Pain of paying

Last updated

The pain of paying is a concept from Behavioral Economics and Behavioral Science, coined in 1996 by Ofer Zellermayer, whilst writing his PhD dissertation at the University of Carnegie Mellon, under supervision of George Loewenstein. The term refers to the negative emotions experienced during the process of paying for a good or service. [1] In other words, to make this simpler to understand, the more a purchase hurts, the less people are willing to make this purchase. [2] During the payment process, the handing over of money is akin to losing money. As most people are loss averse, this is experienced as a negative feeling, and as such can also be used to avoid or reduce spending. [3] In 2023, Farnoush Reshadi and M. Paula Fitzgerald reviewed the literature on pain of payment and offered a new definition of pain of payment that distinguishes between two types of pain of payment: immediate and anticipated. Immediate pain of payment is “the negative psychological affective reaction consumers experience immediately after they become cognizant that they havelost a certain amount of their financial resources.” Anticipated pain of payment is “the negative psychological affective reaction consumers experience when they become cognizant that they will or may lose a certain amount of their financial resources in the future.” [4] These new definitions consider that pain of payment can be experienced both after and before making payments, can be experienced when losing any type of financial resource that can act as a source of security (e.g., savings, investments), and is only evoked when consumers become aware of the financial loss. [4] The pain of paying has been tested in several contexts, and has been found to differ per payment method. The pain of paying is often heralded as a tool to curb individuals' spending. [5]

Contents

Research on payment methods

The pain of paying is not equal amongst all payment methods. The original research by Ofer Zellermayer [6] showed that when it came to the pain of paying, consumers preferred using methods of payment they ranked as the least painful. Bank deduction (direct debit) and credit card were preferred, whereas check and cash were judged to be the most painful, and the least preferred. The least painful payment methods were not only preferred, they were also the most frequently used.

Card payments

Zellermayer's dissertation is not the only research looking into the pain of paying as related to card payments. Applying the reduced pain of paying to credit cards would be able to explain the effects seen within credit card usage. Increased credit card usage, as compared to cash usage, has been linked to increased spending, [7] [8] [9] less accurate expenditure recall, [10] [11] [12] reduced impulse control leading to more frequent spending [13] [14] and debt accumulation. [15] The pain of paying would account for these phenomena occurring by the reduced salience associated with lower levels of pain.

Notably different from normal card payments, in which signatures, swiping or PIN-verification is used, are contactless card payments. Looking exclusively at cards, research has found that individuals predominantly using contactless cards were less aware of their spending, were more likely to spend more and felt less in control over their spending. [16] Aforementioned research [17] found that levels of pain of paying across credit card and contactless cards were equally low, as compared to the levels of pain experienced when using cash.

Mobile payments

Research on the effect of mobile payments on the pain of paying has been done as well, showing that lower levels of pain are experienced when using phones and other gadgets to pay, as compared to cash, but also to cards. [18] Other research has found similar effects, and attributes this to theories of multifunctionality, in which the pain of paying by a phone is reduced, as a phone is not exclusively used for payments, as such reducing the salience of the payment. [19]

Research on Individual Characteristics

In addition to the pain of paying not being constant across different methods of payment, it also does not hold constant across individuals. Research has shown that different types of people experience different levels of pain of paying, which can in turn affect spending decisions. [20]

Spendthrift-Tightwad Scale

The first scale developed to account for individual differences within spending behaviour measured the divergence between one’s typical spending habits and one’s desired spending habits. [21] Derived from this, a more detailed scale was developed to indicate how much pain was experienced during the process of spending, called the tightwad-spendthrift scale, where tightwads experience higher levels of the pain of paying, as compared to spendthrifts who experience lower levels of the pain of paying. Research has also looked into the possible effects of marketing on this scale: tightwads are particularly sensitive to marketing contexts that make spending less painful [22]

Neuroscientific Research

The pain of paying is not an exclusively behavioral phenomenon. Neuroscientific studies have shown that the pain of paying exists on a neural level. In addition to merely representing costs or loss in a rational sense, the “pain of paying” theory argues that price can elicit an aversive response akin to physical pain (Prelec and Loewenstein 1998, Rick et al. 2008). The results for nucleus accumbens (reward centre) and medial prefrontal cortex indicate that even if price primacy evoked pain early in the decision process, that pain did not systematically lower estimates of product value, nor did it prevent or decrease purchases [23] If activity in the nucleus accumbens (reward centre) was unable to counteract the activity (pain experienced) in the insular cortex, the participant would not purchase the product in question, as paying was too "painful". [24] Further research also contributed to showing that the pain of paying does exist on a neural level, showing that inducing the pain of paying can be done through priming and is resistant to placebo effects [25] showed similar results

Other Theories on Payment Methods

The pain of paying is not the only theory aiming to explain the different behaviours associated with different payment methods. Dilip Soman produced the framework of payment transparency, in which he argues that it is the transparency of the payment method, focusing on its reflection of value, that determines how salient, or painful, the payment is. [26] The observations and predictions made by Soman closely align those of Zellermayer. Both relate to the degree of coupling (i.e., the strength of the dyadic relationship) between payment and consumption as influencing the severity of the pain of paying.

A second theory which looks into the effect of payment method on the pain of paying is the theory of decoupling, as proposed by Raghubir and Srivastava. [27] Within this theory the coupling of payment and pain of paying refers to its concurrency. This theory too, is based on Zellermayer's concept that the pain of paying affects consumers' payment-time/mode preferences. The concurrency of payment method with paying (the good/service has to be paid for as it is obtained), determines its pain. Payment methods that don't allow for this concurrency are decoupled, and as such the pain of paying for the good/service is postponed, whereas the pleasure from obtaining the good/service is immediately experienced. The decoupling theory focuses predominantly on the different behaviours associated with credit card usage. Credit cards being the only method that allows for non-concurrent payment at the point of sale.

Related Research Articles

<span class="mw-page-title-main">Debit card</span> Card used for financial transactions, usually without a credit line

A debit card, also known as a check card or bank card is a payment card that can be used in place of cash to make purchases. The term plastic card includes the above and as an identity document. These are similar to a credit card, but unlike a credit card, the money for the purchase must be in the cardholder's bank account at the time of a purchase and is immediately transferred directly from that account to the merchant's account to pay for the purchase.

<span class="mw-page-title-main">EFTPOS</span> Type of electronic payment system

Electronic funds transfer at point of sale is an electronic payment system involving electronic funds transfers based on the use of payment cards, such as debit or credit cards, at payment terminals located at points of sale. EFTPOS technology was developed during the 1980s.

<span class="mw-page-title-main">Debt</span> Obligation to pay borrowed money

Debt is an obligation that requires one party, the debtor, to pay money borrowed or otherwise withheld from another party, the creditor. Debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. In financial accounting, debt is a type of financial transaction, as distinct from equity.

<span class="mw-page-title-main">Mobile payment</span> Payment services via a mobile device

A mobile payment, also referred to as mobile money, mobile money transfer and mobile wallet, is any of various payment processing services operated under financial regulations and performed from or via a mobile device, as the cardinal class of digital wallet. Instead of paying with cash, cheque, or credit cards, a consumer can use a payment app on a mobile device to pay for a wide range of services and digital or hard goods. Although the concept of using non-coin-based currency systems has a long history, it is only in the 21st century that the technology to support such systems has become widely available.

<span class="mw-page-title-main">Mental accounting</span>

Mental accounting is a model of consumer behaviour developed by Richard Thaler that attempts to describe the process whereby people code, categorize and evaluate economic outcomes. Mental accounting incorporates the economic concepts of prospect theory and transactional utility theory to evaluate how people create distinctions between their financial resources in the form of mental accounts, which in turn impacts the buyer decision process and reaction to economic outcomes. People are presumed to make mental accounts as a self control strategy to manage and keep track of their spending and resources. People budget money into mental accounts for savings or expense categories. People also are assumed to make mental accounts to facilitate savings for larger purposes. Mental accounting can result in people demonstrating greater loss aversion for certain mental accounts, resulting in cognitive bias that incentivizes systematic departures from consumer rationality. Through increased understanding of mental accounting differences in decision making based on different resources, and different reactions based on similar outcomes can be greater understood.

The debt snowball method is a debt-reduction strategy, whereby one who owes on more than one account pays off the accounts starting with the smallest balances first, while paying the minimum payment on larger debts. Once the smallest debt is paid off, one proceeds to the next larger debt, and so forth, proceeding to the largest ones last. This method is sometimes contrasted with the debt stacking method, also called the debt avalanche method, where one pays off accounts on the highest interest rate first.

<span class="mw-page-title-main">NETS (company)</span>

Network for Electronic Transfers, colloquially known as NETS, is a Singaporean electronic payment service provider. Founded in 1985, by a consortium of local banks, it aims to establish the debit network and drive the adoption of electronic payments in Singapore. It is owned by DBS Bank, OCBC Bank and United Overseas Bank (UOB).

<span class="mw-page-title-main">Contactless payment</span> Technology enabling payment without physical contact

Contactless payment systems are credit cards and debit cards, key fobs, smart cards, or other devices, including smartphones and other mobile devices, that use radio-frequency identification (RFID) or near-field communication for making secure payments. The embedded integrated circuit chip and antenna enable consumers to wave their card, fob, or handheld device over a reader at the Point-of-sale terminal. Contactless payments are made in close physical proximity, unlike other types of mobile payments which use broad-area cellular or WiFi networks and do not involve close physical proximity.

Mobile ticketing is the process whereby customers order, pay for, obtain, and validate tickets using mobile phones. A mobile ticket contains a verification unique to the holder's phone. Mobile tickets reduce the production and distribution costs associated with paper-based ticketing for operators by transferring the burden to the customer, who is required to contribute the cost of the physical device (smartphone) and internet access to the process. As a result of these prerequisites, and in contrast to paper-based systems, mobile ticketing does not follow the principles of universal design.

<span class="mw-page-title-main">Dan Ariely</span> Israeli-American professor of psychology and behavioral economics

Dan Ariely is an Israeli-American professor and author. He serves as a James B. Duke Professor of psychology and behavioral economics at Duke University. Ariely is the founder of the research institution The Center for Advanced Hindsight, as well as the co-founder of several companies implementing insights from behavioral science. Ariely's TED talks have been viewed over 15 million times. Ariely wrote an advice column called Ask Ariely in the WSJ for over ten years; he stepped away from the column at the end of 2022. Ariely is the author of the three New York Times best sellersPredictably Irrational, The Upside of Irrationality, and The Honest Truth about Dishonesty, as well as the books Dollars and Sense, Irrationally Yours – a collection of his The Wall Street Journal advice column Ask Ariely; and Payoff, a short TED book. Ariely appeared in several documentary films, including The Inventor: Out for Blood in Silicon Valley and produced and participated in (Dis)Honesty: The Truth About Lies.

<span class="mw-page-title-main">OnePulse</span> Credit card issued by Barclaycard

OnePulse was the name given to a credit card that was issued by Barclaycard that combined the functionality of Transport for London's Oyster card with a Visa contactless-enabled credit card. Barclaycard OnePulse was launched in early September 2007. Barclaycard has now started to change and simplify its range of credit cards and has started moving all OnePulse cardholders to one of their other cards.

An issuing bank is a bank that offers card association branded payment cards directly to consumers, such as credit cards, debit cards, contactless devices such as key fobs as well as prepaid cards. The name is derived from the practice of issuing cards to a consumer.

A payment processor is a system that enables financial transactions, commonly employed by a merchant, to handle transactions with customers from various channels such as credit cards and debit cards or bank accounts. They are usually broken down into two types: front-end and back-end.

<span class="mw-page-title-main">Denomination effect</span> Form of cognitive bias relating to currency

The denomination effect is a form of cognitive bias relating to currency, suggesting people may be less likely to spend larger currency denominations than their equivalent value in smaller denominations. It was proposed by Priya Raghubir, professor at the New York University Stern School of Business, and Joydeep Srivastava, professor at University of Maryland, in their 2009 paper "Denomination Effect".

RuPay(portmanteau of Rupee and Payment) is an Indian multinational financial services and Payment Service System, conceived and launched by the National Payments Corporation of India (NPCI) in 2014. It was created to fulfil the Reserve Bank of India's (RBI) vision of establishing a domestic, open and multilateral system of payments. RuPay facilitates electronic payment at all Indian banks and financial institutions. NPCI maintains ties with Discover Financial, JCB to enable RuPay Card scheme to gain international acceptance.

<span class="mw-page-title-main">Surcharge (payment systems)</span>

A surcharge, also known as checkout fee, is an extra fee charged by a merchant when receiving a payment by cheque, credit card, charge card or debit card which at least covers the cost to the merchant of accepting that means of payment, such as the merchant service fee imposed by a credit card company. Retailers generally incur higher costs when consumers choose to pay by credit card due to higher merchant service fees compared to traditional payment methods such as cash.

Apple Pay is a mobile payment service by Apple Inc. that allows users to make payments in person, in iOS apps, and on the web. It is supported on iPhone, Apple Watch, iPad, and Mac. It digitizes and can replace a credit or debit card chip and PIN transaction at a contactless-capable point-of-sale terminal. It does not require Apple Pay-specific contactless payment terminals; it can work with any merchant that accepts contactless payments. It adds two-factor authentication via Touch ID, Face ID, PIN, or passcode. Devices wirelessly communicate with point of sale systems using near field communication (NFC), with an embedded secure element (eSE) to securely store payment data and perform cryptographic functions, and Apple's Touch ID and Face ID for biometric authentication.

Financial social work is an interactive and introspective, multidisciplinary approach that helps individuals explore and address their unconscious feelings, thoughts and attitudes about money. This self-examination process enables people to improve their relationship with their money and thus establish healthier money habits that lead to improved financial circumstances.

Card transaction data is financial data generally collected through the transfer of funds between a card holder's account and a business's account. It consists of the use of either a debit card or a credit card to generate data on the transfer for the purchase of goods or services. Transaction data describes an action composed of events in which master data participates. Transaction focuses on the price, discount and method of payment interaction between the customer and the organization. They are based on volatility as each transaction data changes every time a purchase is made, one time it could be $10, the next $55. Since debit and credit cards are commonly used to pay for goods and services, they represent a strong percentage of the consumption expenditure in the country.

<span class="mw-page-title-main">Google Pay (payment method)</span> Mobile payments platform developed by Google

Google Pay is a mobile payment service developed by Google to power in-app, online, and in-person contactless purchases on mobile devices, enabling users to make payments with Android phones, tablets, or watches. Users can authenticate via a PIN, passcode, or biometrics such as 3D face scanning or fingerprint recognition.

References

  1. ↑ Zellermayer, O. (1996). It is a visceral sensation that depends on the condition under which the purchase is made. The pain of paying. (Doctoral dissertation). Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, PA.
  2. ↑ "Off DeWall: The Pain of Paying | Psychology". psychology.as.uky.edu. Retrieved 2020-11-09.
  3. ↑ Prelec, D., & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28.
  4. 1 2 Reshadi, Farnoush; Fitzgerald, M. Paula (2023-05-09). "The pain of payment: A review and research agenda". Psychology & Marketing: mar.21825. doi:10.1002/mar.21825. ISSN   0742-6046.
  5. ↑ Prelec, D., & Loewenstein, G. (1998). The red and the black: Mental accounting of savings and debt. Marketing Science, 17(1), 4-28.
  6. ↑ Zellermayer, O. (1996). The pain of paying. (Doctoral dissertation). Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, PA.
  7. ↑ Prelec, D., & Simester, D. (2001). Always leave home without it: A further investigation of the credit-card effect on willingness to pay. Marketing letters, 12(1), 5-12.
  8. ↑ Runnemark, E., Hedman, J., & Xiao, X. (2015). Do consumers pay more using debit cards than cash?. Electronic Commerce Research and Applications, 14(5), 285-291.
  9. ↑ Soman, D. (2003). The effect of payment transparency on consumption: Quasi-experiments from the field. Marketing Letters, 14(3), 173-183.
  10. ↑ Gross, D. B., & Souleles, N. S. (2002). Do liquidity constraints and interest rates matter for consumer behavior? Evidence from credit card data. The Quarterly journal of economics, 117(1), 149-185.
  11. ↑ Raghubir, P., & Srivastava, J. (2008). Monopoly money: The effect of payment coupling and form on spending behavior. Journal of experimental psychology: Applied, 14(3), 213.
  12. ↑ Srivastava, J., & Raghubir, P. (2002). Debiasing using decomposition: The case of memory-based credit card expense estimates. Journal of Consumer Psychology, 12(3), 253-264.
  13. ↑ See-To, E. W., & Ngai, E. W. (2019). An empirical study of payment technologies, the psychology of consumption, and spending behavior in a retailing context. Information & Management, 56(3), 329-342.
  14. ↑ Thomas, M., Desai, K. K., & Seenivasan, S. (2011). How credit card payments increase unhealthy food purchases: Visceral regulation of vices. Journal of consumer research, 38(1), 126-139.
  15. ↑ Gross, D. B., & Souleles, N. S. (2002). Do liquidity constraints and interest rates matter for consumer behavior? Evidence from credit card data. The Quarterly journal of economics, 117(1), 149-185.
  16. ↑ James, B. (2017). How has the adoption of contactless payment affected UK students’ Spending Habits? (Doctoral dissertation, Cardiff Metropolitan University).
  17. ↑ See-To, E. W., & Ngai, E. W. (2019). An empirical study of payment technologies, the psychology of consumption, and spending behavior in a retailing context. Information & Management, 56(3), 329-342.
  18. ↑ Pisani, F., & Atalay, S. (2018). Cashless Payments, Pain of Paying and the Role of Attachment. ACR European Advances.
  19. ↑ Gafeeva, R., Hoelzl, E., & Roschk, H. (2018). What else can your payment card do? Multifunctionality of payment modes can reduce payment transparency. Marketing Letters, 29(1), 61-72.
  20. ↑ Rick, S. I., Cryder, C. E., & Loewenstein, G. (2008). Tightwads and spendthrifts. Journal of consumer research, 34(6), 767-782.
  21. ↑ Prelec, D., Loewenstein, G., & Zellermayer, O. (1997). Closet tightwads: Compulsive reluctance to spend. In Association for Consumer Research Conference, Denver.
  22. ↑ Rick, S. I. (2018). Tightwads and spendthrifts: An interdisciplinary review. Financial Planning Review, 1(1-2), e1010. Retrieved from https://doi.org/10.1002/cfp2.1010.
  23. ↑ Karmarkar, U. R., Shiv B., & Knutson B. (2015). Cost Conscious? The Neural and Behavioral Impact of Price Primacy on Decision-Making. Journal of Marketing Research 52(4),467–481
  24. ↑ Rick, S. I., Cryder, C. E., & Loewenstein, G. (2008). Tightwads and spendthrifts. Journal of consumer research, 34(6), 767-782.
  25. ↑ Mazar, N., Plassmann, H., Robataille, N., & Lindner, A. (2014). Pain of Paying—A Metaphor Gone Literal: Evidence from Neurobiology and Behavioral Decision Making. INSEAD working paper.
  26. ↑ Soman, D. (2003). The effect of payment transparency on consumption: Quasi-experiments from the field. Marketing Letters, 14(3), 173-183.
  27. ↑ Raghubir, P., & Srivastava, J. (2008). Monopoly money: The effect of payment coupling and form on spending behavior. Journal of experimental psychology: Applied, 14(3), 213.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.