Today's entry examines a question which arose in a conversation with Aimee Hokanson and Bethany Spring, regarding spending behavior. Simply put, the question, which was not specifically addressed to the blog, but I found to be blog worth is:
"Does the payment mode (using cash, credit, or debit cards) impact the amount spent?"
While some people claim that the answer to this question is well established and boarders on common knowledge, I was actually surprised to see very little research. Although it is unclear why people feel that the answer to this question is common knowledge, it seems likely to a variety of misinformation posted on the internet may be the cause.
For example, one commonly cited study, among bloggers to financial gurus such as David Ramsey, favors the notion that people spend more when using credit cards. According to these sources, a study was conducted by Dunn and Bradstreet, who found that people, on average, spend 12-18% more when making credit card purchases, compared to using cash. Additionally, they are reported to have discovered that the average McDonalds transaction increased from $4.50 to $7.00, upon the company's acceptance of credit cards as a viable payment option. However, to date, I have been unable to find this report, and have viewed some sources which claim that even Dunn and Bradstreet are unaware of the validity these figures.
Remember, Ronald "loves to see you smile".
So, if this study is not valid (or worse yet, does not exist), why do a variety of individuals constantly cite it? Well, the citation could be erroneously propelled by credit card corporations. After all, if you are in charge of a business, why would you opt for a payment method which requires time, equipment, and money to process? According to Flagship Merchant Services, gateway, statement, and monthly fees for processing transactions could be anywhere from $25 - $45 a month (and those are the "best" processing fees). Add this with the notion that your credit card may be lost, or stolen, which could end up costing the consumer more than they bargained for, and there seems to be little reason to accept credit or debit cards.
"And how will you be paying Mr. Flanders?"
Regardless of where this misleading information came from, I have decided to stick with books, peer reviewed studies, and dissertations which I was able to access, in order to seek out the correct answer.
ARGUMENTS FOR AND AGAINST:
Regardless of which mode of payment you feel is most likely to prompt spending, there are logical and possibly valid arguments supporting either view. For example, those who feel that someone who has cash on them is likely to spend more will often argue that the person in question withdrew that money and has it on them, so that they could spend it. Essentially, the decision to spend that money was made as soon as they withdrew it from the bank. Additionally, people who favor this view may argue that the money is "burning a hole" in one's pocket, begging to be spent at the first available moment.
Money is the root of all evil!
Alternatively, others claim that using credit cards is more likely to prompt spending. Proponents of this view argue that that, in general, cards distance the consumer with the reality of monetary exchange. Additionally, credit cards are based upon exchanging money one does not have, for goods, with the promise that the money will be paid back. Thus, by a literal - and narrow - definition, people who use credit cards are spending more money than they have. The same argument would not hold true for debit cards, as that is an exchange from money which is available in one's bank, but debit cards may also be viewed as a form of distance.
I'm here to steal your soul!
EMPIRICAL DATA:
Retailers (Borgen, 1976; Huck, 1976), credit researchers (Hirschman, 1979), and popular writers (Galanoy, 1980; Merchants of Debt, 1977) generally argue that credit cards facilitate spending. However, it has been debated if this facilitation significantly exceeds that of cash. Given that the majority of data on this subject is correlational, it has been difficult to objectively determine whether or not credit cards actually prompt more spending.
Hand over your money or
I will give you this credit card!
To date, the most comprehensive response to the question at hand was provided by Raghubir and Srivastava (2009), who conducted a series of studies attempting to ascertain whether or not payment mode makes a difference. In the first study, participants estimated how much they would spend using cash vs. credit cards for a restaurant meal. The results noted that people are willing to pay more when they use a credit card, versus cash. In a second experiment, researchers prompted participants to estimate food expenses for an imaginary Thanksgiving dinner, item by item. When participants considered the cost, the cash-credit spending gap closed, suggesting that people who are confronted with the reality of expenses, no longer allow the mode to influence their decisions.
Collectively, the results from these studies indicate that people may spend more when using a credit card, due to the expense seeming less real. Raghubir and Srivastava conducted two additional studies which examined gift certificates. In the first gift card study, results suggested that participants spend more when using a gift card than cash. In a second study, participants were given $1 gift cards which could be used to buy candy. Participants were instructed to put a gift card in their wallet for an hour, which the researchers argued, made the value card seem more real. Results indicate that people participants put the gift cards in their wallets; they were less likely to use them.
While the question of using debit cards remains unaddressed, the experimental studies outlined provide sound evidence for the notion that credit cards prompt more spending. For some reason, the use of cards seems to be less transparent when considering monetary exchange.
TRANSPARENT TRANSPARENCY: A HISTORICAL APPROACH:
Having read the previously stated arguments, one may wonder why using a card is viewed as distancing the consumer from their money? After all, if these cards are little more than money, why should it make any difference as to its form? Although the aforementioned study provides some data as to the cause of credit cards facilitating spending, the answer remains somewhat elusive. Sources have suggested that while credit cards do prompt spending, there is no special aspect of credit cards which can be implicated for this cause (Federal Reserve System, 1968; Zipprodt, 1969). Thus, in order to fully understand the reasoning behind the theory proposed by Raghubir and Srivastava , a historical overview may be necessary.
According to historical data, the barter system was commonly used up to 100,000 years ago (Mauss, 1923). However, many cultures around the world soon developed the use of commodity money, as the barter system was limited to use between family and friends (Graeber, 2001). While money originally served as a medium of exchange, individuals were limited to the amount of wealth which they had gained to date.
Torg needed companionship, Gark needed food...
...what to do... what to do?
The concept of using a card for a purchase was first noted in 1887 by Edward Bellamy, author of Looking Backward (http://en.wikipedia.org/wiki/Looking_Backward). Bellamy used the term "credit card" eleven times throughout his novel. In the late 1920s, a variety of companies developed a device called the "Charge Plate", which was issued by large-scale merchants to their regular customers. Since the 1960s, credit card use has dramatically increased in the US (Duca & Whitesell, 1995), such that credit cards are now seen as a vital component of business, banking, and personal money management (Clark, 1975; Savage, 1970).
The reason that a historical approach may allow for additional insights is that, for most of the known economic history, money was used as the primary exchange. It stands to reason that given the explosion of technological advances that devices such as credit cards are likely to be viewed as positive and convenient. However, much of the technology which allows us to monitor credit is hard to obtain (try getting your credit report in five minutes), or at the very least, requires individuals to be proactive (banks may push for online banking to save paper, but also require you to login to monitor your finances). Essentially, the concept of a credit card is new, and it may not be highly associated to our personal finances in the same way that that money is.
CONCLUSION:
As credit cards become more common place, the cash to credit card gap may dissolve. However, until then, research suggests that you may be more likely to spend more when using a credit card. This may sound bad at face value; however, there is nothing inherently wrong with using a credit card. After all, where would the world economy be if entrepreneurs were not able to secure funding for their projects?
Well, for one, Trump would be broke.
If you ask me, a world with Donald Trump is a small price to pay for the convenience afforded to the general public thanks to credit cards. Credit cards require the user to be fiscally aware, and somewhat proactive with their finances, which, if you ask me, is not a bad thing. Although some individuals still end up over their head in debt, I would argue that this is the fault of an unregulated fiscal sector which felt it was too big to fail.
I guess we'll have to sell one of the kids.
On a final note, I will admit that the research presented here is not too conclusive. Additional studies are needed. After all, there could be some third variables which need to be controlled for to see whether or not the pattern would hold. For example, age, experience with credit, or even whether or not students in the study had money in their wallets in that fourth study could all influence the results. While some could argue that the difference may hinder on a variety of personality traits, or individual differences, it is important to approach the subject such that one determines if an effect exists or not. Once an effect is established, it would be useful to consider these others variables and how they may strength or reverse the observed relations.
NOTE: If you have a question for me to research and answer please submit it as a comment, or send it to ELKronos@aol.com / Facebook.com/ELKronos. Submit your name and location if you wish to opine.
CITATIONS:
Borgen, C. W. (1976). Learning Experiences in Retailing: Text and Cases, New York: Goodyear.
Clark, F. (1975). Bank Credit Cards: Attitudes and Decisions of Selected Retail Merchants in Arkansas and Missouri, unpublished dissertation, University of Arkansas, Department of Business Administration, Fayetteville, AR 72701.
Duca, J.V., & Whitesell, W.C. (1995). Credit Cards and Money Demand: A Cross-sectional Study. Journal of money, credit and banking, 27, 604-623.
Federal Reserve System (1968), Bank Credit Card and Check Credit Plans, Publication Services, Division of Administrative Services, Board of Governors, Washington, D.C. 20551.
Galanoy, T. (1980). Charge It: Inside the Credit Card Conspiracy, New York: G.P. Putnam Sons.
Graeber, D. (2001). Toward an Anthropological Theory of Value, 153-154.
Hirschman, E. (1979). Differences in Consumer Purchase Behavior of Credit Card Payment System. Journal of Consumer Research, 6, 58-66.
Huck, L. (1976). Making the Credit Card the Customer. Banking, 68, 37, 80, and 83.
Mauss, M. (1923). The Gift: The Form and Reason for Exchange in Archaic Societies. 36-37.
Merchants of Debt (1977). Time Magazine, 109, 36-40.
Raghubir, P., & Srivastava, J. (2008). Monopoly money: The effect of payment coupling and form on spending behavior. Journal of experimental psychology: Applied, 14, 213-225.
Savage, J. (1970). Bank Credit Cards: Their Impact on Retailers. Banking, 63 (1), 39, 92.
Zipprodt, C. (1969). Bank Charge Cards-An Evaluation. The Journal of Consumer Credit Management, 1, 10-19.
No comments:
Post a Comment