Why Consumers Spend More in Cashless Transactions ?

consumer-spending-indiaAcademic research indicates that digital mediums (credit/debit cards, digital wallets, etc.,) do not have cash outflow vividness, and hence reduce the pain of payment during a transaction in comparison to cash. As pain of payment reduces, spending propensity increases. Also, when using these mediums, people are more likely to underestimate or forget the amount spent on recent purchases; the lack of saliency for these mediums leads buyers to believe that they have more liquidity than they actually do, and this increases the purchasing probability of additional products (even non-essential ones).

Research also indicates that consumers tend to prefer credit over saving for consumption expenditures, and a possible reason is that credit allows for immediate consumption. Credit cards, digital wallets, and other mediums where payment is either advanced or deferred, create a temporal separation between transaction benefit (immediate) and payment (later). This separation reduces the pain of payment, thereby inciting spending behaviour by advancing purchases. This advancement of purchases will typically see rising consumption of white goods.

Cash, by nature, has the highest salience in terms of form and amount and inflicts the highest pain of payment. This results in lower spending and higher savings. Also in case of cash, there is no temporal separation – i.e., payment and transaction benefit are both realised at the same time. This further increases the pain of payment and reduces spending propensity.

For other forms of payment, like credit, debit, prepaid cards, and digital wallets the opposite holds true. These have relatively lower salience of form/amount, lower transparency and the temporal separation is high (payment timing is decoupled from that of benefit). The pain of payment using these mediums is lower and the propensity to overspend is higher. Higher spending (fuelled by potentially higher consumer debt) alongside lower savings will have long-term consequences on the less cash economy.

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