The Psychology of Separating You From Your Money

Jeff–Saturday

Thirteen years ago, as I was driving back to New York, I heard an educator on NPR radio explaining how banks and businesses use psychology to separate consumers from their cash.  I wish I could remember his name or the title of his book because the subject was fascinating. At least I remembered I'd blogged about it back then, for I see it as timely a warning now as ever before--caught up as we are in the throes of the annual holiday shopping season madness.  

His seminal premise was that to succeed in separating money from the consumer a seller should keep the potential buyer as physically far away from actual cash as possible.  Yes, taking real money out of one’s pocket or purse gets you to thinking about whether the purchase is actually worth it.  And parting with a fistful of bills in hand is about as real as it gets, so whatever sellers can come up with to distance consumers from feeling the money leaving their control—be it by accepting plastic, the simple click of a mouse, or the waive of a phone—dramatically increases the likelihood of THE SALE.

There are variations of course.  A prime example is Amazon’s program of the same name.  Join Amazon Prime for the low annual fee of $14.99 per month ($139 per year) and receive unlimited free two-day shipping on all your purchases.  That’s pure marketing genius.  Not only has the consumer parted with $139 up front for free shipping only a few days quicker than the shipping often offered free to all Amazon customers, but the consumer has unconsciously tethered itself to Amazon as its primary shopping source.  Having paid a monthly fee the consumer will undoubtedly want to get its money’s worth, meaning that every time a purchase is considered the potential buyer is likely to think, “I’ve already paid for free shipping from Amazon…” 

What an edge that gives Amazon over its cyber and brick and mortar competitors.  Like I said, genius, though I must admit Amazon also offers just about the best prices anywhere.

W. C.Fields

And then, of course, there’s the casino model based upon requiring up front exchanges of real money for chips.  That overcomes two very serious psychological hurdles to unreasoned spending.  First, by replacing money with chips the consumer doesn’t have to pull out five twenties to make a hundred unit bet.  Just plop down one black chip.   But perhaps most importantly, since cash must be exchanged for chips before the customer gets to play, casino gambling becomes psychologically akin to paying admission for an event—and once the show starts one doesn’t expect to get back the cost of the ticket.  Hence, the often heard words that warm a casino’s bottom line: “We’ll just play until these chips are gone.”

As I listened to the radio, I thought of another highly effective model for separating consumers from their cash through psychology.  Perhaps the most insidious and inadvertent ever, for I doubt it was planned to operate as it has when it was created—or at least I hope it wasn’t.  I am talking about the euro.

Let’s start from the premise that coins, aka change, are generally not perceived to be as valuable as paper currency.  When is the last time you heard a beggar asking for spare bills?  Do you tip with paper or coins?  And on those occasions when you do hand over coins as a tip, do you sometimes say, “Sorry, but I only have change.”

The bottom line is that we pay more attention to the paper in our pockets than the coins. In the US, our smallest paper denomination is $1 and, except for the rarely used $2 bill, our next largest is $5.  And though what we get for a dollar seems less and less every day, when it comes time to pull out those singles we still think about the purchase, or if it’s for a simple gratuity, whether to give one dollar or two.

Now, let’s take a look at the lowest denominations of euro currency.  There is no €1 note or even €2 note, the smallest paper denomination is €5 or approximately $7.  The €1 coin ($1.06) and slightly larger €2 coin ($2.12) are each roughly the size of a US quarter. 

The euro began formal circulation in Greece on January 1, 2002 at an exchange rate of one euro for 340.75 drachmas. 

100 drachma note

Before turning to the euro, Greece’s smallest paper currency and largest coin in general circulation was 100 drachmas, equivalent to approximately €0.30 or $0.32 today.  It was the basic unit for most simple transactions and gratuities.  A hundred drachmas here, a hundred drachmas there, what’s the big deal. (A 500-drachma coin was minted in 2000, but by then Greece knew it would be switching to the euro and it was done more to commemorate the Olympic games than anything else).

After the switch, the smallest euro note was worth almost 17 times the former value of 100 drachmas (now worth 30 cents) and the closest coin in the euro form of currency to 100 drachmas was the twenty-cent coin.

Logic would have the twenty-cent coin, or perhaps even the fifty-cent coin, replacing 100 drachmas in Greece’s new spending culture.  But that is not what happened.  Instead, prices often jumped in terms of whole euros.  Bread that once cost 100 drachmas now cost a euro, a cup of coffee two euros, flowers at the bouzouki three euros, and so on.  Casual tips were soon being expected in denominations of a euro or two.  After all, they were “just coins.” 

Rounding up to the next euro took place in practically all areas of commerce except one: the conversion of wages from drachmas to euros was done precisely to the cent.  Soon workers earning €900 per month (considered a good monthly wage…cops started at €800 per month) found themselves paying multiples of what they had under the drachma for the very same products or services. 

Economists would call that inflation.  I can think of some other terms.  But one thing is for sure (at least in my mind), had there been paper currency in one and two euro denominations there would not have been as rampant and far reaching an inflationary jolt to Greece’s economy.  People are conditioned not to take coins as seriously as paper currency, and even today the euro is treated as close to “church change,” the small coins Greeks drop in a collection box in exchange for candles.  Just how much that attitude costs the average Greek I do not know, but if it’s just a single extra euro a day that’s 3% of a €900/month worker’s earnings.

ECB, Frankfurt

I am not alone in that view.  For years there were serious efforts by some EU member states (including Greece and Italy) to convince the European Central Bank (who prints the money) of the need for one and two euro notes.  But the ECB ignored their requests—including a motion by more than half the members of the European Parliament for such relief.  The ECB’s excuse was that paper currency costs more to create than coins and is less durable. 

But perhaps the truth lay closer to what the man on the radio had to say: banks are attuned to the psychology of currency, and the ECB understood that consumer-driven economies benefited (at least in the short term) from consumers who did not realize why they were spending more than they should.

Still, I doubt Europe will be seeing one or two euro notes any time soon.  Apparently the ECB (and those with influence upon it) like the euro exactly as it is: for all intents and purposes as unthreatening and playful as a gambling chip.

—Jeff