I recently taught another class on the intersections between payment methods, how people handle money and how they perceive money. During these lectures, seminars and sessions one question continues to pop up: “as money becomes increasingly more abstract, how do you perceive that money in fact, does have a limit? And how do you teach that to children in what is becoming an increasingly cashless society?”
I think these two questions are killer questions. They are both interesting theoretically and require solving practically. But there is also a lot to unpack there. So let’s start.
The idea of limitless money comes from non-concurrent payment methods. The best two examples of these are credit cards and buy-now-pay-later (BNPL), but can also be found with being in an overdraft on a checking account associated with a debit card (which is concurrent). The idea here is simple: just because you don’t have the money now, doesn’t mean that should stop you from spending it.
Let’s take a few steps (decades) back and provide some context: the credit card was introduced around the late 1950s, early 1960s (America, UK). It’s purpose was to allow for consumption-smoothing: not having to wait till one’s wage came in to purchase everything at once, but be able to do so when the need to purchase arose, thereby spreading it throughout the wage-cycle. Credit cards thereby removed the need to have the money ready now. Knowing that it would come in later.
Obviously, if people were rational, highly disciplined and infallible creatures, the credit card wouldn’t cause any real damage. People would exclusively use it to spend on their normal, within budget, purchases and repay the amount in full each month, having the best of both worlds: no interest charges, late fees etc. with all the benefits of consumption-smoothing. But that’s not at all what’s happening.
There’s plenty of research, and I’m happy to provide you with all references, that credit cards, as compared to cash, lead to more spending, more frequent spending, higher spending on vice products, more impulsive spending, reduced product attachment, reduced expenditure recall, increased willingness to keep spending after a purchase, and of course, an increased likelihood of being in debt [if you want to know the details of any of the research showing this just dm me].
So what’s going on here?
When we look at cash we can see three things very clearly: it’s physical, it’s says exactly how much we’ve got and if we want to purchase something we lose (part of) our cash immediately. This physicality, value representation and concurrency lay at the heart of every payment theory known to behavioural science. But what these three things also promote is cash being finite.
It is possible to buy something on loan even when using cash, but is becoming increasingly difficult. And even in this scenario, eventually, you’ll have to rock up with a physical resource to repay the loan. And once the loan has been repaid, the resource is gone again. It’s physical form now belongs to someone else. The finiteness of cash is incredibly salient.
As money has moved increasingly into the online domain, where it’s simply numbers on a screen, its tangibility, physicality, salience and therefore its finiteness has reduced.
Look at how your credit card (if you have one) is represented in your online banking app. It doesn’t say what you owe. It doesn’t have a minus sign in front of it. It says $5000 (if you have a credit card with that limit that you currently have no outstanding repayments on). And once you spend $2000 of that balance it doesn’t say -$2000, which is what you now owe the bank. No it says $3000, because that is what is left of that limit. The total limit of $5000, which isn’t your money, it’s the bank’s money. And if you do end up spending the bank’s money, well the bank is going to want it back.
It's just that that is not the way it’s presented in the app. It’s not how any financial institution present their loans to you. Because that is what a credit card is. It’s a loan. Not your money. Their money.
Even if we are looking at current accounts. They can have a minus sign in front of it. But what does that really mean? You can hit overdraft on a current account. It’s the exact same as the credit card, you have now switched from spending your money into spending the bank’s money. But the representation of this isn’t salient at all.
I can go on and on with examples of this. BNPL, which is targeting younger, credit card-averse, generations is no better. Sure, the repayment terms tend to be a bit easier to understand (set terms, set amounts, late fees and no interest) but it’s still a form of “you can spend money now that you don’t have now, and might not have later either”.
Given these payment methods and their representation of money facilitate a perception of infinity, it's becoming increasingly important to teach people that money does in fact have a limit. After a while financial institutions are expecting these loans to be repaid. And there’s consequences for those who don’t. Which, if severe enough, excludes you from access to a lot of the financial system has to offer (think of mortgages).
So what can we do? Well, we need to teach people the finiteness of money. I do believe in financial education, as long as it targets a specific problem, analyses it from all angles and is timely. I do believe this is equally important for children and adults. I believe teaching children early on how debt works, how to properly budget and how to (try to) live within your means is incredibly important. I also find it increasingly strange why this is no longer part of a standard curriculum in either late primary, or early high school. When it comes to teaching adults, often we only really address the issue when it is too late: when they are already struggling with debt repayments and the chance of defaulting increases per hour. Obviously, when we reach this stage it’s become a game of damage control, rather than damage prevention. We need to shift focus to the damage prevention. I do think there is a great behavioural design challenge here. How do you make money, and its limits, more salient in an exclusively online setting? How do you make people realize that a credit card is a debt, not “their” money? I can’t say I have the answers, but I do have ideas that may or may not be workable. But at the very least, I think it’s worth having a discussion about the perceptions of money, as numbers are indicating that BNPL is going exactly the same way as the credit card, creating consumer debt traps that they struggle to get out of.
