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Practical Psychology: Purchase Motivation Is Key Payment Preference Determinant

by Chuck Reed
Posted On: 9/19/2012

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TAGS: Chuck Reed, MEI, MEI group, psychology of money, payment preferences, payment behavior, vending, vending machine, cashless vending, banknote validators, lower-value transactions, low-ticket transactions, smart cards, credit card usage, Christopher D. Salyers, mobile payments, cash, Dennis Abrazhevich

There have been many transitions in retail payment technology over the past 75 years, improving the speed and convenience of making a purchase. Cash was king for many years; companies paid their employees in cash and people visited their local bank every week to deposit or withdraw cash. When personal checking accounts came along, it took decades for everyone to get on board. The same happened with credit cards and automated teller machines. Believe it or not, consumers were highly suspicious of ATMs for years.

Although these technologies worked reliably from day one, consumer adoption really lagged because humans resist change by nature. Consumers weigh the added benefits of using the new technology against their innate distrust of change, and often opt to stay put. Recently, though, the benefits seem to be tipping the scale.

Even when consumers are comfortable using new payment technologies, studies show that they will sometimes prefer paying with cash, and that their purchase behavior is highly personal and variable. Purchase behavior varies according to many factors including preference, situation, comfort with technology, type and size of transaction. For this reason, vending operators can gain a competitive advantage if they truly understand their customers' preferences and motivations, and offer payment choice accordingly.

History has shown, over and over again, that added convenience isn't always enough to change consumer behavior when it comes to new technology. Most people wait for others to start using it first, a tendency explored in detail by researchers as the "technology adoption life cycle."

According to this model, every new technology goes through an adoption cycle as successive groups of users embrace it. Early Adopters select new technologies that interest them, try them out, and become the evangelists for more early adopters. It is at this stage -- Geoffrey Moore explored it in his Crossing the Chasm -- that many technologies fail. But if they do succeed in gaining momentum and move past this stage, an Early Majority starts to form and the rest of the normal adoption curve typically plays out. The time needed in each phase varies, but the progression through the phases is usually the same.

In a recent Australian study on electronic payment acceptance,[1] new payment technology proved more popular and acceptable to the majority of consumers -- not just early adopters -- indicative of the growing comfort level that consumers have towards new technology in retail environments. The study categorized survey respondents into three groups, similar to those found in the technology life cycle models, and identified them as:

• Potential early adopters: These consumers were the most likely to utilize new payment technologies, as they were open-minded about innovations and technological advances. They tended to be younger (18-35) and already using a range of electronic payment methods. However, this category also included some older families and "empty nesters" who were highly literate about digital media.

• Hesitators: These consumers were more likely to follow others' lead in adopting new payment methods. They were content to keep using current payment methods until someone showed them the advantages of changing. "Hesitators" spanned a broad spectrum of ages and socioeconomic groups but did not constitute a large group.

• Laggards: These consumers were strongly resistant to adopting new payment methods. Given the recruitment criteria, there were very few laggards in the sample. They included people without children who had less exposure to innovations, and were more likely to come from blue-collar families and regional areas.

To maximize the return on investment and produce a clear increase in sales volume, vending machines must be configured with vending patrons in mind. That means spending time and effort to understand their needs. The past few years have clearly shown that self-service system roll-outs have been most successful when the retailer carefully asked the following questions before launching into the design phase:

How do my buyers make purchases?

What forms of payment do my customers use for varying purchases?

Do my customers carry cash or credit cards, or do they prefer other forms of payment, like debit or stored-value cards?

Are my customers typically in a hurry?

Are they familiar and comfortable with technology, or are they intimidated by it?

Money and payment systems are just as much sociological and psychological phenomena as they are financial mechanisms. If electronic payment systems are to succeed in any retail environment, including vending operations, they must be accepted and trusted by customers. Like goods that satisfy Dr. Abraham Maslow's famous "hierarchy of needs," the world of electronic payment systems must meet a certain hierarchy of behavioral criteria in order to gain customer acceptance. According to research conducted by Delaney & Erwin, [2] these are:

Perception of trust: In the retailer, in the security of funds and in the payment system's functionality.

Perception of accessibility: Barriers to use are not too high.

Perception of equity and value: That the payment system, at a minimum, provides a fair deal and offers advantages not available through face-to-face transactions, such as discounts or rewards.

Perception of esteem: That by using an unattended retail application, customers show that they are discriminating and intelligent.

The research found that adults are using a range of electronic payments for many transactions over $10. There is an expectation among adults that they should be able to make electronic payments for these high-value purchases, and they often become frustrated when this is not possible. Further, respondents expect that electronic payment methods will be increasingly used in the future. Just as current payment methods like debit cards have become the norm, the same is expected to occur for other electronic payment methods.

Once operators have considered these behavioral criteria, they can discern more accurately what type of payment system will most appeal to vending machine regulars, and turn those early adopters into a large majority.

Traditionally, consumers used vending machines to make fast, relatively small purchases, and they most frequently used cash to pay for them. A 2005 Banking Automation report stated that nearly 75% of all personal payments were made with cash. But now only 54% of U.S. adults cite cash as their preferred form of payment, according to market research in Consumer Payment Trends in the U.S.

The most recent payment trend data from the Federal Reserve Bank of Boston shows that many forms of payments (cash, credit, debit, key fob) are used in retail environments today. This makes sense, since 68% of American adults have both a debit and a credit card in their wallets. Contactless payment has had the fastest deployment of any emerging payments technology. Since mid-2005, leading financial issuers have placed tens of millions of contactless credit and debit cards and devices into the hands of consumers worldwide.[3]

Plus, there's a new payment game in town: mobile payment. And while still in the minority, mobile payment systems that enable consumers to use their smartphones to make purchases are a growing trend that many major technology vendors are pushing (think Google Wallet). Jupiter Research predicts the money flow through the U.S. mobile payments industry will reach more than $600 billion by 2014. EMarketer estimates that mobile commerce sales will reach $6.7 billion this year in the U.S. -- a tiny fraction of overall retail sales, to be sure, but a 91.4% increase over 2010. Next year, sales will rise another 73.1% to $11.6 billion.[4]

While just getting started in the U.S., mobile payment technology is already popular in other parts of the world. Japan, for instance, was the first country to embrace using a mobile phone to make purchases, and the Japanese have been using this technology in grocery stores, gas stations, retail outlets, and at vending machines since 2004. Euromonitor International projects that high-volume and low-priced purchases offer the greatest opportunities for mobile payment success -- ideal for vending operators, who sell large quantities of items under $3.[5]

With all these payment methods, how can a retailer or vending operator predict consumer preference? This is especially challenging, because consumers rarely use the same payment method all the time. Studies show that many customers prefer to use cash for some types of purchases, credit for others, and mobile payment for still others. There appear to be two primary purchase influences:

Commerce Sales Chart

No. 1: Type of transaction. The biggest reason for payment inconsistency is that people think of purchases in many different ways, and act accordingly. According to McNally & Day researchers and the London School of Economics, most purchases fall into one of the following groups:

• Impulse. Impulse purchases are unplanned purchases that consumers typically make when they are shopping for something else. These purchases can be low or high in cash value.

• Distressed. The car breaks down. The water heater bursts. Distressed purchases must be made quickly, and leave little time for research or comparison shopping.

• Low-value. Low-value purchases are purchases that are low in price, such as snacks, video rentals, etc. -- the types of purchases most common in vending.

• Repetitive. Repetitive purchases are weekly or monthly, budgeted such as groceries and utilities.

• Luxury. Luxury items are those that consumers don't actually need, but that they want such as vacations, real estate and flat-screen televisions.

The McNally and Day study shows that there is a clear link between types of purchases and the payment method selected. The chart above represents this relationship.

No. 2: Value of transaction. Another factor that determines payment methods is the size of the transaction. As the world's top developer of banknote validators for the retail, vending, gaming and transportation industries, MEI has studied more than 2 million transactions in different purchase environments, and found that payment type is inversely proportional to the value of the purchase. Lower-value transactions, for example those under $5, are made with a higher proportion of cash to cashless. In some cases, retailers will even influence the payment decision by posting notice that credit purchases under a certain amount will not be accepted, due to the proportionally higher costs to process those low-ticket transactions.

In fact, a new breed of vending machine that only offers high-value purchases is proliferating around the world -- and the most common payment method is credit card. These vending machines can be quite high-tech, and their users expect the latest payment technology.

For example, vending machines in Tokyo have "electronic eyes" that evaluate customers' skin and wrinkles to determine whether they are old enough to buy tobacco. In bathrooms at upscale Canadian bars, vending machines with flat irons enable women to de-frizz their locks. In Abu Dhabi, the lobby of a luxury hotel has a vending machine that dispenses gold bars and coins at more than $1,000 an ounce. Throughout the United States, Best Buy, Sephora, Apple and Proactiv have been selling their upscale products through vending machines for the past few years. Quiksilver even offers boardshorts and bikinis in machines.[6]

"We're starting to see, more and more, weirder items and weirder machines," said Christopher D. Salyers, the author of a new book, Vending Machines: Coined Consumerism (Mark Batty, publisher), that chronicles the rise of the machines, from the boom in the 1800s Tutti-Frutti gum era to today.

Flashy and futuristic, souped-up machines -- often referred to as automated retail stores -- are popping up everywhere, from the Mondrian hotel in Miami to a Macy's in Minneapolis. They have touchscreens instead of buttons, façades that glow and pulse, and technology intended to blunt "vending machine rage" -- like sensors to ensure that a customer's credit card is not charged unless the chosen item has dropped. Cash is seldom used to make purchases from equipment of this kind.

Clearly, these machines are not for quarters: purchases are measured in dollar amounts that typically start at two figures and go up. With these higher price-points, vending machines must offer various options for payment if they want to be successful.

Additional factors that influence payment choice include:

• Customer's social status;
• Customer's age;
• Customer's employment;
• How customers receive their salaries;
• Where the transaction takes place;
• Whether there is a bank or ATM located nearby, providing access to cash;
• The time of day, day of the week and the season;
• Ownership of a bank account.

A vending machine needs to meet the varied needs of as many consumers and enable as many purchase types as possible. This demands payment choice.

In a study of payment preferences, 85.5% of respondents report that a good retailer should offer customers the choice to pay with any form of currency they like (A Survey of User Attitudes Towards Electronic Payment Systems, Dennis Abrazhevich, IPO, Center for User-System Interaction, Technical University of Eindhoven, which surveyed daily users of payment systems including debit, credit cards, smart cards, and cash).

In an age of iPads, high-speed Internet, ATMs and self-service retailing, consumers expect instant gratification. Not only are they accustomed to researching and buying products on their own by touching screens and pressing buttons; they often prefer it. Many of the latest payment technologies enable this level of instant gratification, and when incorporated into your vending machine, can deliver "more for consumers' money"-- and that's the ticket. Make your machines make more money and everyone wins.

1. Australian Communications & Media Authority, "Community research into attitudes towards the use of mobile payment services -- A qualitative research report," July 2010.
2. Delaney & Erwin, "Electronic Payment Systems in Transportation:  What Will the Future Bring?"
3. Packaged Facts, a division of, March 29, 2010.
4., October 2011.
5. Euromonitor International Podcast "Emerging Payment Trends in the U.S.," July 21, 2011.
6. The New York Times, May 25, 2010.

CHUCK REED is marketing director of MEI's vending channel and has more than 12 years experience in the trade. He oversees all marketing efforts for MEI's vending, amusement and bottling products, including Easitrax hardware and software. He holds a bachelor's degree in business administration from Gettysburg College and an MBA in marketing management from St. Joseph's University (Philadelphia).