When consumers pay with credit cards instead of cash, they are willing to spend more. In auction experiments involving genuine purchases, MIT's Drazen Prelec and Duncan Simester found that instructing bidders to pay by card rather than cash raised willingness to pay by as much as 100%[1]. This 'credit card premium' isn't just an interesting statistical quirk; it's a window into how payment methods shape our spending behaviour. As we've moved from physical cash to digital payments, this psychological effect has only intensified, reaching new heights with Buy Now, Pay Later (BNPL) services.
The Science of Spending
The reason for increased spending with cards lies in what behavioural economists call 'payment coupling' – the mental link between purchase and payment. Cash creates immediate pain of paying, while cards create psychological distance between buying and spending. This distance reduces the emotional impact of spending, leading to larger purchase amounts and more frequent transactions.
Digital payments have amplified this effect. When paying becomes as simple as tapping a phone or clicking a button, the psychological friction that might otherwise make us pause and reconsider a purchase diminishes significantly. The seamless nature of digital transactions further weakens the mental link between spending and payment, making it easier to spend more without feeling the immediate impact.
BNPL: Psychology in Overdrive
Buy Now, Pay Later services take this psychological distance to another level. By breaking payments into smaller chunks, BNPL makes purchases feel more manageable – even when the total cost remains the same. This psychological framing proves particularly powerful in influencing purchasing decisions, especially for larger items that might feel out of reach as a single payment.
The mechanism at work here is known as 'present bias' – our tendency to prioritise immediate benefits over future costs. BNPL services leverage this by offering instant gratification while pushing the financial impact into the future. The psychological appeal is clear: you get the dopamine hit of a purchase now, while the pain of payment is both delayed and divided.
The Dark Side of Frictionless Finance
However, this reduction in payment friction comes with consequences. The Financial Conduct Authority's research on unregulated BNPL found that users were markedly more likely than non-users to show low financial resilience (37% against 22%), rising to half of those who had used it ten or more times in a year, and that 11% of users had paid a late payment fee, with under-35s the most affected[2]. The same psychological distance that makes spending easier can lead to disconnection from the reality of accumulating obligations.
The problem is compounded by what behavioural scientists call 'payment stream blindness' – difficulty tracking multiple payment obligations across different services. When payments are spread across various providers and dates, consumers often struggle to maintain a clear picture of their total commitments.
Choice Architecture: The Hidden Influence
The way payment options are presented significantly influences consumer decisions. The positioning of BNPL alongside traditional payment methods, the visibility of total costs, and even the order of payment options can all shape purchasing behaviour. This highlights the crucial role of choice architecture – the way options are presented to consumers can either help them make informed decisions or nudge them toward potentially problematic spending patterns.
Financial Literacy: A Weaker Buffer Than Assumed
Financial literacy is usually assumed to be the natural buffer here, but the FCA's own data complicate that story. Its analysis of the Financial Lives survey found that self-assessed financial knowledge had no strong relationship with BNPL use, and that people rating their knowledge as moderate were slightly more likely to use it than those rating it low or high[3]. What did vary was awareness of the terms: 19% of users of fee-charging providers did not know a late fee could apply. That points to clearer disclosure at the point of choice, rather than restriction alone, as the more promising lever.
Looking Forward
As BNPL continues to evolve, the challenge lies in balancing convenience with responsibility. Some providers are now experimenting with 'mindful spending' features, such as clear visualisation of total commitments and proactive warnings about potential overextension. These innovations suggest a growing recognition of the need to balance commercial interests with consumer protection.
The psychology of modern payments reveals both opportunities and risks. While BNPL can make purchases more accessible, it also amplifies the psychological distance that already makes digital spending feel less 'real'. Understanding these mechanisms is crucial for consumers, merchants, and providers alike.
Corrected 4 October 2026: the opening claim that cards add 12-18% to spending was misattributed to MIT research and now states what Prelec and Simester (2001) found; the FCA statistic on BNPL payment difficulty cited a report that does not exist and has been replaced with figures from the FCA's 2023 Deferred Payment Credit research note; and the section on financial literacy has been rewritten because the FCA did not find that stronger financial knowledge buffers BNPL use.
- Prelec, D. and Simester, D. (2001), 'Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay', Marketing Letters 12(1), 5-12 - https://doi.org/10.1023/A:1008196717017 ↩︎
- Financial Conduct Authority (October 2023), 'Deferred Payment Credit: findings from the Financial Lives Survey', Research Note - https://www.fca.org.uk/publication/research-notes/deferred-payment-credit.pdf ↩︎
- Financial Conduct Authority (October 2023), 'Deferred Payment Credit: findings from the Financial Lives Survey', pp. 8 and 10 - https://www.fca.org.uk/publication/research-notes/deferred-payment-credit.pdf ↩︎