Holiday Debt Hangover: The Dangers of Contactless Payment

Holiday Debt

The holidays may be over, but for many they are far from forgotten. For kids, the holiday joy continues with toys and games, but for adults, the holiday hangover might not be as pleasant. In fact, according to Niro Sivanathan, bssociate professor of organisational behaviour at London Business School (LBS), the holiday hangover could mean an unprecedented amount of festive debt. The truth is that in 2016, more people than ever used touchless payment to make their holiday purchases, and that comes with some consequences: the holiday debt hangover.

“Parting with cash is psychologically painful and, as a result, consumers are more likely to spend with a credit card,” Sivanathan explains. “Specifically, credit cards decouple the pleasure of consumption from the pain of paying. Contactless reduces the limited friction that still remains with credit cards (signing the credit card receipt, entering your PIN, etc.) further. Thus contactless payment further anaesthetises the pain of paying by making the transaction essentially frictionless.”

The ultimate problem of this reduced pain is that people tend to amass more holiday debt—more than they may be able to afford. They don’t feel the pain of paying, and thus they don’t realize how much they spend. So, while contactless and touchless payment is convenient, it’s also something that should be handled with care.

At least, that’s what Sivanathan’s research found. He found that not only are consumers more likely to purchase goods when using contactless payment but that they’re also willing to pay more for those goods. And his findings weren’t surprising.

“Our work was taking the well-established effect of credit card expenditure explained above and extending this work to see if those with lowered self-esteem would find this purchasing platform especially appealing when looking to acquire luxury goods,” described Sivanathan. “Our research shows purchasing luxury goods on credit is especially attractive to those who have low self-esteem,” he explained in an LBS news release. “These individuals seek to boost their self-esteem by purchasing high-status goods to make them feel better about themselves. The combined effect of low self-esteem, high status goods and the ability to purchase on credit creates a ‘perfect storm.’ This can be dangerous; consumers with low self-esteem are at higher risk of falling into debt.”

The prior work that Sivanathan mentions are his 2010 papers titled The Plastic Trap: Self-Threat Drives Credit Usage and Status Consumption and Protecting the Self Through Consumption: Status Goods as Affirmational Commodities. In these papers, Sivanathan looked at consumption debt and how it was affected by a person’s personal view of themselves and their payment method.

“By deferring payment to a future date and therefore divorcing actual payment from the purchase, credit helps dull the sting of expenditure while maintaining the pleasure of consumption,” Sivanathan wrote in The Plastic Trap. “Thus, despite credit having no direct alteration on the price of the product, this temporal shift in payment markedly alters the psychological impact of consumption on self.”

And that trap of paying more than you should becomes even worse when payment is made through a mobile phone or another contactless device. In many cases, contactless forms of payment also come with un-printed receipts, which means there is even less confrontation with money being spent. It’s easy to say yes to another $100 in gifts if you’re never presented with the fact that you actually spent $100 in the first place.

And, interestingly enough, this problem is especially prevalent when it comes to luxury goods, especially for the economically troubled. “The experience of owning status goods provides important psychological armor to protect the self against the arrows of negativity,” Sivanathan explained in Protecting the Self Through Consumption. “Individuals who do not possess status goods lack the benefit of this affirmational resource, and are more likely to feel the psychological sting of negative information.”

The thinking is that if you spend a significant amount of money on a luxury or status good, the good itself will take away the pain of the spend. It’s a dangerous cycle.

To learn more about Sivanathan’s research into debt, credit cards, luxury goods and contactless payment, visit the London Business School website and check out the links to his research.

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