Click, Tap, Swipe. The Trap Of Spending Digital Money.

Unbeknownst to us, our brain ‘nudges’ us to spend lesser when we use cash, writes Abaneeta Chakraborty.

A bank card is a kept on a keyboard. (Photographer: Grant Turner/Bloomberg News)
A bank card is a kept on a keyboard. (Photographer: Grant Turner/Bloomberg News)

Sometime during the late 1990s, various social messaging exercises made using cash look ‘uncool’. Suddenly, credit cards had become a status symbol. I distinctly remember a client flaunting his new acquisition – the Black Card. This was his ticket to limitless spending and was available only ‘by invitation’.

There were other clients who were modest in their demeanor and in particular, I remember one – an elderly gentleman, who always settled the lunch bills in cash. One day, I asked him, very gently, what may be the reason for his preference? He just smiled and said he was more in control that way.

While I was having these conversations in India, somewhere in another continent, a certain Professor Drazen Prelec was administering an experiment on his students. The class was to bid for sold out tickets to a popular basketball game. Half of them were to bid only with cash, while the other half were to bid only with credit cards. The results were startling – students using credit cards to bid were willing to offer double the amount than the students who were using cash.

He eventually ran MRI scans to understand how our brains react to various methods of spending and found evidence that while parting with cash, even though for a nano-second, some specific neural pathways lit up. These pathways are the same as those that respond to physical pain.

Unbeknownst to us, our brain ‘nudges’ us to spend lesser when we use cash.
Click, Tap, Swipe. The Trap Of Spending Digital Money.

Behavioural Economics And The ‘Pain Of Paying’

When I started teaching behavioural economics in 2014, I came across several well-known studies on the ‘pain of paying’. The basic premise is that when we are making an expenditure, there are two transactions –

  • The consumption transaction that provides pleasure.
  • The payment transaction, which provides pain.

Anyone who can dissociate the pain from the pleasure will have cracked the code that encourages us to spend needlessly and endlessly. Prof. Prelec concluded that credit cards are ‘insidious’ because they disconnected the consumption transaction, which is pleasant, from the payment transaction, which is painful.

Debit cards and online transactions do the same. This is a well-set trap, envisioned by tech giants to one day, kill cash.

Spending on credit is particularly dangerous. We tend to think of that spending as something our future selves have to deal with.

In a sense, our present consuming selves are dissociated from our future paying selves, so it seems okay to spend now and pay later, whether we can afford to or not.

Either way, we spend more than we would if we had to part with cash.

Card payment only notices sit on a protective screen in London. (Photographer: Hollie Adams/Bloomberg)
Card payment only notices sit on a protective screen in London. (Photographer: Hollie Adams/Bloomberg)

The Evil Side Of Technology

Let us understand this in a little more detail. If I buy something from you and hand over cash, the transaction process is complete. There is no money to be made in the middle. If I make an electronic payment, someone has to facilitate that transaction. That space between you and me, when we use technology to transact, is no longer void – it is the playing field of technology giants who facilitate payments. There is a global effort by these corporations to wipe out cash from our lives.

I am not against technology, don’t get me wrong. It feels wonderful when I get payments credited electronically, or when I can pay for my flights via net banking. Amid the ongoing coronavirus pandemic, there are good reasons to not be exchanging cash all the time. I even feel that credit cards are safer to use compared to debit cards.

However, when cards auto-debit for subscriptions, charge a bit extra for convenience, hook us into payments that will last till eternity, they are small spends that add up to a slow-ticking bomb on our savings.

Where The Government Stands On This

One of the popular reasons cited for discouraging the use of cash is to reign in ‘black money’. Well, we tried this with demonetisation and the results are for all to see. People who used untaxed cash found a way of legitimising it. This was evident from the currency count returned to the central bank. The lucky beneficiaries of this policy flop were digital payment platforms and credit cards.

RBI data clearly reflects a steady upward trend in the usage of the electronic mediums and many will say that the government intends to take us there. But to what end?

With the current health crisis and the extended lockdown, many people will get income shocks and our government seems to be encouraging spending on credit again. What good is a credit card ‘moratorium’ going to do to me if I have to pay anyway, with additional interest! The labeling of lenders allowing moratoriums as ‘relief package’ is puzzling.

Whenever we head towards a recession, efforts to spike consumption go up.

While calculating gross domestic product, consumption fueled by credit or consumption fueled by cash or direct debit cannot be told apart.
A sign showing logos of various electronic payment methods is displayed on the window of a s store in Bengaluru. (Photographer: Dhiraj Singh/Bloomberg)
A sign showing logos of various electronic payment methods is displayed on the window of a s store in Bengaluru. (Photographer: Dhiraj Singh/Bloomberg)

Policymakers know this well. So do marketers who have been selling aspirational lifestyles, easy repayment options, and instant gratification.

In the United States, credit card debt that encouraged a generation of compulsive spenders was an identified disaster as early as in the 1960s. In India, a high rate of savings was instead the concern. Several decades later, it is almost as if we Indians are stepping into the same black hole that the U.S. has seen. Individual saving is not good for the economy as a whole, we know this from high-school economics. However, consumption fueled by credit when there aren't enough jobs amid slowing economic activity can only lead us to the dark path – one of deep dissatisfaction and eventually even social unrest.

A Hard Look At Our Personal Finances

We live in times of abundant information but a certain ignorance and apathy for what is harming us at the core. What else could explain our disinterest in personal finance?

We are a large population of people who are going to retire without any public pension or retirement support. We really need to be ‘atmanirbhar’ (self-sufficient) in our finances. However, we now have pent-up demand and once the lockdown ends, we may just experience a highly-fueled discretionary spending spree – one that could be disastrous for our finances.

A large fintech revolution seems to be taking place in the country but most personal finance apps seem to be data-gathering systems that direct people into some form of a credit expansion lane.

If our technology entrepreneurs want to do something socially useful while making money, they need to collaborate with subject experts and devise ways to encourage people to save and invest. Surely, there are ways to ‘nudge for good’. Financial planning applications have to pull up their socks and move beyond suggesting equity mutual fund SIPs to meet every life-goal. Savers have to recognise that engaging a financial planner is a better investment than buying a luxury phone on credit.

We need to wake up!

I remember the time when my father used to withdraw a portion of his salary as the monthly expenditure. Towards the end of the month, as that corpus would start dwindling, he would start postponing purchases by simply saying – “we can afford that only next month”. I don’t remember grudging this. It was a way of life. Is it not time for us to reflect on how we spend and save -to make the uncool, cool again? I have started to withdraw my monthly expenditures and spend as per my mental accounting budgets every month. Would you like to try things my way too?

Abaneeta Chakraborty has close to two decades of experience in managing money for ultra-HNI families, and founded the firm Abanwill Consultants LLP in 2017 to provide independent views on investing. She is also Visiting Faculty at Praxis Business School.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.