Card or cash: what makes you spend more
Many countries have begun to abandon the use of cash, and the United Kingdom and the United States are far from the forefront of these changes. But maybe the Americans and the British know something important about the "cache", since they do not want to completely switch to electronic payments? Or are citizens who still keep a bundle of notes in their wallet cling to the past? Lu-Hai Liang found out in his article for with the BBC.
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 (Britain), a small town in East Sussex, famous for the Battle of Hastings (1066) and its charm as a seaside resort, a bit neglected, but always with “development prospects”.
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 from the West and the Chinese, made fun of me, calling me old-fashioned because I cling to "dirty cash" - wrinkled banknotes that have been 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.
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 delving into how a piece of painted paper or metal can have any value in itself.
But money is a relatively recent invention, and embody the fundamental changes that have taken place in human society, emphasizes Natacha Postel-Vinay, who teaches a course in 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 seek full compliance with the desires of two different people.” If you wanted to buy bread, the seller did not demand something special in return - your coat or vegetables from your garden. Now you just had to have a few coins in your pocket. ”
Technically, money is a means of preserving value, it must be a standardized accounting unit, which is this or that currency.
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.
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 need to be material,” says Postel-Vinay.
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 by Barclays on June 29, 1966, and the first debit card only in 1987. Chip cards with PIN were introduced in 2003, and contactless 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 explained by the widespread adoption of WeChat - a super application that combines electronic wallet, instant messenger and social network functions, as well as the popularity of Alibaba's online stores like Taobao. And also due to the fact that China has relatively low interest 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.
“Much is built on the tip, and in many stores they simply do not accept cards or require purchases of at least $ 10,” she says about her experience in the United States. “But something is still changing for the better.” Imagine: just five years ago I paid for renting an apartment in cash! ”
The United Kingdom is also not the most advanced country in this regard. Compared to Sweden, says 20-year-old Moa Karlsson, a meat seller from Gothenburg, Britain looks old-fashioned.
“It seems to me that using cash is fun and almost strange,” 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 crown 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 pounds in your wallet or think about an ATM. Where is the nearest ATM? Well, here it is, in your pocket, ”says William Vanbergen, a British entrepreneur who first came to China in 2003 and became a big enthusiast of electronic payments.
Like Karlsson, he says cash fussing is something out of date. When Vanbergen has to travel to Hong Kong for work, where cash payment is still more popular, or return to his native England, it's like a trip to the past, he says.
Well, what about the alleged flaws? Are cashless payments really a waste?
This is a difficult question, because people are basically irrational beings.
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 behavioral economics is Drazen Prelech, 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.
Researchers told half of the participants that they could only pay in cash, and the other half that they only pay by 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 the feedback, explains Emir Efendic, a psychologist and behavioral economist from the Louvain Catholic University (Belgium).
“Using credit cards, you do not receive a quick update of the status of your account. But when paying with an electronic wallet, you see almost instantly how money leaves your account, ”says Efendich. “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 Beijing-based British woman who uses WeChat Pay, says she likes to receive notifications right after every purchase - her balance is updated in real time.
Nevertheless, Prelech discovered a certain psychological “moment of shudder” common to all - our reaction to parting with money, which resembles a short physical pain.
Perhaps the “moment of shudder" is absent when you pay using 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 prepayment, even if in this case there are no financial advantages. 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’s 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 do not scatter it, then there will be no sense in it."
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 Prelech speaks of.
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