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A new study from ���˴�Ƭ researchers has revealed that while cashless payments are convenient, they come at a price.

The world is in the grip of a cost of living crisis as price inflation puts pressure on households and businesses. In Australia, skyrocketing utility bills and everyday expenses are outpacing wage growth, leaving many to make difficult decisions about where to spend their money. Sticking to a budget is challenging at the best of times, and new research reveals that convenient cashless payment methods may make it even harder. 

While it might seem like there’s little distinction between paying for your groceries with your smart watch or a crumpled handful of notes, ���˴�Ƭ researchers have found a significant difference. A new study reveals that payment methods have significant influence on our spending behaviour. 

“The pattern was clear; it does not matter whether consumers use a credit card, a debit card, a buy-now-pay-later service, or a mobile phone––they’re likely to spend more when using cashless payment methods compared to using cash,” said PhD student Lachlan Schomburgk, who led the study. 

These findings are particularly notable because of the rapid uptake of cashless payment options. In 2007 in Australia, 70% of transactions were reportedly conducted with cash. Now, that figure has plunged to 16%.

Schomburgk’s research was conducted in collaboration with the ���˴�Ƭ’s Professor Arvid Hoffmann and the University of Melbourne’s Dr Alex Belli. The trio analysed studies on payment methods and spending behaviour from around the world, drawing on 71 research papers from 17 different countries and data from more than 11,000 participants. 

They believe the change in behaviour when going cashless can be attributed to a phenomenon known as “the pain of paying.”

“When paying with cash, consumers must physically count out notes and then hand them over at the cashier. Given that humans are motivated to avoid losses, and paying with cash involves a physical loss, this is a painful process,” Schomburgk said. 

However, also found exceptions to the rule. Payment method doesn’t influence spending behaviour for tips and donations, with Schomburgk theorising that the “warm glow” associated with these transactions could counterbalance the pain of paying effect and result in higher spending, even when using cash.  

Conversely, the research shows that the tendency to spend more with cashless payments is exacerbated in “conspicuous consumption situations.”

“Consumers spend more with cashless payments on products typically bought to signal social status or wealth to others,” Schomburgk said.

While businesses will understandably continue to offer digital payment options to boost and ease consumer spending, Schomburgk suggests budget-conscious buyers should avoid them.  

“Although it may sound counterintuitive, individuals should aim to introduce as much effort and friction into the payment process as possible,” he said. “It’s best to use cash when possible to increase the perceived ‘pain of paying.’”  

“Reducing expenses is more important than ever due to the ongoing cost-of-living crisis we are all facing.”

What’s next?

Payment methods, like most things in the post-internet age, continue to be disrupted by the emergence of new and novel technologies. For example, innovations like Buy Now, Pay Later platforms and cryptocurrencies are gaining ground and changing the way we pay. 

Further research in the burgeoning field of payment methods and spending behaviour will ensure that when we reach for our wallet––no matter whether that’s virtually, physically, or in some as-yet-unimagined way––we’re doing so with the knowledge that changes in how we buy can also change how much we buy.