woman who lives in Beijing and uses WeChat Pay, says she likes to receive notifications immediately after each purchase - her balance is updated in real time.

However, Prelech discovered a common psychological “shudder moment” - our reaction to parting with money, which resembles a short physical pain.

Perhaps there is no “shudder moment” when paying with a smartphone - this requires a separate study.

The psychological suffering that we experience when parting with money can protect us from unnecessary expenses, but, on the other hand, it poisons us the joy of consumption, the pleasure of shopping.

This psychological price, which Prelech calls a moral tax, can be reduced in several ways. For example, using a tool such as the purchase of several products combined in one set, including something free.

Another way is to pay in advance, even if there is no financial advantage in this case. For example, it turned out that for some reason people prefer to pay in installments for a vacation trip.

And when we are abroad, it is much easier for us to pay in local currency - we take it less seriously than our own, “real” money.

A company such as Club Med exploits this psychology by selling plastic tokens to vacationers at their resorts, which they subsequently pay for. Tokens, of course, are not perceived as real money, it is much easier to part with them.

As for me, I eventually switched to electronic payments when I lived in Beijing. The system works flawlessly, it is very convenient. You seem to find yourself in a world where you enjoy shopping without the suffering of parting with money.

It may be better for the economy when people spend money more freely, which is why in many countries governments encourage the transition to such a system.

The English philosopher Francis Bacon once said: “Money is like manure: if you don’t throw it around, it’s of no use.”

However, sometimes this kind of scattering, without the feeling of an empty wallet, can lead to some anxiety, anxiety.

Apparently, this is the same “moral tax” that Drazen Prelec talks about.

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