The Importance of Emotion in Payment Decision Making

A new study published in the Munich Personal RePEc Archive ¹ looks at what influences consumers’ decision to use cash when presented with digital alternatives. The study is particularly interesting because it is based on a survey from Africa, it deliberately focuses on a middle income group, and it focuses on emotional and social factors of behavioural decision making. The study aims to help those tracking and forecasting changes in cash usage.

There is a significant body of existing research focusing on factors determining consumer demand for cash such as consumers’ preferences, service fees, payment innovation diffusion, easy access and, perhaps most importantly, their willingness to change their payment habits.

This study was based on a study of MBA students who had lived in Africa for at least five years, who spoke English, were digitally included and had a middle income. In the end the study is based on data from 24 African countries and 252 usable returns.

The study measures the impact of the emotional driver on the choice of payment method, and sets out to test five hypotheses based around emotional and social factors.

Affect

People rely on affect – the specific quality of goodness or badness – when judging risks and the benefits of specific hazards.

An affect heuristic is a mental shortcut that allows people to make decisions and solve problems quickly and efficiently, in which current emotions, such as fear, pleasure, surprise etc., influence decisions.

The affect heuristic is typically used while judging the risks and benefits of something, depending on the positive or negative feelings that people associate with a stimulus. It is the equivalent of “going with your gut”. If their feelings towards an activity are positive, then people are more likely to judge the risks as low and the benefits high.

On the other hand, if their feelings towards an activity are negative, they are more likely to perceive the risks as high and benefits low.

So, if using cards and electronic payments is perceived as riskier under the affect heuristic, the higher the affect, the higher the intention to use cash and the lower the intention to use alternatives to cash. The affect heuristic is moderated by other well documented behavioural variables.

Mental accounting

Mental accounting refers to the implicit methods individuals use to code and evaluate transactions, investments, and other financial activities. For example, people may label money as college education money, retirement money or holiday money.

Mental accounting is a proven determinant in the allocation of personal wealth. Cash, together with debit card payments, is known to be helpful for monitoring household finances. Due to cash being particularly noticeable and important (salient, in the language of the paper), cash might be expected to facilitate sticking to a budget compared to non-cash payments.

Consequently, the hypothesis tested was that the higher the mental accounting, the higher the intention to pay in cash and the lower the intention to use alternatives to cash.

Fungibility

Fungibility is how interchangeable an item is. When people engage in mental accounting, they allocated money to something which makes it less interchangeable. Mental accounting changes their perception of potential outcomes and the cost-benefit evaluation.

Individuals who perceive money as non-fungible have a higher propensity to use cash. The hypothesis tested was that the higher the fungibility bias (seeing cash as interchangeable), the higher the intention to pay in cash and the lower the intention to use alternatives to cash.

Loss aversion

In riskless choice, in the context of payment methods, there is a long-standing literature examining the ‘pain of paying’ associated with cash. People show a higher willingness to pay (WTP) when using cards rather than cash. They experience a reduced pain of payment using a card due to this being less salient than paying by cash and the decoupling of purchase and payment implied.

People tend to experience a negative reaction when paying by cash (as they are ‘giving up cash’), not experienced, or only to a lesser extent, when paying via other payment methods.

The fourth hypothesis was that the lower the loss aversion, the higher the intention to use cash and the lower the intention to use alternatives to cash.

Habit.

Habitual behaviour is the act of automatically repeating past actions with little or no regard for current goals. Automaticity is not necessarily sequential, nor does it involve any kind of deliberation: these are actions initiated by environmental cues with no deliberate intention and may even continue without the involvement of conscious control.

People with higher automaticity scores tend to use cash, while the relationship between routine and payment intention seems to be nonlinear (higher use of cash on both the low end and high end of the routine scale).

The final hypothesis was that the higher the tendency for trait habitual behaviour, the higher the intention to use cash and the lower the intention to use alternatives to cash.

Findings

Most research has focused on ‘nudging’ and mental accounting, and the limited empirical evidence finds some link with credit card use and mobile payment adoption. Habit also seems to play a role habit in reducing debit card adoption.

The results of this research, however, did not reveal any significant impact of mental accounting (including fungibility bias) and habit on the overall preference for one payment option or another.

The results revealed the absence of significant results associated with loss aversion. Loss aversion is frequently used to understand choice in a risky environment, and the credit card was the only payment method in this study that included explicit risk (credit) as a complementary feature. The main driver against using credit card appeared to be the affect heuristic.

This suggests that the risk perception of using a credit card instead of cash operates at an emotional level and, more importantly, it is in line with the traditional criticism of behavioural finance for placing more emphasis on cognitive biases than on emotional biases. The relevance of the affect heuristic on the use of credit card is, it appears, a novel result.

Beyond behavioural biases, the study found robust evidence that individuals with a higher personal income proxy (capita) preferred to use debit cards rather than electronic payments. The results by purchase amount and transaction context gave statistically significant evidence of mental accounting and habit driving payment choice for different purchase amount and transaction context, mostly around the use of debit and credit cards.

Lower value transactions: Respondents exhibited a marked habit to prefer credit card rather than debit card for payments greater than $5, and mental accounting which helped explain why electronic payments were preferred to debit cards in petrol stations. Affect heuristic helps to explain most of the results associated with lower use of cash (for haircuts and in restaurants), and more use of debit cards in most payment contexts.

Both results rejected the first hypothesis, that the higher affect, the higher the intention to use cash, suggesting that the affect heuristic does not operate through a perceived higher risk profile of payment methods alternative to cash. Instead, there seems to be an emotional response against the use of cash for respondents who rely on the affect heuristic to make decisions.

Finally, there was significative evidence that a higher fungibility bias increased use of cash (supporting the second hypothesis that the higher mental accounting, the higher use of cash) and reduced the use of credit in payments of less than 1$.

Payment choices: The paper argues that individuals do not have a preferred payment method: they choose the one that best suited their needs according to the context or situation.

Conclusions

The results show that an emotional driver (affect heuristic) was the single behavioural trait that decided the overall use of one payment method or another – in particular, the decision to use cash or a credit card.

Other behavioural traits did not mediate in the overall preference, but mental accounting and habit helped to explain situations in which people prefer to use one payment method or another. Loss aversion seems not to have had any impact at all, once controlling for the emotional driver.

Within the extant literature, the recommendation is for government policy to ‘invest more in nudging’, that is, to use psychological behaviour and habits to influence, for instance, greater use of electronic payment methods or eliminate cash transactions. The authors argue that while existing research suggests authorities should ‘nudge’ people to policy goals, greater digital payments, less cash etc., this is not necessarily correct given that most people in the sample didn’t appear to have a preferred payment method. Instead, they choose according to the transaction context in specific situations.

The conclusion was that authorities should either develop an awareness of where and when people prefer to use a given payment method and intervene if desired. For instance, by reducing a high share of cash transactions that may be considered costly from a societal point of view, ensure that a wide variety of payment alternatives is available for people to use, including cash, and let them choose.

1 - ‘Behavioural drivers of cashless payments in Africa.’ Bernardo Batiz-Lazo, Northumbria University (UK), J Carles Maixe-Altes, La Coruña University (Spain), David Peon, La Coruña University (Spain).