Opaque payments, open wallets: The relationship between payment transparency and overspending

Abstract

As payment methods evolve from cash to digital alternatives, their psychological and behavioural effects on spending behaviours, especially among young consumers, become increasingly important. Previous research has mainly compared credit cards and cash, showing that credit cards lead to more spending. However, the psychological mechanisms behind this are unclear due to differences in coupling time and transparency between the methods. This study bridges the gap by examining not just credit cards and cash, but also prepaid cards and cash, which have a similar coupling between consumption and payment but differ in transparency or payment format. By comparing prepaid cards with cash, the study explores whether the format of payment itself impacts spending behaviour. Drawing from a novel survey of Indonesian college students, this study presents empirical findings that credit card and prepaid card use (extensive margin) and payment frequency (intensive margin) are associated with overspending, whereas cash payments show no such association. The evidence suggests that payment transparency influences consumer behaviour, clarifying the underlying psychological mechanism of how payment methods affect spending. Further analysis shows that higher financial literacy helps mitigate the impact of less transparent payment methods on overspending. These insights suggest opportunities for developing digital payment solutions that minimize negative consequences, particularly for younger users. Educational initiatives tailored to promoting responsible digital payment usage could further reduce these effects.