I have a memory as a boy, saving my pocket money by placing it in a special drawer, the golden pound coins collecting into a neat stack. (Although the stack never got too high to endanger its structural integrity.) I grew up in Hastings, a small coastal town in East Sussex, famous for 1066 and seaside charm. It has a reputation for being somewhat rundown and is forever “up-and-coming”.
I got my first debit card when I was 14. Later, I saved up money for a gap year, by working at a bingo hall, and I put the money into a savings account. I avoided credit cards. Back then (2007) it was still around 5% interest rates, and I remember getting £70 ($91) one year, which made me feel very rich indeed.
Skip forward to 2018 and I was living and working in Beijing, China, as a freelance journalist. All around me Beijing residents were paying for everything using just their smartphones. They would walk up to a counter of a restaurant, shop, or convenience store, and offer up a QR code for the cashier to scan. Once scanned, the online system would immediately deduct the exact amount owed from the payer’s e-wallet. No fumbling for cash and waiting for change. No swipe of a plastic card either. The transaction would take seconds.
But I was a stubborn holdout. My friends, both Western and Chinese, would make fun of me for being so traditional – for clinging onto “dirty cash” – seeing the crumpled paper bills as evidence of my Luddite ways. But there were a couple of reasons why I kept using physical money and avoided getting into e-payments and e-wallets. Firstly, it felt safer. I wasn’t really aware of how electronic money would work on my smartphone and I feared it would somehow get easily siphoned off. Having physical cash just felt safer.
Secondly, I feared that by moving to electronic payments, and losing the greater friction of paying with cash, I would end up spending more. I was afraid that by losing the tangible, visible qualities of paper money, and the physical transaction – of fishing out my wallet, finding the required bills, and handing over the cash – I would lose all sense of how much, day by day, I would be spending.
Were these fears justified? As more and more people across the world shun cash, these are essential issues to consider.
Before we get into the twisty and tricky slopes of consumer psychology, and the conflict between classical economics and psychology that led to the birth of behavioural economics – let’s first consider what money is exactly.
Money is an abstract concept – and today we take it for granted, not considering how a piece of paper, or pieces of metal, are valuable items in themselves. But money is a relatively recent invention, and it represented a fundamental change in human society, says Natacha Postel-Vinay, who teaches a course in the history of money and finance at the London School of Economics.
“It was completely different from barter,” she says. “You don’t need exact matching from two different people and their desires. If you wanted to buy some bread, the bread seller didn’t need to have something specific from you; your coat or your garden veg. You just needed some silver.”
The first recorded use of money was in ancient Iraq and Syria, in the Babylon civilisation, around 3000BC. In Babylonian times people used chunks of silver which were accounted according to a standardised weight known as a shekel. From Babylon, we have records of the first prices, recorded by priests at the Temple of Marduk, as well as the first ledgers and the first debts.
From Babylon we have many of the essential things required for a monetary economy. These include the fact the silver was regularly tested for its fineness and there was a stabilising force, such as a King or government, which people could trust to guarantee the value of the money. “At all times, in order for money to have value, trust is needed,” says Postel-Vinay. But there have been many developments in money along the way. Babylon had money, but it was still bulky and had to be weighed – it wasn’t as advanced as coins. From about 1000BC other civilisations were using precious metal, and in ancient Greece, in the Kingdom of Lydia, the first coins were minted.
The first paper bills were used in Imperial China during the Tang dynasty (AD 618-907), which existed as privately issued bills of credit or exchange notes, but Europe wouldn’t cotton on to the idea until the 17th Century.
Nowadays, money is not tied to physical objects that are in themselves valuable commodities, such as gold or silver coins, but we use a form called fiat money which is a currency that a government has established as legal tender.
The concept of credit (and debt) existed long before credit cards were invented. “It doesn’t need to be physical in order for it to be money,” explains Postel-Vinay.
The bank-issued credit card was invented by John Biggins of the Flatbush National Bank of Brooklyn in New York in 1946. Subsequently, credit cards were promoted to travelling salesmen, for them to use while on the road, in America. In the UK, Barclays issued the UK’s first credit card on 29 June 1966.
The first debit card appeared in the UK in 1987. Chip and pin was introduced in 2003, and contactless credit cards followed four years later.
In China, meanwhile, scanning QR codes with your smartphone, or generating QR codes on your smartphone to be scanned by merchants, was co-opted as a means of making payments. China’s rapid adoption of electronic payments is explained by the ubiquity of WeChat in the country, a super-app that includes e-payment/e-wallet, messaging, and social media functions; the popularity of e-commerce platforms, such as Alibaba’s Taobao platform; and the fact that China has relatively low rates of credit card usage. From around 2015, adoption of e-payments in day-to-day usage became much more prevalent.
Countries that have the highest rates of cashless spending include Canada, where having more than two credits cards per person is a norm. In Europe, Sweden is the most cashless society, with just 13% of Swedes reporting that they used cash for a recent purchase, according to a nationwide survey conducted last year, down from around 40% in 2010. In comparison, around 70% of Americans still use cash on a weekly basis, according to a recent Pew Research Center study.
加拿大是無現金消費比率最高的國家，一人擁有兩張以上的信用卡是普遍現象。在歐洲，瑞典是最無現金消費的社會，瑞典去年進行的一項調查顯示，只有13%的瑞典人說在最近一次購物中使用了現金，低于2010年的40%左右。皮尤研究中心（Pew Research Center）最近的一項研究顯示，相比之下，約70%的美國人仍然每周使用現金。
Emelie Svensson, a Swede who works in New York City as a broadcast journalist, says the two countries are very different when it comes to the use of cash. “It’s based on tipping and a lot of stores don’t even take cards, or it’s a minimum $10 purchase,” she says, referring to her experience of living in America. “It’s getting better though, just five years ago I paid my rent in cash!”
And although the UK might be increasing in its use of non-cash payments, it still has a long way to go. For Moa Carlsson, a 20-year-old butcher from Gothenburg, the country feels quaint in comparison to her native Sweden. “I guess it’s a bit of fun and almost strange in a way to use cash,” she says, when she visits the UK. “England feels a bit more old-fashioned in itself. I would almost feel strange not to use cash there. I feel like the pound is a big part of England, much more so than the krona for Sweden”.
For people who live in these increasingly cashless societies, the benefits of electronic payment are obvious. “It’s very convenient. You don’t have the feeling of having £200 in your pocket or [the hassle] of having to go take out money. ‘Where is the cash machine?’ It’s there in your pocket,” says William Vanbergen, a British entrepreneur who first arrived in China in 2003, and was a late adopter of e-payments.
Like Carlsson, he says dealing in cash feels antiquated. When Vanbergen travels to Hong Kong for work, where cash is still the more usual payment method, or back to his native England, he says it’s like going back in time.
But what of the supposed disadvantages?
Does spending without using physical cash make people spend more? This is a complicated question and it involves seeing humans as fundamentally irrational creatures, in various ways. For instance, it has been shown psychologically that people feel more pain when they lose £100 than the joy they feel on gaining £100. In other words, the pain of the loss stings more, even though the two sums are exactly the same.
This kind of psychological insight has powered enormous change in the field of economics. Whereas before, in classical economics, academics based their theories on the assumption that people behave rationally (so that the loss and gain of an equal sum would be treated the same by an individual), this was shown to be false by psychological studies. This led to the discipline of behavioural economics and branches such as consumer psychology.
One of the great researchers in this relatively new discipline is Drazen Prelec. The MIT professor once conducted a study that involved a silent auction. The auction was held for students at the prestigious Sloan business school, for tickets to sold-out NBA basketball games. The researchers told half the bidders they could pay only with cash, while the other half were told they could pay only with a credit card.
The results astonished the researchers. On average, it was found that the credit card buyers were bidding more than twice as much as the cash buyers. What this means, according to Prelec, is that the psychological cost of spending a dollar on a credit card is only 50 cents.
Spending on a credit card clearly has effects on how people spend, which numerous studies have borne out. However, it’s also been shown that credit card bills, when they arrive, cause enormous pain for the receiver. So much so, in fact, that behavioural economists believe this explains the continuing popularity of debit cards.
But what about using e-wallets? What’s important is feedback, explains Emir Efendic, a post-doctoral psychologist and behavioural economist at the University of Louvain. “With credit cards, you don’t get instant updates. But with online banks, you see the amount deducted immediately,” says Efendic. “If you lose feedback, then yes you’ll be spending more”.
With credit cards, the pain of payment is delayed (until that monthly bill arrives, anyway). The great ability of credit cards, in other words, is that they wield the psychological power of separating the pleasure of buying from the pain of paying.
But with e-wallets, users can see that money is deducted immediately. Emily Belton, a British ex-pat who uses WeChat Pay in Beijing, says she likes getting a notification each time she pays with it, and her balance and payments are updated in real-time. This is instant feedback and so does not have the same effect as a credit card.
However, Prelec has found that neural pathways light up in what he describes as a “flinch moment”, almost like brief physical pain, when we part with our money. Although there is no similar research yet on paying with e-wallets, it could be hypothesised that the flinch moment could be missing when paying with a smartphone. But this needs more research.
This pain of parting with our money can keep us from overspending, but the negative aspect is that it can rob us some of the joy in consuming. This psychological cost, what Prelec calls a “moral tax”, can be reduced in various ways. Pricing instruments such as bundling – including “free” goods along with the purchase of a main good, can take away some of this “moral tax”. Prepayment is another method, even when there is no financial advantage. For example, people have been shown to prefer to pay in instalments for vacations (even though they’re losing some of their cash liquidity).
And once they’re abroad they also find it easier to spend in foreign currency, treating it with much less seriousness than with the “real money” of their native country. Companies such as Club Med have latched onto this kind of psychology, where their resort guests buy plastic chips to use instead of cash.
For me, I eventually transitioned to using e-payments in Beijing. I’ve found the cashless system quite staggering in its seamlessness, its convenience. It is like living in a world where you get all the benefits of spending, without the pain of paying.
Perhaps this is better for economies, where it could be beneficial if people spend their money more freely, and many governments around the world are trying to encourage this. There is an old English saying: “Money, like manure, does no good till it is spread.” But sometimes, this kind of free spending, without any friction at all, leads to a kind of uneasiness.
Perhaps this is the “moral tax” Drazen Prelec refers to, which is a psychological tendency to feel opportunity costs as real pain. In other words, I might be feeling this uneasiness because I am imagining that I could be spending that money on other things instead.
As more societies move from cash-based to cashless, the way we spend might change. But money will remain a governing force in the lives of humans.