The Future of the Piggy Bank
Just Cash At Stake?
Why would people still (prefer to) use cash? Britain's national audit office might have recently asked the same question at the discovery of soaring cash circulation and a mysterious 50 billion pounds they do not know who it is holding. While countries struggling to improve access to financial services welcome the trend of going cashless as an opportunity, some in the UK express concerns over its impact on financial inclusion.
Costs of keeping money circulating in the economy are higher than alternative payment methods, such as digital cards, mobile technology and online banking. Hence, ATMs are quickly disappearing, and the speed of bank branch closures has accelerated. In contrast, transactions charges and credit card balances are profitable income streams that cash could never match. Albeit subject to different threats, digital payments are also more secure, quicker and convenient, particularly for users paying in other than their home currency.
Convenience and financial well-being may be two sides on the same coin. Cost and convenience arguments appear to dominate the public debate at the expense of consumers' financial well-being. Most consumers are not even aware of how preferred payment methods manipulate their spending behaviour and may even be responsible for private over-indebtedness.
Psychological traits of cash
The convenience of digital payments may lead many to spend more, says Jay Zagorsky, an economist and senior lecturer of markets, public policy and law at Boston University. “You’re divorced from the moment of payment. You can safely swipe your card and worry about it 30 days later.”
Likewise, Utpal Dholakia calls card payments “painless payments” and found in his research “When compared to paying by cash, people tend to overspend, they buy things impulsively, their shopping baskets tend to fill with unhealthy food, and they are less committed to products they have purchased. Even for marketers, this is mixed news.“
Research suggests that our brains treat cash purchases differently than the spending on credit cards. There is the time dimension already mentioned. Like rewards that feel less sweet, the pain of payment tends to fade the more time passes. Due to this time-lag, the intensity of positive feelings from purchases made today far outweighs the pain felt at payment at a future date.
Morewedges research further discovered that people paying by card are willing to spend more on the same purchase than if they would use cash. Our brains relate the asking price for an item to the pool of resources available to us. Thus, the bank accounts or credit card limits usually present a much larger pool than cash carried at the time of the purchasing decision. Findings of studies in participants' decision making suggest “people do not fully consider the total amount of resources available for their consumption, and consumer evaluations and decisions are therefore highly sensitive to the size of the resource account that just happens to be cognitively accessible at the time of judgment.”
In his example cited by Emma Betuel, “the pain of payment” for a cappuccino by card is perceived less then when paying cash for it. “The bigger the top relative to the bottom, the more you’re likely to feel “the pain of payment”.”
Accepting digital payments presupposes trust in financial institutions. The trust levels tend to be lower in emerging economies where many people have limited financial buffers. In certain societies, cash is still preferred over worrying about receiving digital credits. There is the perception that keeping cash at their secret places is safer and cheaper than in bank accounts. In their immediate environment, cash transactions cost less since no transaction fees are involved.
For good reasons, cash-preferring consumers often just do not want card issuers and retailers to track their personal information and purchases. Jay Stanley explains how in the US, data-brokerage services and Digital Appending services assist the knitting of detailed personal profiles about customers and making it available to the card accepting sellers of goods and services. Often the same fuel the data-pools with the information received from their credit card paying customers.
Low Numeracy, Limited Financial Education
Interestingly, low-numeracy business owners are completely capable of returning the correct cash change in their transactions with customers. However, often they are not able to write or type currency amounts. This prevents them from using ATMs, bank accounts, internet banking or digital payment services. With a little training, this missing skill is acquired very quickly.
Also, financial education may become even more important in the future for managing personal and business finances. It is astounding how few people check credit card and bank statements or even till receipts. Customer reviews of subscription services bear witness to frequent complaints about finding unauthorised debits only many months after cancellation deadlines.
Digital Readiness & Access
The Covid 19 crisis has hit vulnerable populations groups including the elderly particularly hard. Many have been unable or advised not to leave their homes. A large proportion of them still use cash and often have no access to internet banking. Also, many shops have suspended the acceptance of cash payments. Arrangements to pay volunteers for shopping errands and worries about running out of cash might have increased already high anxiety levels.
In conclusion, going cashless is not just about financial inclusion. Realistically, the future of the cash-fed piggy-bank is uncertain. However, for the sake of financial health, the arguments outlined above need to be considered in the design of financial products and financial education.
Cash is still widely used in emerging economies. EXCEED helps tracking the spending of cash expenses and provides micro-entrepreneurs with easy to understand reports for their financial decision making. Every micro-entrepreneur receives training in the use of the mobile record-keeping solution. Some need to be shown how to write or type currency amounts. Most master this skill very quickly and find a major barrier lifted to use ATMs and other digital payment methods.
Wharton University: "Show Me the Money: Does Going Cashless Hurt Financial Inclusion?", 12th March 2019
Utpal Dholakia, "Does It Matter Whether You Pay With Cash Or A Credit Card?" in Psychology Today, 11th July 2016
Unfixed Resources: Perceived Costs, Consumption, and the Accessible Account Effect Author(s): Carey K. Morewedge, Leif Holtzman and Nicholas Epley Source: Journal of Consumer Research, Vol. 34, No. 4 (December 2007), pp. 459-467; Published by: Oxford University Press
Emma Betuel: "The psychological reason credit cards make you spend like a Kardashian", Inverse
Wharton University: "Going Cashless: What’s Good for Banks May Not Be Best for You", June 2012
Jay Stanley: "Why Don’t We Have More Privacy When We Use A Credit Card?", American Civil Liberties Union, August 2019