Payments: beyond the pleasure and pain principle

In the decades since payment cards entered commerce alongside cash their promoters have struggled to convince a significant minority of merchants the benefits of non-cash payments outweigh the costs.

While payment schemes like American Express, Visa and MasterCard, or banks (like this one) which issue the cards, wheel out the evidence that offering consumers a choice of payment and the option of on-the-spot credit increases sales, some merchants just see extra fees and charges.

"As online commerce has taken off, businesses have ignored consumer preference at their peril."
Andrew Cornell, Managing editor, BlueNotes

Consumers though like choice, they like credit options. Increasingly those options include mobile and online payments. But according to a growing body of research, new payment modes will not just expedite or enrich traditional payment choices, they will affect how and why we buy in the first place. And obviously what and where.

Payment systems always come laden with ulterior motives. In some cases, as central banks and government revenue offices are increasingly aware, merchants like cash because cash payments can be used to avoid tax or pay workers sub-award rates.

In other cases, merchants surcharge for a particular consumer choice because the business itself doesn’t bear the brunt of consumer resistance.

In restaurants, for example, where some businesses surcharge for payment card use, the data shows the consumer response is to punish the service staff by cutting the tip or not tipping at all – which doesn’t directly affect business revenue just staff take home pay.


As online commerce has taken off, businesses have ignored consumer preference at their peril.

While some major players have been able to surcharge where it is the industry norm – airlines and hotels are prime examples – others facing more diverse competition have realised increasing the pain of paying can be seriously detrimental.

Some studies have suggested each additional step in making a payment – registration forms, preferences, security checks, to say nothing of surcharges – sees around half the potential buyers drop off.

The common thread through this history is payment is not a simple, one dimensional economic transaction. It is also a psychological one (excuse the marketing, but here’s quite a droll take on this insight from the ANZ Apple Pay launch).

Payment is not a separate component of the transaction between buyer and seller, it is intrinsic. There can be a frisson of new experience – as in Apple Pay – or a reward – as with loyalty schemes – or an analgesic – simple pain reduction.

A recent article in the journal Science examined whether Apple’s inclusion of Touch ID on its new generation of laptops might increase impulse buying – given approval would now require just a simple finger impression.

“On the front end, the new method is faster and probably more secure than using stored credit card info online,” the article noted. “On the back end, it gives merchants and banks a new framework to process your purchases.”


Of even deeper interest was whether there would be a psychological impact which may impact purchase decision making.

“You might assume, from a rational point of view, there should be no difference in spending behaviour based on how you’re paying for the item, using Touch ID versus a credit card,” Science quoted Sachin Banker, a consumer researcher at the University of Utah, as saying.

His core argument from behavioral economics? The way you pay can make a big difference in what you buy and how much you’re willing to spend.

Cash purchases, apparently, are associated with immediate payment pain. Credit cards deliver pleasure at the purchase point but pain when the statement arrives.

Payment companies have long noted the distinct customer behaviours and preferences around different modes: “pay before” – travel and gift cards - “pay now” – cash and debit - and “pay later” – credit cards.

Pay-before systems need to offer considerable convenience or coercion to work as consumers are giving up money before receiving the product or service – hence they are mainly used in transport systems or gift cards (where the convenience is in not having to go through the pain of finding the right present for grating second cousin Rupert when a $A5 7-11 gift card is perfect).

The fascinating and yet-to-be-proven insight from the Science report was introducing mechanisms such as ‘touch’ payment may radically reshape the experience.

It quotes Tom Noyes, a former Citibank and Wells Fargo executive and digital payments wonk, saying the implications are potentially radical. “Instead of presenting a payment, you’re presenting your identity,” he says.

Research from the University of Melbourne (which is BlueNotes’ Out of the Blue recommendation today) points out a striking neurobiological link between economic and dietary decision making as an example of the undercurrents of choice.

“If you are a spender, the way your neurons fire means you may be more impulsive in other areas of your life too,” the research found – such as impulse eating (leading to obesity). This finding suggests that similar brain processes might be involved in eating decisions and financial choices.

“Where psychologists and economists may have previously looked at the same decision from completely different perspectives, by working together we’re now learning that decisions across many different domains of life are much more closely related than we previously thought, because they involve common brain processes,” University of Melbourne Decision Neuroscience Laboratory co-head, economist Dr Carsten Murawski says.


That the payment process itself can influence the product bought is a version of the “medium is the message”, futurist Marshal McLuhan’s insight into how what we know is selected and transformed by the medium from which we learned it.

The emerging, ethically controversial field of behavioural design which underpins many of the most popular websites is the practical extension of this insight in the online world. Rewards – whether they are ‘likes’ or ‘followers’ or some other ephemeral pleasure point – are intentionally ‘variable’ in that you don’t know when you will receive them.

Just like rats in a famous experiment, when the reward is variable we repeat a potentially rewarding activity far more often than if we know exactly when and how much we will be rewarded.

There’s a brilliant essay on the emergence and covert power of behavioural design in social networks by Ian Leslie in The Economist’s 1843 magazine.

For the moment, the big social network sites use it to gain followers but as they and established ecommerce sites become more and more sophisticated, we can expect to see these principles applied to the payment process.

This won’t just be significant to the digital native generation. Even we digital troglodytes of advancing years are moving to online payment – and finally, excruciatingly, away from cheques.

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According to the Australian Payments Clearing Association’s latest Milestones report into the digital economy, online payments are increasingly attractive to older Australians at least.

“In 2015 more than half of internet users over the age of 65 made banking transactions online (53 per cent) and just under a half (48 per cent) had paid bills online,” the research found.

Australia is ahead of the UK and US in terms of internet use among older citizens.

The APCA noted the Australian Government has committed funding to improve the digital literacy of senior Australians and improve their safety online.

The emerging digital literacy challenge payment systems themselves might create though is quite fascinating.

Not only do we need to be aware of dodgy merchants, scam sites and phishing expeditions alongside the vast new choice, convenience and value more merchant competition online will bring, we will need to be alert to how the payment process itself might affect our choices.

Andrew Cornell is managing editor at BlueNotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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