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23-10-2019

The ease of paying

 

If there is one thing that unites people, it might be that we don’t like paying.

 

I don’t just mean the fact that paying generally means that we end up with less money (which is why we are so attracted by things that are, or appear to be, free – but that is another story). I am thinking of the process of paying for goods or services.

 

For much of human history, the most common mechanism for paying retailers has been cash. Good news for manufacturers of wallets and purses! We had to make sure we had somewhere to store our coins and banknotes. It was also good news for manufacturers of yarn and needles; many of us (I hold up my hand) simply kept our loose change in our pockets, which would then require frequent mending.

 

Carrying money was not the only problem, though. Imagine (or, if you were unlucky, recall) a situation with the person before you at the supermarket till taking out their purse and counting out one coin after the other for the checkout operator. Paying with cash is time consuming and inefficient.

 

Cheques eliminated the need for carrying cash, but they just came with their own set of inconveniences. Cheque books were hardly compact, and you had to write the amount out in digits and words, then sign the darn thing every time before handing it over (along with the guarantee card) to the shop assistant so they could verify you were not impersonating someone else. Not exactly a simpler solution.

 

Fast forward to today, when plastic rules.

 

We have already come some way from the ancient ‘swipe’ machine (the technical term is a ‘manual imprinter’), which required no less than six steps to operate correctly. An electronic machine where we just needed to enter our PIN was a great leap forward, but the cherry on the icing on the cake is surely the contactless card.

 

In fact, it’s not even plastic that rules – contactless rules. We don’t even need to carry cards, as long as we have our mobile phone with us to tap against the terminal.

 

Contactless payment is a great example of what behavioural economist Richard Thaler (2017 Economics Nobel laureate and co-author of Nudge together with Cass Sunstein), calls “making it easy”. The smooth and speedy payment process appeals to both the consumer and the retailer. It is pretty much a win-win, and therefore not surprising that contactless payments are in the ascendant (in 2018 there were 7.4 billion of them – up 31% from 2017, or nearly one-fifth of all payments in the UK). It is quite likely that in 2019 there will be more contactless than cash transactions.

 

But the rapid growth in the popularity of contactless is not universal.

 

The way we perceive money is not the same everywhere. In some countries, loans and credit card balances are seen as perfectly normal, but in others borrowing, even if it is just until the end of the month when the credit card bill is paid off in full, is frowned upon.

 

And there may be other reasons why people prefer using cash, as colleagues of mine who are working in Italy are reporting. Its anonymity and lack of traceability means that it does not automatically register on the radar of the authorities – notably the tax authorities. (According to a working paper the so-called ‘shadow’ economy, which relies on cash, represented more than 20% of GDP in Italy in 2015, compared with 9.4% in the UK and 12.3% in France.)

 

This might explain in part why merchants are not as eager to switch to card payments in Italy. In 2017, cashless payments (cards and mobile) amounted to 107 billion euros in the UK (well over 4% of GDP), but just 9 billion in Italy (just 0.5% of GDP). In other words, the cashless spend of the average Italian is less than 10% of that of the average Briton.

 

Another reason why cash is popular – with the consumers this time – is the status it conveys.

 

Someone who can peel off several banknotes from a fat roll signals they’re loaded; someone pulling out a credit card might be just a pretender with a huge balance. There is also a persistent (and untrue) perception that electronic payments are not accepted for small amounts. If people are not swayed by swifter and easier payment, and really prefer to continue using cash, then what might make them consider adopting contactless payment?

 

One option might be to stress the improved security. As the number of cash machines begins to dwindle, people will need to withdraw and carry quite large amounts of money, which brings heightened risk. And there is another aspect of cash that has the potential of activating strong emotions; it is dirty. Nobody would happily put coins and bank notes in their mouth – yet shop assistants often handle money with the same hands they use to handle fresh, unwrapped food like meat, cheese or bread.

 

But the most successful nudges manage to go with people’s inclinations rather than to circumvent them. In Italy, the most powerful mechanism to encourage the adoption of mobile payments may well turn out to be the Italians’ love of their mobile phone. They may not care for cards for all the reasons mentioned earlier, but once they realise how easily they can pay using their phone they may be won over. Time will tell.

 

A word of caution – or rather, two words of caution.

 

New technology is cool, but it can go wrong. Have you ever wondered what would happen if you use your phone for contactless payment, and then it runs out of power? Jemima Kelly, a journalist at the Financial Times no longer needs to wonder; she knows. One day in October last year, she used her phone for the contactless payment of her £1.50 (€1.65, $1.80) bus fare in London. Unfortunately, when, shortly thereafter, an inspector boarded the bus and required her to prove she had paid, her phone had died. That ended up costing her £476 and branded her a criminal.

 

More importantly, not everyone may end up better off with the ease of paying that cashless and contactless methods offer. Professor Dilip Soman, a behavioural economist at the University of Toronto, calls them uncash – a medium that conceals the pain of paying. Research by Drazen Prelec and Duncan Simester at MIT found that what we are willing to pay for goods and services when we are using a credit card could be as high as twice what we would be prepared to spend using cash. Research by Richard Shotton, author of The Choice Factory, found that people who pay with cash overestimate their expenditure by 9%, while those who pay contactless underestimate by 5%. New technology has the potential to nudge some people to overspend, ending up in more debt than they anticipated.

 

Human behaviour is complex.

 

We all have different reasons to do what we do, and to not do what we don’t. It is not a simple matter of good behaviours and bad behaviours; sure, every action has consequences, but those consequences can be difficult to anticipate. Nudging may appear simple at first sight, but there are layers of complexity underlying human behaviour. This requires solid expertise to be untangled in order to avoid detrimental results – and contactless payment makes for a good illustration.

Koen Smets

Senior Advisor BVA Nudge Unit UK / koen.smets@bvanudgeunit.com

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