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Expensive downside of going cashless revealed

Consumers spend more and buy more things when they pay with card over cash, new research confirms.

Cashless sign and Australian money
Consumers spend more and buy more when using cashless payment methods rather than cash. (Source: Getty)

Australia is heading towards becoming a cashless society, with some experts predicting we will be functionally cashless by the end of the decade. While opting for card payments can be more convenient and safer for some, there could be an unexpected downside for your finances if you ditch cash.

Researchers have analysed more than four decades of evidence to see how the payment method you use impacts your spending habits. Their conclusion? If you’re trying to save money, pay in cash.

Report author and University of Melbourne senior lecturer in marketing Alex Belli told Yahoo Finance this was because of a phenomenon known as the “cashless effect”, which traces back to the 1970s.



“The cashless effect is the phenomenon of spending more money but also buying more products when paying by cashless methods - whatever they are, it could be credit cards or BNPL schemes - in comparison to cash,” Belli said.

So why do we spend more with cashless payments? The leading theory links it to the “pain of paying”, which describes the emotions we feel when spending money.

“When we make consumption decisions and purchases we tend to feel some pain and some happiness. You can feel pain because you are not sure if you can justify the purchase that you made or because you feel guilty about buying a certain product,” Belli explained.

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When you pay with cash, you usually have to physically count out your money and hand it over. This can make it feel more painful.

In comparison, with cashless payments you don’t lose anything tangible and simply need to tap or swipe your card, so the transactions can feel less painful.

Interestingly, there is also some neurological evidence that suggests people may actually feel psychological pain when making transactions.

The research suggested that returning to “cold hard cash” where possible could be a way for people to save money.

“It’s physical and you know exactly what you have. You can go to an ATM and take out the money you actually need, rather than having an unlimited amount of money like in the case of a credit card,” Belli told Yahoo Finance.

Cash stuffing
The viral 'cash stuffing' trend is one way people are using cash to budget. (Source: TikTok/budgetilliterate)

Using cash for budgeting has been growing in popularity, with 'cash stuffing’ recently gaining traction on TikTok. On the other side, people have also taken to locking up their cards to avoid overspending.

“There’s a phenomenon known as cash stuffing where people put money into envelopes and then hide it away somewhere. I’ve also heard of people putting their credit cards into their refrigerators to freeze it so they aren’t spending their money,” Belli said.

As more consumers opt for cashless payment options over cash, some experts like RMIT associate professor of finance Dr Angel Zhong predict Australia will become “functionally cashless” by 2030.

The share of consumer payments made using cash has plummeted from 70 per cent in 2007 to just 13 per cent in 2022, according to the Reserve Bank.

“I’m not saying that we won’t see cash at all and I’m not saying that cash will lose its value,” Zhong told Yahoo Finance.

“It’s more about how digital payments are becoming the mainstream payments for consumers. The transition is well underway.”

In a bid to keep cash in circulation, independent MPs Andrew Gee and Bob Katter have introduced a new bill to parliament that could see businesses face hefty fines of up to $25,000 if they don't accept or carry cash.

But as Australia continues to move towards a cashless society and people become more used to paying with cashless methods, Belli believes the difference in the “pain of paying” associated with card versus cash will narrow.

“It seems almost inevitable that we are going to move towards a cashless society. In that case, the pain of paying will maybe die out and people won’t feel this anymore. They will treat cashless methods as cash,” he said.

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