Use your imagination and picture a market in the mid XV-th century in Europe. Farmers and tradesmen sell their products in the square of the city. Others want to buy and search for the best offer. At one point the buyer chooses one seller and buys, say wool. In exchange for the wool the buyer will give the seller a number of coins – money.
If we think about this transaction – wool for coins – we notice that it is a very visible one. The buyer takes the coins out of his bag (pocket) and gives them to the seller in exchange for the product.
Putting things a bit differently, for the buyer it is impossible to not see the coins (money) going out of his pocket and going into the seller’s hand and pocket.
Nowadays things are a bit different than in the mid XV-th century. Now we can pay without seeing the money going out of our pockets and into the seller’s hand. We can use checks, bank cards, vouchers, bank transfers etc.
The visibility of a payment – of money going out of one pocket and into a hand – influences the amount of pain of paying associated with a payment. Think of the following scenario: Linda goes out on a weekend day and wonders the streets of the city center. At one point her eyes are drawn to a shop window and she sees a wonderful pair of shoes. They look absolutely gorgeous and she goes into the shop and tries them on.
Miraculously they do not only look great, they also fit close to perfect. Linda looks at the price tag and feels a bit of chill; the shoes cost 129 Euros. Linda is perfectly aware that she doesn’t really need this pair of shoes since she has already more than 15(0) pairs. However she felt in love with them. In her wallet she has three 50 Euros bills and her bank card on which she has more than 129 Euros.
Do you think that Linda will pay in cash or using her bank card?
Most likely Linda will use her bank card because by doing so she will not see the (quite large) amount of money going out of her purse and into the hands of the cashier. The bank card transaction represents the same thing as paying in cash… Linda will still have 129 Euros less and a wonderful pair of new shoes. However, Linda will not see the payment. She will experience less pain of paying by using her bank card.
Linda goes out of the shop happy because she got a wonderful new pair of shoes and feeling quite good that she still has 150 Euros in her wallet. She didn’t see the 129 Euros (price of the shoes) going out of her purse and this contributed to her experiencing a low level of pain of paying. She goes into the street and walks around with a bright face (due to happiness). After about two minutes Linda’s phone rings. She received an SMS which says:
“Your Bank Inc. informs you that a payment of 129 Euros was made out of your account to Fantastic Shoes Ltd. If you do not recognize this transaction contact Your Bank immediately”
How do you think Linda feels now?
She paid with her bank card so that the payment would be less visible and decrease her discomfort of paying a large price for a pair of shoes. Now the bank informs her that this payment was made, thus making it more visible. In terms of pain of paying reduction, almost the entire benefit of using a bank card is gone. Linda’s face is no longer bright and a feeling of pain mixed with guilt (for paying 129 Euros for a pair of shoes she didn’t really need) go through her mind.
The bank introduced this SMS service to prevent fraud and if people would be perfect reasoning machines without feelings it would be a very useful tool for increasing the safety of using bank cards. However, people have feelings and it is no wander that when Linda got home she unsubscribed from this service.
The learning from the story of Linda buying shoes is that the more visible (salient) a payment is, the higher the level of pain of paying is experienced. So if you want to increase the pain of paying you should make the payment as visible as possible. Similarly, if you want to decrease the pain of paying you should make the payment as less visible as possible.
Just as a note: the difference between levels of pain of paying experienced when making a visible vs. a less visible payment will be smaller for purchases that are frequent (e.g. groceries) and planned (e.g. buying a new laptop). This is not to say that there is no difference, rather it is to say that the difference is smaller than in the case of impulse, unplanned (even unnecessary) purchases.
Psychology of money for financial services.