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.

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.

Connected Business Concepts

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.
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.
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.
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.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman since 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.
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.
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 – 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.
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.
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.
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 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.
Moonshot thinking is an approach to innovation, and it can be applied to business or any other discipline where you target at least 10X goals. That shifts the mindset, and it empowers a team of people to look for unconventional solutions, thus starting from first principles, by leveraging on fast-paced experimentation.
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
The CATWOE analysis is a problem-solving strategy that asks businesses to look at an issue from six different perspectives. The CATWOE analysis is an in-depth and holistic approach to problem-solving because it enables businesses to consider all perspectives. This often forces management out of habitual ways of thinking that would otherwise hinder growth and profitability. Most importantly, the CATWOE analysis allows businesses to combine multiple perspectives into a single, unifying solution.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"