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.

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.

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.

Moonshot Thinking

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.


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.

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.

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 is marketing can be associated with social proof.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger

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