Lori: Holiday shopping is well underway in the United States. There are plenty of articles about the rise in inflation, but with the holiday season upon us, consumers are not even tapping the breaks on their spending. It has me thinking about how consumers are feeling and how they are thinking about paying for their purchases.
Andrew: That’s right. Right now, it is less of a question of whether consumers will make a purchase, but how they will make that purchase. Behavioral science tells us that people will gravitate the options that feel best to use and one great way to do that is to provide rewards. But, what feels most rewarding to different people varies massively. Some love to play the points game, they enjoy following trends and trying to get the absolute greatest monetary value from their reward. Others find that degree of complexity to be onerous and take comfort in the straightforward and reliable value offered by a flat cash-back program. You see, it’s not all about pure monetary value, but the experience of using the card and getting those benefits.
Lori: Interesting, so when card companies are trying to figure out what rewards they should offer, it is understandable why we see them going beyond what is “normal” for them. COVID-19 brought an overall shift in wallet away from certain types of reward and cards that worked for shoppers in 2019 may no longer be their favorites. For instance, travel cards are offering more rewards in dining. In essence, brands are trying to get in front of behavior shifts in primary card spending habits. Talk a bit about how consumers feel about redeeming the rewards, rather than just earning them.
Andrew: Yes, in those instances consumers use the card, they know they are getting points or whatever the reward will be, and they feel that satisfying sense of “I did somethings smart here;” “I got the best value for myself and my family.” Then, later, when they get to redeem their points, they get to experience the emotional high of getting something for free. By generating a sense of reward at both the time of purchase and the later at redemption, we close the loop and build the habit. In these cases, they get both a tangible and intangible reward that reinforces their use of the card.
Lori: It’s all fun and games until the bill comes due though!
Andrew: That’s very true. But even then, we have an opportunity to introduce a positive experience by, for example, generating rewards at the time of bill payment or creating a pleasurable user experience.
Lori: This makes me think of Buy Now, Pay Later (BNPL). These types of payment methods are rising in popularity, especially among younger generations. It’s a $15 billion industry. There are many fintech firms such as Affirm, Klarna, Sezzle, Splitit. Zip (formally known as Quadpay), Afterpay and the like, as well as new arrivals looking to carve out their own niche. And there’s a lot of partnerships, innovation, and specialization in the industry. For example:
- UpLift has partnered with the travel industry, Southwest, and Carnival Cruise Lines
- Flex offers a new flexible payment plan
- Scratchpay focuses on healthcare and veterinary services
Most don’t offer tangible rewards in the same way that credit cards do though. What is the behavioral psychology driving the increase in usage of these payment solutions?
Andrew: This is such a fascinating topic! At face value, these products seem very similar to a traditional credit card, but the experience of using them is so different. In both cases, you get to put all those gifts under the tree right now and need to make payments sooner or later. But, with cards, there is some cognitive effort of figuring out how much and how often to pay, all while worrying about interest and fees, which creates a lot of anxiety. However, with a BNPL product, some of that hard cognitive work is taken off your plate, since you know in advance exactly how much you’re in for each month and for how long you’ll be paying it off. It can be a much easier and less painful experience, as long as you are making your payments on time. All this while also avoiding some of the fear that comes with credit, or worse the fear of carrying a credit card balance. Ultimately, of course, there will always be trade-offs. Traditional credit cards can generate exciting rewards, whereas BNPL products can help to ease pain points and create a sense of security.
Lori: Online shopping continues to increase, and digital shopping is rising even faster. Seeing how the payment wars shake out will be fascinating to watch this year.
: Yes, and brands should be keeping a close eye on their consumers’ behaviors. We do Habit Loops research
for a lot of clients, as you know and understanding what emotional drivers reinforce or break habits is really critical.
Lori: Agreed. So important for brands to determine how to allocate resources to get the most impact. Well thank you for your time today, Andrew, and happy shopping!
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