1. Introduction
Digital India initiative has accelerated the notion of ‘cashless economy’. Over last decade concept has got the momentum. During COVID-19 pandemic digital India movement got a boost. Unified Payment Interface (UPI) platforms as Paytm (paytm got heavy attention immediately after demonetization), Google pay, Phone pay, Bharat pay etc. The development of UPI has redefined financial transaction. These platforms have taken place of old cash transaction economy. These platforms made payments quick and convenient. Because of convenience these platforms gradually became part and parcel of the modern payment system. This paper analyzes this ‘Smooth and quick’ payment phenomenon, exploring the psychological, economic, and behavioral consequences of digital payments on consumer spending habits.
2. Theoretical Framework: The Psychology of Money
Why to shift towards digital payments can be best explained by behavioral economics, specifically the "pain of paying" theory introduced by Prelec and Loewenstein (1998).1
2.1 The "Pain of Paying" vs. Frictionless Payments
Cash transactions involves exchange of tangible cash, due to this tangible cash departing from the payer, payer feels something is lost or gone forever and this cause a psychological pain to the payer. In economics it is called “Pain of Paying”. In contrast, digital payment apps create a "frictionless" environment. In digital payments apps physical cash is not involved so it seems to payer that he is losing nothing as psychological impact is less and hence pain of paying is less.
2.2 Mental Accounting and "Spendception"
Many researches have been conducted and concluded that money earned differently is treated differently in the minds of earner. For example salary money cannot be spent freely but lottery money or bonus can be spent easily. Why this as money is money and should be treated the same way. Answer lies in mental accounting. Similarly physical cash and digital balance is also treated differently.
Lack of immediate visibility and physicality of digital money reduces the psychological barrier to spending, leading to increased impulse purchases this phenomenon is sometimes called spendception. Spendception is union of two words spending + deception.
3. Impact of Digital Payments on Spending Behavior Patterns
3.1 Increased Frequency and Volume of Spending
Digital payments made spending easy and convenient. This easiness and convenience has made digital payments more frequent. Various studies suggests that because of digital payments spender are spending more money when compared their digital transactions with cash transactions.2
Small size transactions: Digital payments has boosted small value transactions such as paying for a cup of coffee/tea or paying fare to auto rickshaw/bus.
Category change: Swiggy, Zomato (Food category) Amazon, Flipkart (E commerce category) has seen significant growth because of digital payments. Customer can pay instantaneously and conveniently.
3.2 Unplanned and Impulsive Buying:
The convenience of use like QR code scanner, one click payment etc give encouragement to payer to spend spontaneously and impulsive buying happens.
Research shows that 43% of users make impulsive purchases sometimes, and 31% do so very often, resulting in over 70% of users experiencing some level of unplanned spending.3
Automated subscription: Automatic payment for the subscription has risen due to automated procedure. Sometime the payer forgets to unsubscribe and renewal payment for subscription gets deducted automatically.
3.3 The "Cashless" Effect and Budget Mismanagement
Many individuals struggle with financial tracking, finding it harder to monitor their expenses due to the intangible nature of digital transactions.
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