Well, we've always suspected as much but academic research has now given us the out. We are powerless in the face of unbridled plastic.
The serious question is what happens when Google Wallet and other frictionless mobile transactions make it even easier for consumers to spend money they dont have. The implication is that people are susceptible to inducements to spend, whether they can afford to or, particularly when they can not afford to.
We are still working our way out of the last debt debacle. Businesses who extend too much credit in order to juice sales will have only themselves to blame when consumers take them up on their offers - and then jilt them when the payment comes due. JL
Bob Sullivan reports in MSNBC:
Credit cards take us out of our right minds, inducing a kind of euphoria that makes people ignore the downsides to purchases, suggests a new study in the Journal of Consumer Research.
Like a starry-eyed new lover who ignores the downsides of an obviously incompatible but very attractive partner, consumers who swipe plastic when they buy are often blinded to the true costs of their purchases. They even tend to exaggerate the perceived benefits of whatever they're buying, according to research by Promothesh Chatterjee of the University of Kansas and Randall L. Rose or University of South Carolina. To put it another way: Buying things with credit cards is more like lust than love.
Buying with cash, however, makes people focus on the pain of a purchase -- not just the costs, but other downsides of the purchases, such as a product's limitations.
“Our research suggests that, when it comes to product evaluation, beauty truly lies in the eyes of the cardholder,” the authors say in the report.
The research might help consumers get a better grasp on why they seem to overspend when using plastic. It has broader social implications, too, particularly as new and even more-frictionless payment systems like Google Wallet enter the marketplace.
It also may help consumers understand exactly how large corporations are trying to exploit their behavioral weaknesses, so they can develop their own personal counter-measures.
It's long been observed that consumers spend more when paying with plastic than cash, a phenomenon known as the "credit card premium." But there hasn’t been much research devoted to why, said Chatterjee. It's generally been presumed that consumers who feel the pain of dollar bills leaving their hands spend less than those who zoom through checkouts with just a swipe. But Chatterjee argues that something much deeper is going on.
"The effects of credit cards go far beyond increasing consumer spending power and shifting consumption from the future to the present; fundamental product perceptions are affected as well,” Chatterjee says in the report.
Researchers primed subjects using traditional behavioral study methods, such as making them play words games which focused their attention either on credit cards or on cash. Then they gave the consumers information on items they could theoretically buy, such as a notebook computer or an iPhone. Repeatedly, consumers "primed" to think about credit cards had a harder time recalling products’ price or other downsides.
“Our findings suggest that marketers may be affecting not just the amount of money consumers are willing to spend but also the nature of the goods and services that find their way into consumers’ market baskets,” the report says.
'I keep buying things I don't really want'
Chatterjee said he become interested in the field after he observed his own behavior with regards to credit cards.
"I hardly ever carry cash and as a consequence I keep buying things I don't really want,” he said. “I'm not even thinking about the cost, I'm so consumed with the benefit of what I’m getting. It has been bugging me for a long time. People do not realize how their payment mechanism influences behavior."
The research is even more relevant as new "touchless" forms of payment become common, such as cellphone payments like Google Wallet, enabled by Near Field Communications chips.
"The pain is missing," when consumers make such effortless payments, Chatterjee said. And that prevents them from engaging in an otherwise normal cost-benefit analysis before they acquire things, he said.
"(New electronic payments allow) consumers to make payments without a lot of deliberation. ...This arrangement, ostensibly for the consumers’ convenience, seems to offer an even more powerful disconnection of spending from payment," Chatterjee said.
Retailers have conducted high-level research on consumer behaviors for decades, of course. For example, something as simple as making product containers taller distorts consumers' perceptions of volume, and therefor compromises their ability to comparison shop.
But credit card euphoria is so powerful because it can impact literally every kind of purchase, the new research indicates.
Something as simple as the display of a MasterCard or Visa logo on a cash register could actually nudge consumers to buy more stuff, Chatterjee thinks.
"If we can somehow put that pain back in, we could perhaps retain the convenience of plastic, which at the same time help consumers make more informed decisions,” he said. Perhaps a simple reminder at the point of sale -- an image of cash, or a cell phone reminder of a bank account balance -- could tip the scales closer to normal for consumers.
The research could also inform government agencies distributing social welfare payments. Most now use some form of pre-paid debit card for unemployment payments and other benefits. It's possible that might be encouraging poor spending habits.
As an antidote, Chatterjee suggested that consumers set aside money separately for gifts, or vacations -- a method that recalls old Christmas club savings accounts.
"It's old-fashioned, but it works really well,” he said. “A lot of research shows that when you earmark money for this or that, people see that money as out of bounds and don't touch it until they use it for the intended purpose. The thing I want to tell consumers is to be cautious when paying with credit cards.”
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