Cashless Effect And Why It Matters In Business

The cashless effect is a bias which argues that consumers are likely to spend more money when they don’t have to physically give it up. Physically giving up money is also called “pain of payment” – the more pain a consumer associates with paying, the less likely they are to spend.

DefinitionThe Cashless Effect refers to the shift in consumer behavior and payment preferences away from using physical cash (paper money and coins) and towards digital payment methods. It encompasses the adoption of various electronic payment options such as credit cards, debit cards, mobile wallets, and digital payment apps. The Cashless Effect is driven by technological advancements, convenience, and changing consumer preferences. It has significant implications for businesses, financial institutions, and economies as a whole, affecting how transactions are conducted, monitored, and secured. Understanding this phenomenon is crucial for businesses and individuals alike as they navigate an increasingly cashless world.
Key ConceptsDigital Payments: The central concept is the adoption of digital payment methods over physical cash. – Technological Advancements: Technological innovations enable the transition to cashless payments. – Convenience: Convenience plays a vital role in the preference for cashless transactions. – Security: Digital payment methods are often perceived as more secure than carrying physical cash. – Financial Inclusion: Cashless options can promote financial inclusion by providing access to banking services for the unbanked and underbanked.
CharacteristicsReduced Cash Usage: A notable characteristic is the decline in the use of physical cash for everyday transactions. – Diverse Payment Methods: A variety of electronic payment methods are available, offering flexibility to consumers. – Digital Wallets: The emergence of digital wallets and mobile payment apps is a significant characteristic. – Contactless Payments: Contactless payment methods, such as NFC (Near Field Communication) technology, are increasingly popular. – Payment Security: Consumers value the security features associated with digital payments.
ImplicationsBusiness Transformation: The Cashless Effect necessitates businesses to adapt and offer digital payment options. – Financial Inclusion: Digital payments can promote financial inclusion by reaching underserved populations. – Transaction Tracking: Electronic payments enable easy tracking and monitoring of transactions. – Security Enhancement: Digital payment methods often include security features like biometrics and two-factor authentication. – Reduced Cash Handling: Less physical cash in circulation affects cash handling costs for businesses and governments.
AdvantagesConvenience: Digital payments offer convenience and speed in conducting transactions. – Security: Many consumers perceive digital payments as more secure than carrying cash. – Transaction Tracking: Electronic payments enable users to monitor and manage their spending easily. – Financial Inclusion: Cashless options can include those who were previously excluded from traditional banking services. – Reduced Cash Handling Costs: Businesses benefit from reduced costs associated with handling and securing physical cash.
DrawbacksDigital Divide: Not everyone has access to or is comfortable with digital payment methods, leading to exclusion. – Privacy Concerns: Electronic payments can raise privacy and data security concerns. – Dependency on Technology: Relying solely on digital payments can lead to dependency on technology. – Transaction Fees: Some digital payment methods come with transaction fees. – Fraud Risks: While more secure, digital payments are not immune to fraud and cyberattacks.
ApplicationsRetail and Commerce: Businesses of all sizes increasingly accept digital payments. – Banking and Finance: Financial institutions offer a wide range of digital banking services. – E-commerce: Online shopping relies entirely on digital payment methods. – Transportation: Public transportation systems often accept contactless payments. – Government Services: Government agencies offer online payment options for taxes and fees.
Use CasesRetail Transactions: A consumer pays for groceries at a supermarket using a contactless payment card or mobile wallet. – Online Shopping: An individual makes purchases on an e-commerce website and checks out using a digital payment app. – Mobile Wallet Usage: A commuter pays for public transportation by tapping their smartphone on a contactless reader. – Bill Payments: A customer pays utility bills and taxes online through their bank’s digital platform. – Financial Inclusion: An unbanked individual in a rural area gains access to financial services through a mobile banking app, reducing the need for physical cash.

Understanding the cashless effect

As developed nations transition to cash-free societies, the implications of the cashless effect for consumer spending habits are significant.

The cashless effect states that consumers are willing to pay more when they can’t physically see the money being spent.

The cashless effect has been well documented in studies. In a 2003 marketing study, residents spent more money doing their laundry when washing machines took cards instead of cash.

In another study by MIT, two groups of people were asked to bid on tickets to a sporting event. The group who had a credit card to fund the purchase bid up to 72% more than the group funded with cash.

Implications for business and marketing

The benefits of a business taking advantage of the cashless effect are obvious, but this does not diminish their scalability or effectiveness.

Let’s take a look at how the cashless effect is already being implemented:

  • Reducing pain. By taking as much effort out of the purchasing process as possible, businesses are also reducing payment pain. Apple Pay has revolutionized the payment process, with users simply having to wave one of their devices in front of a payment terminal. Amazon’s one-click ordering has also taken much of the hassle out of e-commerce ordering.
  • Simplicity – many businesses are now incorporating entire payment experiences within smartphone apps. Coffee company Harris + Hoole recently won an award for its app, which allows users to order their daily cup of coffee or add funds to their account in just a few short taps.
  • Tipping – when making a credit card payment at a restaurant, diners are now prompted to automatically add a tip to the cost of their meals. Paying with a credit card means that tips are likely to be higher. Given that the percentage amount of tips is calculated for the consumer, further pain is reduced from the payment process.

Potential limitations to cashless effect in business

With the shift toward digital transactions, payment providers and app developers may decide to establish or increase user fees. While this is unlikely to curb spending habits for existing users, fees may dissuade others from signing up.

The ease of spending associated with the cashless effect can also create social problems and widen economic inequality. For example, consumer debt in the U.S. in 2019 was almost $14 trillion alone. Long term, consumer debt is bad for business because people have less disposable income.

In the face of the COVID-19 pandemic, many countries have also seen credit card ownership and debt reduced significantly. Whether this reduces the cashless effect remains to be seen, but there is potential that consumers who use debit cards for purchases may be more discerning buyers.

Key takeaways:

  • In simple terms, the cashless effect describes the consumer tendency to spend more money when that money is intangible. 
  • The cashless effect is a bias related to the pain of payment, which states that consumers who pay with cash experience more pain and are therefore likely to spend less.
  • The cashless effect is becoming ubiquitous as trends shift toward card transactions that remove the pain and hassle out of purchasing. However, the effect has the potential to exacerbate wealth inequality and is vulnerable to the rising unpopularity of credit use in some countries.

Key Highlights about the Cashless Effect:

  • Definition: The cashless effect is a bias in consumer behavior that suggests people are more likely to spend money when they don’t physically have to hand over cash. This is linked to the concept of the “pain of payment,” where the act of physically parting with money is associated with a sense of loss.
  • Transition to Cashless Societies: As developed nations move towards cashless payment systems, the cashless effect becomes more significant in shaping consumer spending habits.
  • Behavioral Observations: Research studies have documented the cashless effect. For instance, people spent more money on laundry when they used cards instead of cash-operated washing machines. Additionally, individuals bidding on event tickets with credit cards were found to bid significantly higher than those using cash.
  • Business Implications: Businesses can leverage the cashless effect to encourage higher spending. Streamlining the payment process, such as with Apple Pay and Amazon’s one-click ordering, reduces the perceived pain of payment. Smartphone apps are being designed to offer seamless payment experiences, further reducing friction in the buying process.
  • Tipping and Social Norms: Cashless transactions can also impact behaviors like tipping. Credit card prompts for automatic tipping at restaurants can lead to higher tips, benefiting service staff. However, this can also be influenced by social norms and pre-set tip percentages.
  • Potential Limitations: While the cashless effect can boost spending, it may lead to user fees imposed by payment providers or app developers. Additionally, the ease of spending associated with cashless transactions can contribute to consumer debt, potentially impacting long-term disposable income and overall financial well-being.
  • Wealth Inequality and Trends: The cashless effect could contribute to wealth inequality and social issues. In some cases, the shift towards digital payments may lead to reduced credit card ownership and debt, with consumers becoming more discerning about their purchases.

Connected Thinking Frameworks

Convergent vs. Divergent Thinking

Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.

Critical Thinking

Critical thinking involves analyzing observations, facts, evidence, and arguments to form a judgment about what someone reads, hears, says, or writes.


The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Second-Order Thinking

Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Bounded Rationality

Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Dunning-Kruger Effect

The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Lindy Effect

The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.


Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).

Systems Thinking

Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.

Vertical Thinking

Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.

Maslow’s Hammer

Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).

Peter Principle

The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.

Straw Man Fallacy

The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.

Streisand Effect

The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.


As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Recognition Heuristic

The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.

Representativeness Heuristic

The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.

Take-The-Best Heuristic

The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.

Bundling Bias

The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.

Barnum Effect

The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.

First-Principles Thinking

First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.

Ladder Of Inference

The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.

Goodhart’s Law

Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.

Six Thinking Hats Model

The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.

Mandela Effect

The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.

Moore’s Law

Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.

Disruptive Innovation

Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Value Migration

Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.

Bye-Now Effect

The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.


Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.


A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.

Murphy’s Law

Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”

Law of Unintended Consequences

The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.

Fundamental Attribution Error

Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.

Outcome Bias

Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.

Hindsight Bias

Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger EffectLindy EffectCrowding Out EffectBandwagon Effect.

Main Guides:

About The Author

Scroll to Top