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Introduction

Having visited almost 70 countries, I’ve never understood why an outsized number of businesses in my home country of Germany only accept cash. If you’ve spent time there, you've probably had this experience. You walk into a cozy restaurant, enjoy a delicious meal, and then, when it's time to pay, you discover they only accept cash. Frustrated and somewhat embarrassed, you're forced to leave your table and the restaurant, running to find a nearby ATM where you can withdraw some cash.

When I’ve asked fellow Germans why so many businesses still only take cash, the answers are mostly the same - that companies simply want to reduce costs. Some say it’s a way for them to avoid taxes. Others suggest they don't want to pay the 2-3% transaction fees of card payments (although they could adjust prices to cover these costs). Regardless of the reason, many younger Germans agree that cash-only culture is neither good for business nor the greater economy.

Contrast Germany with countries like Sweden and South Korea where cashless systems reign supreme. In Sweden, over 80% of all transactions are cashless. And because they're faster and more secure than handling cash, staff spend less time counting money, making bank deposits, and managing cash flow. This translates into savings for businesses, reducing the need for cash handling services, minimizing the risk of theft and fraud, and lowering the cost insurance premiums, to name just a few.

It's a similar story in South Korea where over 90% of all transactions are cashless. This staggering level of cashless payment adoption has profoundly streamlined consumer buying processes, reduced friction and time needed for purchase transactions, increased the likelihood of impulsive purchase behaviors, and enabled consumers to spend more freely and businesses to make more money.

But cashless payments aren't just about convenience. They are, in fact, a market response to a fundamental psychological concept known as the “pain of paying” - that discomfort you feel when you part with your hard-earned money. This discomfort is more pronounced with certain payment methods, particularly those that are more tangible and immediate like cash. The sensation of handing over physical money creates a vivid awareness of loss, making the transaction feel more significant and impactful. In contrast, digital payments are less tangible and more abstract, mitigating some of this pain and making it easier for consumers to part with their money.

By understanding the pain of paying phenomenon, businesses are better equipped to explore payment systems that can increase their profits and improve their customer experience at the same time.

The Pain of Paying

The “pain of paying” is a fascinating phenomenon that delves into the psychological and neurological processes involved in parting with our money. It was first explored in depth by Prelec and Loewenstein in their seminal 1998 paper, The Red and the Black: Mental Accounting of Savings and Debt. They discovered that the act of paying can trigger negative emotional responses, which they aptly termed the “pain of paying.” In their study, 60 participants were asked to bid on various items such as tickets to sporting events and electronics, using either cash or credit cards. The results revealed that participants were willing to pay significantly more for the same items when using credit cards compared to cash, with the average bid for card payments nearly twice as high as those paid with cash. The researchers thus concluded that the abstract nature of credit card transactions reduced the psychological discomfort associated with parting with money, leading to higher willingness to pay.

Another experiment conducted by Raghubir and Srivastava in 2008 further reinforced these findings. In their study, 100 participants were given either cash or a voucher of the same value and asked to make purchases of snacks and small household goods. The results showed a clear difference in spending behavior between the two groups, with participants using vouchers spending on average 80% of the total amount, while those with cash spent only about 60%. This showed that the vouchers, being less tangible than cash, helped to reduce the psychological discomfort associated with spending.

Neuroscience of Consumer Purchase Behavior

The act of making a purchase is not merely a financial transaction. It’s a complex biological process underlined by psychology and neuroscience. Because when we consider buying something, several brain regions are involved, each playing a distinct role in the decision-making process.

• The anterior cingulate cortex (aCC) - the region responsible for emotional processing and decision-making - becomes particularly active when we experience negative emotions, such as the discomfort associated with spending money.
• The insula - the region responsible for anticipating loss or experiencing pain - becomes activated when we process the emotional aspects of paying, such as the anxiety and discomfort of parting with money that could be used for something deemed more important.
• The prefrontal cortex (PFC) - responsible for rational thinking and self-control - helps us weigh the pros and cons of a purchase.
• And the nucleus accumbens - part of our brain’s reward center, interacts with the PFC to process the anticipated pleasure of a purchase.

In one of the most comprehensive neuroscience studies on the pain of paying, Knutson et al. (2007) examined its neural correlates by using fMRI scans of participants making purchase decisions. In the study, participants were presented with a series of products and their prices. They had to decide whether or not to purchase each item while their brain activity was monitored.

The study found that when participants encountered prices that were perceived as too high, there was significant activation in the anterior cingulate cortex (aCC) and the insula. The activation in these regions correlated with the sensation of pain associated with spending money. Conversely, when participants decided to purchase an item, the prefrontal cortex (PFC) and nucleus accumbens showed increased activity, correlating with the anticipation of pleasure from the acquisition.

The simultaneous activation of the aCC, insula, and PFC demonstrated how these regions collectively contribute to the overall experience of spending money. The aCC and insula were more active when participants felt the pain of high prices, while the PFC was involved in evaluating the purchase and exercising self-control.

By illuminating these neural mechanisms, Knutson et al.’s study provided valuable insights for businesses to help them gain a greater appreciation of the complex emotional and cognitive processes underlying consumer purchase decisions.

How Different Payment Methods Activate Neural Pathways

Neuroscience research using functional MRI (fMRI) has shown that not just payments, but different methods of payment can activate distinct neural pathways that influence a customer’s perceived pain of paying. That means brain science can show us unequivocally that consumers are more likely to spend their hard-earned money through certain payment methods over others.

In another groundbreaking experiment by Loewenstein et.al in 2007, twenty-six participants were asked to make purchase decisions about various consumer goods using both cash and credit cards while their brain activity was recorded. The fMRI results showed that cash payments significantly activated the insula, indicating that parting with cash can be emotionally distressing and create a strong, immediate sense of loss. In contrast, participants’ use of credit cards or digital payments resulted in lower insula activation, suggesting reduced pain. Credit card transactions displayed increased activity in the prefrontal cortex (PFC) and the reward-related nucleus accumbens, indicating that digital payments are less emotionally taxing and more rewarding, suggesting that consumers are more willing to spend with less tangible payment methods.

When comparing cash payments to digital payments, these neural responses highlight stark contrasts in their emotional impact. Cash payments are more salient, making the loss feel more immediate and real. This heightened awareness triggers stronger activation in the brain’s pain centers, creating a more intense discomfort. The physical act of handing over money amplifies the sense of loss, as the brain processes this tangible transaction with a greater emotional response. On the other hand, digital payments are less tangible and more abstract. The act of swiping a card or tapping a phone lacks the physical sensation of handing over money, resulting in lower insula activation. This cognitive “decoupling” separates the act of the purchase from the payment, obscuring the immediate financial impact and leading to less perceived pain and more liberal spending. This reduced pain of paying makes digital transactions more palatable, encouraging consumers to spend more freely.

Tactics to Reduce the Pain of Paying

Most businesses can, of course, reduce the pain of paying for their customers by offering credit card payments. But there are other payment methods and tactics, backed by science, that may be even more effective at fostering customer purchase behaviors for the right kind of business.

We’ll explore nine compelling and increasingly-common approaches, highlighting notable examples and the cognitive mechanisms that underpin their success.

Digital Payment Systems
Digital payment systems like Apple Pay and Google Wallet offer a convenient and secure way to complete transactions, streamlining the payment process and making it quicker and more efficient. When Apple introduced Apple Pay, they not only provided a convenient payment method but also reduced friction in the transaction process. They also eliminated the need for consumers to carry cards with them, removing barriers to impulsive or inconvenient purchases.

These positive changes can be explained by neuroscience. Digital payment systems minimize the activation of pain centers in the brain compared to cash transactions. Their abstract nature make the loss of money feel less tangible, thereby reducing the discomfort of spending while encouraging greater purchases.

Illuminating its impact, a study by First Annapolis Consulting in 2015 reported that the adoption of Apple Pay led to a 12% increase in overall spending among users. Furthermore, a 2016 report by Deloitte found that transaction times were reduced by an average of 50% compared to traditional card payments. This ease of use led to increased adoption of Apple Pay and eventually, increased spending from consumers.

Invisible Payments
Invisible payments, like those used by Uber and Lyft, remove the need for a visible transaction as the payment is processed automatically at the end of the service. Uber’s automatic charging system enhances user experience by eliminating the need for a physical transaction, creating a seamless process that encourages more frequent use and higher spending.

This streamlined method is highly brain-based, as removing the visible payment process reduces activation of the brain’s pain centers. The intangible nature of the transaction further makes the payment feel less significant, decreasing emotional discomfort while fostering a smoother, more enjoyable user experience.

A study by PYMNTS in 2018 reported that users of ride-sharing services spent 15-20% more when using invisible payment methods compared to traditional ones. Furthermore, 2017 research by McKinsey & Company found that the convenience of invisible payments led to a 30% increase in user retention, resulting in more spending and greater lifetime value.

Contactless Payments
Contactless payments, such as NFC payments and contactless cards, allow customers to pay by simply tapping their card or phone on a terminal, making transactions swift and hassle-free. The widespread use of contactless payments in many parts of the world has led to higher spending and faster transaction times, while eliminating the psychological barrier of handing your card to the clerk, entering a pin in a public setting, or finding the space to sign and credit card slip.

This change can be explained psychologically, as the speed and ease of contactless payments reduce the emotional burden of parting with money while feeding psychological demands for security and safety. The quick, effortless, and seemingly secure nature of contactless transactions makes the payment feel less painful, encouraging larger and more spontaneous purchases.

A study by Barclaycard (2019) found that contactless payments in the UK increased transaction speed by 15-20 seconds per transaction and boosted consumer spending by 30%. Additionally, research by Mastercard (2018) reported a 40% increase in spending among contactless card users compared to those using traditional payment methods.

Mobile Point-of-Sale Systems
Mobile point-of-sale (POS) systems, such as Square, Zettle, and Lightspeed enable businesses to accept payments anywhere using a mobile device, providing both businesses and customers flexibility and convenience. Small businesses adopting mobile POS systems often experience increased sales and operational efficiency through the reduction of congestion at check-out and the elimination of servers navigate back and forth between tables and the till.

Cognitively, the flexibility and convenience of mobile POS systems decrease the salience of the payment event in the brain. The ability to pay anywhere, anytime makes transactions feel less burdensome, enhancing the overall customer experience and ultimately driving more sales.

A study by Square (2017) reported that businesses using mobile POS systems experienced a 20% increase in sales. Additionally, research by Paypal/Zettle (2018) found that mobile POS systems reduce transaction times by 25%, creating a more convenient shopping experience that increases overall customer satisfaction.

Self-Checkout Systems
Self-checkout systems, such as those found in some supermarkets, allow customers to scan and pay for their items themselves, reducing the need for interaction with a cashier. This has led to faster transaction times and reduced labor costs for businesses that decide to make the investment into kiosks like these.

The psychological benefits of self-checkout are quite simple to surmise, as the greater sense of control and autonomy experienced by the customer mitigates some of the emotional discomfort associated with paying. Allowing customers to manage their own transactions makes the payment process feel less intrusive and more efficient, reducing friction in the transaction experience.

A 2018 study by NCR Corporation found that self-checkout systems reduce transaction times by 40% and increase customer throughput by 25%. Additionally, research by RBR in 2017 reported that stores with self-checkout kiosks see a 10-15% increase in customer satisfaction, contributing to greater spending and more autonomy in the shopping experience.

One-Click Payments
For eCommerce companies, one-click payment systems such as Amazon’s one-click purchase streamline the buying process by reducing the steps required to complete a transaction. When Amazon introduced its one-click system, it significantly simplified the purchasing process, making it quick and effortless for customers to complete their transactions.

Psychologically, one-click payments reduce cognitive load and decision-making effort, lowering the activation of pain centers in the brain. Simplifying the payment process makes it less emotionally-taxing for consumers, facilitating impulsive purchases and enhancing the overall shopping experience.

A study by Business Insider in 2017 reported that Amazon’s one-click purchase system increased the company’s conversion rates by 5-10%. Additionally, research by the Baymard Institute (2019) found that reducing the steps in the checkout process led to a 20% decrease in cart abandonment rates. This translated to millions of dollars in increased revenue for the business.

Subscription Models
Subscription models, such as those used by Netflix and Amazon Prime, provide ongoing access to services for a recurring fee, spreading the cost over time and reducing the perceived pain of individual payments. When Netflix introduced its subscription model, it offered customers a vast library of content for a predictable monthly fee, significantly reducing the friction and pain associated with one-time purchases.

This change can be explained by neuroscience, as subscription models impact the brain’s anticipation and reward systems, reducing the pain of individual transactions. The regular, predictable nature of subscriptions makes the cost less noticeable and more manageable, leading to sustained consumer engagement.

Highlighting the benefits of subscription models, a study by Zuora (2018) reported that companies employing subscription-based pricing saw a 15% increase in customer retention and a 25% boost in overall spending. Furthermore, research by McKinsey & Company (2019) found that consumers using subscription services experienced reduced cognitive load when making purchasing decisions, contributing to more consistent purchases and greater customer lifetime value.

Loyalty Programs
Loyalty programs, such as digital loyalty cards and rewards apps, offer incentives for purchases, promoting more frequent purchases, larger basket sizes , and, in the end, better customer retention rates.

These benefits can also be explained by neuroscience, as the positive reinforcement from loyalty rewards triggers the brain’s reward system, which offsets some of the pain of paying. Furthermore, the anticipation of earning rewards makes the cost feel more worthwhile, encouraging repeat business and enhancing loyalty.

A study by Bond Brand Loyalty in 2019 reported that loyalty program members spend 12-18% more than non-members. Additionally, research by Harvard Business Review (2016) found that businesses with effective loyalty programs see a 15% increase in customer retention, providing more rewarding experiences for the customer while increasing revenues for the business.

Buy Now, Pay Later
Buy Now, Pay Later (BNPL) systems allow customers to receive and use items before making a payment, spreading the cost over time and reducing the immediate financial burden. When Amazon introduced its “Try Before You Buy” feature, it allowed customers to try on clothes and accessories at home before committing to the purchase, significantly reducing the uncertainty and pain associated with an immediate payment.

That's because BNPL impacts the brain’s anticipation and reward systems, reducing the pain of immediate transactions. The deferred payment separates the act of receiving the product from the act of paying for it, making the cost feel less immediate and more manageable.

Highlighting its benefits, a study by PYMNTS (2020) reported that companies offering BNPL options see a 20% increase in conversion rates and a 30% increase in average order value. Further research by McKinsey & Company (2021) found that consumers using BNPL experienced reduced cognitive load when making purchases, minimizing the psychological discomfort of parting with money, encouraging more immediate purchases, and reducing the downside risk when making the wrong decision.

Conclusion

The pain of paying is not just an inherent sense of frugality that surfaces when you're about to make a purchase. It's actually a series of influential psychological and biological processes that have profound implications for businesses. By better understanding (and mitigating) its discomforts, businesses can better enhance customer experience, increase sales, and foster greater brand loyalty.

As seen in countries like Sweden and South Korea, the adoption of cashless systems and innovative payment methods have led to increased efficiency, reduced costs, and higher consumer spending. The Swedish Central Bank reported that the country’s GDP increased by 2.5% due to the widespread adoption of digital payments, which have also reduced cash-handling costs by 60%, leading to increased business efficiency and higher government revenues. The Bank of Korea reported that the country’s GDP increased by 3% due to the widespread adoption of digital payments, which has reduced tax evasion by 20%, increasing tax revenues for the government.

German businesses and policymakers take note! These simple strategies to modernize payment systems are both impactful and backed by science - each able to reduce the cognitive and emotional burden of consumer purchases. By embracing any one of these cashless methods of payment, businesses are able to create an improved shopping experience for their customers, not to mention greater profits for themselves.

Authors Note: The inspiration for this article was not just my frustration with cash-centric brick & mortar commerce in Germany, but also the ease of which purchases occur in other parts of the world. We’re currently on holiday in Thailand, where even modest businesses like street vendors offer cashless payment options. Wandering through the Sunday Night Market here in Chiang Mai, I couldn't help but notice how many small vendors had QR code stickers on their stalls. Locals simply placed their order, scanned the code with their bank’s mobile app, and inputed the purchase amount. The vendor immediately received a phone notification showing the transfer of funds. Minimal effort, minimal friction, minimal cost… all part of a purchase experience that we in countries like Germany should take note of.

References

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• Zuora. (2018). Subscription Economy Index. Retrieved from https://www.zuora.com/resource/subscription-economy-index/

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