This trend was only further fuelled by the COVID-19 pandemic, during which online shopping became more popular, and consumers and retailers became more reluctant to handle notes and coins, given potential hygiene concerns.   In response to these changes, industry leaders adjusted their marketing strategies by offering embedded payment methods such as Apple Pay, or creating cashless stores such as Amazon Go.  While we race towards a digital future, is this transition from cash to cashless payments truly beneficial for retailers? On one hand, cashless payments offer advantages for retailers, such as better consumer data, improved operational efficiency, and a reduced risk of theft.  On the other hand, the transition towards a cashless society faces some resistance from concerned politicians. Indeed, independent MPs recently introduced the Keeping Cash Transactions in Australia Bill 2024, which would legislate that businesses operating in face-to-face settings must accept cash payments for transactions that do not exceed $10,000. Similarly, Australian consumers increasingly seem to resent the rise of cashless stores, with an annual ‘Cash Out Day’ on June 14 that encourages Australians to withdraw money from ATMs. The million-dollar question, however, is how cashless payments will affect consumer spending? The cashless effect To answer this question, we compiled all available empirical research on the topic, spanning over four decades and drawing from both academic and industry sources. In total, we analysed 71 research papers from 17 different countries to obtain the strongest insights available to date.  Using advanced meta-analysis techniques, we were able to analyse the results from all prior studies collectively and re-examine their insights. This methodology, rather than just looking at individual results, helped us get a clearer picture of what these prior studies together found. Along with our colleague Alex Belli, senior lecturer in marketing at the University of Melbourne, we recently published our findings in the Journal of Retailing. Most importantly for retailers, we found that cashless payments are indeed associated with higher levels of consumer spending than cash transactions: the ‘cashless effect’. This happens across all payment methods. It does not matter whether consumers use credit cards, debit cards, or their mobile, they spend more money using cashless methods. We were also able to identify key factors that might make the cashless effect stronger or weaker, by focusing on differences among studies. For example, we found that the tendency to spend more when using cashless methods is largely consistent across all types of products and industries; however, there are two notable exceptions.   First, when purchasing products typically used to signal status, such as jewellery or luxury cars, consumers tend to spend even more with cashless methods (vs. cash). Second, cashless payments do not necessarily result in higher tips or donations than with cash. This suggests that traditional cash-based methods of collecting money, such as tipping jars and spiral wishing wells, are as effective as digital point-of-sale terminals for collecting tips or donations.  Finally, we find that the tendency for consumers to spend more with cashless methods has become weaker over the last four decades, indicating that the cashless effect may eventually disappear.  What is driving the cashless effect?  If consumers behaved rationally, we should see no difference in their spending across different payment methods – money is money after all, right? Behavioural economics teaches us, however, that consumers are not purely rational decision-makers; emotions affect our choices a lot.  The leading theory to explain why consumers spend more with cashless methods is differences in the ‘pain of paying’, a concept describing the negative emotions we feel when spending money. The pain of paying is not just a metaphor; a 2021 study from researchers at Carnegie Mellon University, Stanford and MIT found that it even shows up in brain scans.  How consumers pay for goods and services influences this pain. When paying with cash, consumers must physically count out notes and then hand them over. Given that humans are motivated to avoid losses, and paying with cash involves a physical loss, this is a painful process.  In contrast, paying with cashless methods using a swipe or tap involves no physical loss, making it less painful. As a result, consumers may spend more freely, as we indeed found.  How to approach a cashless society  The evidence is clear. Over four decades of empirical evidence indicates that providing the option to use cashless payment methods instead of cash increases consumer spending. Thus, retailers should not only equip themselves to accept cashless payments (if they haven’t already) but actively promote them. This could include displaying signs indicating that cashless payment methods are welcome (and perhaps eliminating the surcharge when consumers want to use cashless payments, which might put them off using this payment method). Clearly, despite the overall benefit for retailers of cashless payment methods in terms of consumer spending, there is a need for a nuanced discussion on how to strategise in this regard.   Each retailer must consider their own customer base. While refusing to accept cash is not currently against the law in Australia, think about how your customers might respond. For many consumers, cash is still crucial, whether it’s for budgeting, a preference, or simply because they have no other choice. Offering a variety of payment options, including cash, will, therefore, ensure that you are not jeopardising potential revenue.  While cashless methods do involve merchant service fees, don’t forget that cash transactions also come with their own set of costs,  as cash must be managed, guarded, and accounted for.  Take care with the cashless approach. Keep an eye on the constantly changing regulations for cashless methods. For instance, the Reserve Bank of Australia will soon review the no-surcharge rule, which will give merchants more freedom in nudging customers towards particular payment methods.  Also, given the current climate of diminished trust in retailers, it is crucial to find a balance between maintaining consumer trust and protecting profit margins. To avoid jeopardising your reputation, steer clear of exploiting the cashless effect with methods that encourage consumers to spend money they don’t have, such as those relying on credit. Instead, focus on promoting cashless methods that allow consumers to spend only what they can immediately afford.   Despite all ifs and buts: as society shifts towards a cashless future, there is clear evidence that embracing cashless payment methods positions retailers for success in this evolving landscape. This story first appeared in the August 2024 issue of Inside Retail Australia magazine.