Money makes the world go round but cold hard cash is no longer doing the heavy lifting.

Cash accounted for more than two-thirds of the number of consumer payments made in 2007. Just seven years later, less than half of consumer payments were made in cash.

Online shopping, contact-less cards and other digital forms of payment offer convenience but it comes at a cost. Digital forms of payment fundamentally change our relationship with money in a number of ways that have implications for our current and future financial wellbeing.

Credit cards, first launched in Australia with the now defunct Bankcard in the mid-70s, radically changed spending habits.

It’s now well accepted that credit cards encourage over-spending. Australians hold more than $32 billion in credit card debt – an average of more than $4270 per cardholder Reserve Bank of Australia data shows.

A 2001 US study, in which participants bid for tickets to a sold out Boston Celtics basketball game, found those using credit cards offered nearly twice as much as those using cash. This was not being driven solely by having easier access to cash when people needed it most (extra liquidity).

Several years later, this same tendency is being increasingly revealed in other forms of electronic payments.

Less painful to spend

Cash has a powerful psychological impact on people. For example, contactless cards provide instant gratification; compare that with the psychological pain point of handing over cash, London Business School associate professor Niro Sivanathan says. Credit already decouples the pleasure of consumption from the pain of paying. Contact-less payment reduces the friction even further.

Similarly, a survey by price comparison website GoCompare found that 15 per cent of respondents were concerned that digital payment systems encouraged them to spend more than they should, while 7 per cent said they didn’t connect digital spending with ‘real money’.

This tendency is also revealed in the way Australians are flocking to Afterpay, which is integrated into merchant websites, allowing customers to buy now and pay later across four fortnightly payments. Customers pay no fees or interest and receive their goods immediately, while the business receives its payment immediately from Afterpay, minus its commission.

More than 2600 merchants now use the service and retailers such as Veronika Maine, General Pants Co, Tony Bianco, Cotton On, and Cue have reported the average order of customers using Afterpay is 18-24 per cent higher.

This is a greater expenditure of their own money and suggests customers are not making a rational assessment of the cash worth of delayed payment (such as potential interest savings or extra liquidity).

The trend towards digital payments is unlikely to slow, as the online retail sector is growing at a double-digit pace, led by millennials. The NAB Online Retail Sales Index estimates that Australian consumers spent about $21.83 billion on such purchases over the 12 months to January 2017.

Innovation raises questions and answers

Technology creates new opportunities but often brings unforeseen challenges.

Microwave ovens, for example, offered convenience but few predicted they would ultimately turn home cooking into a choice rather than a necessity. The growing popularity of television almost resulted in the demise of cinema in the US in the 1960s just as the rise of online entertainment threatens TV today.

The move to digital payment systems is more pernicious. It has enriched our lives with greater convenience but may be encouraging greater aggregate spending. This is of particular concern, given Australia’s household debt-to-disposable-income ratio now stands near a record 190 per cent, the RBA states.

But, just as technology has led us to this dilemma, it can also lead us to a solution.

Digital payments vary widely in form but the technology now exists not only to track them but also to gather this information and analyse it. This is just the first step. The challenge is to create a deeper connection with consumers that has a similar emotional weight as cash.

Financial advice and coaching is crucial but advisers can’t do it alone. Technology is the pathway to creating a scalable way to change behaviour, as well as a stronger connection between advisers and their clients. These platforms and solutions will also expand advisers’ traditional service propositions by helping clients reach their goals.

The rise of big data and powerful analytics means the forms these services ultimately take will be limited only by our imaginations.

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