Payment Pulse – Ep. 2

Payment Pulse: How do consumers decide when to spend, save, or swipe their cards? In this episode of Payment Pulse, we explore the microeconomics behind consumer spending decisions—breaking down the psychology of trade-offs, budgeting, and incentives that shape how we pay.

From credit card rewards to the rise of Buy Now, Pay Later (BNPL), we uncover why certain payment methods drive more spending and how businesses can use these insights to better serve their customers.

Why do people choose card over cash? How do pricing, technology, and behavioral economics influence purchasing decisions? We answer these questions and more in this deep dive into consumer payment habits.

Also Listen On:

Episode Transcript

Steve: Payment Pulse, A podcast by Clearent by Xplor, a leading full service payments provider.

Welcome to Payment Pulse, a podcast by Clearent by Xplor where our goal is to humanize and simplify the complex world of payments. My name is Steve Bell and I’m here with my co-host Max. How are we doing today, man?

Steve: I’m good. Good to see you, Steve. Wasting no time. We’re going to jump right into it. You know, really trying to cut the fluff here, but our topic today is how Microeconomics helps to explain consumer spending. This is the first episode in our miniseries where we’re covering all of the consumer spending behaviors.

A really interesting topic that I think you’ll find value in. It’s not something we typically think about, but you know, our goal throughout this series is to dive into various schools of thought, but explain why consumers choose to spend the way that they do as a payments and software service provider.

One of our primary goals at Clearent is to consistently aim towards making life easy for our customers, which includes both our partners and our merchants. As well as the consumers that interact with the technology as well. The critical role that we play in the payments experience is why we are diving deep into this topic.

So whether it’s answering why consumers choose to pay with card versus cash, or why credit card spending varies across demographics or why new technologies are or aren’t gaining transactions with consumers. We’re digging into some of the fundamental reasons why consumers are spending way the way that they do.

With that being said, Max, today’s topic is consumer decision making and how microeconomics helps to explain it. Can you start by breaking down what we mean when we say microeconomics?

Max: Yeah, sure, Steve. I’m happy to, well, at its most fundamental level, microeconomics or micro, as I might call it throughout the episode, is a subfield of economics that studies how individuals cons individual consumers, kind of people like you and I and producers, like the businesses that we shop from, make decisions plain and simple.

This differs from macroeconomics, which looks at broader trends in the market like changes in national income or employment. But let’s like stick to the microeconomics piece. The theories of microeconomics essentially help to explain consumer decision making and how that leads to overall demand for goods and services.

For example, why someone might buy one product over another or decide to save instead of spend. Does that make sense?

Steve: No, that makes sense. You know, now, now that you’ve kind of given that brief introduction to Microeconomics you know, let’s set the groundwork for how Microeconomics Theory helps to explain how consumers make certain decisions about payments and consumption.

Max: Yeah. So the most fundamental part of understanding decision making by consumers is, what we think of what we call consumer theory in micro and that that partakes in understanding the trade-offs that consumers make for services and goods over other services and goods. So let’s just have an take an example, Steve.

What are some items that you like to collect in your day to day?

Steve: Yeah, for sure. I mean, over the years I’ve definitely, you know, gained an unhealthy amount of shoes and hats.

Max: loves, shoes and hats. Okay, so it’s a good example. Let’s do a little thought experiment. Let’s envision that you’re happy with some kind of combination of shoes and hats.

Let’s say that you have a shoe collection and a hat collection that you’re always updating regardless of your economic situ situation. And at any given time, you can have a certain amount of hat, shoes and a certain, you know, certain amount of hats in your collection. You know, what, what’s roughly, you know, the ratio of shoes to hats that you would kind of say is your go-to ratio?

Steve: Yeah, I mean, at a minimum I’d, I’d probably say two hats for every one pair of shoes. That seems fair.

Max: Seems fair, right. Now let’s say for argument’s sake that you have a collection of 10 shoes, 20 hats, right? So two to one. If I were to say, Steve, I’d like to take nine of your 10 pairs of shoes, like how many hats would I have to give you to force you into that situation?

Steve: Well, if you’re taking my whole collection or, or most of my collection, you know, I’d probably need a lot more than two for every one shoe, you know.

Max: I mean, that’s exactly right, and what you’re describing here is, is roughly what’s called the marginal rate of substitution. And that’s the rate at which you’re willing to trade one or more goods for another while maintaining that same level of happiness or utility.

And so in microeconomics, it teaches us that humans are utility maximizing creatures, meaning we’re always making decisions that provide us with the greatest satisfaction possible based on what we have and what we want. Anywhere along this. Kind of curve. And if you think of like an XY axes, you have shoes on one axes and hats on the other axes, you would be happy with some combination of shoes and hats as long as in your mind it’s an equal trade-off.

So if you have at the moment, 20 hats, or 20 hats and 10 pairs of shoes. You might want you know, more of one good in order to start trading. You know, me some shoes and I would have to give you many more hats than just two to one hat as we explained earlier. And if we, you know, add in budget and we add in like how much you actually have to spend on shoes and hats, we start to figure out where your optimal price point is and usually.

When this, you know, happens in real life, you know, we, we typically try to buy things and especially things such as shoes and hats, which are you know, some to your level, you know, they often become luxury items because you’re collecting them and you’re. Perhaps buying them more than you need to buy them.

They become this kind of you, you typically have a balance, right, based on your budget. So does that make sense? How that all kind of comes together?

Steve: Yeah, yeah. In theory that, that absolutely makes sense. You know, what does that have to do with consumer decisions and, and when paying for goods in the real world, you know, for example.

I’m not out there just buying shoes and hats all the time, as you know. I wish I could, but I’m buying groceries, you know, getting a haircut, paying rent, things like that.

Max: Yeah, exactly. And that’s where it gets fun. So we all play this trade off game in our heads a bit subconsciously. But instead of weighing the tradeoff between two items as we’ve highlighted already, we weigh the tradeoffs of a good or service against everything else we can use that money for.

For example, let’s say you’re deciding how to spend a tax refund. On one hand, you could spend it on a new pair of shoes. On the other hand, there are other things in your life that might be worth saving for if you already have a large shoe collection. What’s another pair of shoes? To some people it’s amazing.

Yes, to other people, it’s worth, it’s not worth as much on another pair of shoes. We’re always playing this trade off game of how to decide what the next purchase is. And see this is what behavioral economic economists refer to. Psychological accounting. This mental framework we use to categorize and evaluate spending decisions.

You know, everyone places a slightly different value on. Their basket of goods depending on their preferences and priorities. Does, does that still kind of jive with your understanding of, of this kind of new topic? I. It

Steve: It does. Yeah. But, you know, things for, for the prices of things are changing. So in that case, you know, then what?

Max: Well it depends. So you know that you bring up a good point. When the price of good goes up, a price of a good goes up say because of inflation, your ratio of goods in your basket, as I previously mentioned, changes to a new price. If your shoe, if let’s just say one item goes up in price, say your shoes become more expensive, you might substitute them out with something cheaper, or you might have to shift the spending in the rest of your basket to you know, the new situation, the new price for your shoes.

And so, you know, higher costs for the entire basket will obviously, shrink how much in your basket you can buy. But the change in price for one good might just shift around or, or force you to change your preferences. So that’s, that’s kind of the, the, the hard part about this is, is you’re constantly making those tradeoffs in your head.

Steve: Yeah, yeah. No, I, that’s, yeah, that’s why this is so interesting cause that’s not even something I even considered, you know, the, the tradeoff graph. But it makes total sense. So, you know what? Let’s bring it back. Like how does this then tie to payments? Like what does that have to do with payments?

Max: Yeah, so this is really where the rubber meets the road for consumers.

Imagine you’re at a checkout, ready to swipe your card or click purchase online. You’re asking yourself, do I have the budget for this? And now if someone said like, you could pay for the, you could buy those shoes today. Have those shoes today. And still have money for everything else, those more expensive shoes, and still have money for everything else in your basket.

You know, and maybe just pay for the pay for it later. You know, we’d be pretty happy. We’d be like pretty psyched that like, Hey, we could have everything we want despite higher prices. Well, that’s essentially. Kind of the basis of some of our credit card systems today. You know, credit cards kind of distort the psychological, psychological accounting matrix that we have in our heads by making it easier to justify purchases we might not otherwise be able to afford.

Or that we might make if we were rationally thinking about the total budget that we have. And so. Some credit cards make it easier to stick to budgets while others encourage more spending outside of, outside of our budgets. And studies show that people are more willing to spend on leisure and entertainment when they are mentally separating those.

Funds, right? So, you know, funds for vacation and, you know, travel and all that. Versus the, the groceries and, and necessities that we typically have. That’s why like when we, when we use budgeting apps, we typically have different icons and, and charts to show how much we’re spending on one or the other because.

Budgeting company, you know, these tech companies who have built these platforms understand, you know, how human behavior typically works psychologically. So all that’s to say is in terms of payments. The technology that we use to pay for things definitely distorts the mental accounting that we have developed over the years.

And sometimes it helps us and sometimes it hurts us.

Steve: Yeah, that’s, I mean, the distortion of, of, you know, psychological accounting by the use of credit cards is, it really is so interesting. And I can absolutely attest, you know, in my younger years some of those feelings as you’re, you’re getting your first credit card and some are better, you know, managing that than others.

But, you know, now let’s, let’s consider the payment technologies that are also impacting how they’ve changed the game for consumers. You know, I have a few that I want to ask you about, and so let’s start with the first one on the list, and that’s online checkout.

Max: Yeah, so online checkout systems have totally streamlined the buying process.

I don’t think there’s any doubt in our minds there, and mostly because they’ve removed. The barriers that might otherwise delay a purchase. You know, from a microeconomic perspective, these per systems reduce the transaction costs. Meaning the effort and time required to make the purchase this reduction in the friction increase, you know, in buying something increases the likelihood that a consumer will complete the purchase.

Particularly for low cost or impulse items. You know, so. I’m, I’m sure you’ll tell me that you had this experience at some point. But I, I typically think of going through Instagram and I see like a hat that I really like. I’m also a hat guy. And you, if it’s 30 bucks and it’s like right there and I can click it right there.

I’m doing it, I’m impulsively just buying it right there because it’s just available. Does that, you know, does that kind of feel like it resonates?

Steve: Yeah. I mean, Instagram got me on a hat just last week, so, it’s, it’s absolutely relatable. Yeah. But yeah, that, that the ease of, of transaction, you know, with.

Essentially online checkout has progressed even further, right? With Instagram ads and, and autofill Amazon with like the, the click to buy, you know, kind of immediately and not having to go to the cart and do extra steps basically. Mm-hmm. It’s, you know, it’s, it’s really interesting. But, yep. You know, the next one that I have on my list is is credit card points.

You know, let’s, let’s dive into that.

Max: Yeah. So credit card points introduce this interesting dynamic where we all of a sudden become incentivized by the rewards of credit cards and it incentivizes us to spend and in effectively reduces our, you know, perceived price of the purchase. So a good example is, you know, you getting cash back.

Max: By offering cashback or maybe travel miles you know, we. For, for the redeemable goods that our card offer, you know, for the redeemable goods that like the card is suited for you know, the credit card is shifting consumer preferences towards the, those types of purchases. So.

It taps into the psychological tendency to maximize reward which often leads to increased spending or, you know, choosing higher priced goods than we otherwise might have mentally budgeted for. So, again, like I, I look at. Airlines is a great example and, and typically a very common one. We typically justify a big flight somewhere or, you know, going and visiting making a kind of impromptu trip somewhere because we’re like, Hey, we’ll, we’ll get the points, like it’ll pay dividends down the road.

And you know, if I, if I use it enough, I can get into the lounge or I can, you know, get points, cash back down the road for. Groceries or whatnot. And it, it stimulates this reward system in our heads that, hey, making this purchase will pay dividends for us down the road or makes it the current purchase cheaper.

Does that kind of jive with you?

Steve: Yeah, no, I mean, you know, I’m personally a travels miles stacker, so that’s, you know, kind of where I, I lean towards. And like you said, that’s a, a very popular one. But yeah, it’s interesting to see how, you know. Cards and the, the reward systems that are you know, attached to specific cards, influence then where you’re spending your money as well.

Yep, yep. So yeah, again, really, really interesting. You know, this next one as well. I, it’s a newer you know, technology, but it’s, it’s really taken off and I’m, I’m very curious and on your perspective on this one, max, but buy now, pay later. Dive into that for me.

Max: Yeah, buy now, pay later is kind of the hot topic in the last few years of FinTech and buy now, pay later, you know, services.

Just for those who are kind of a little familiar with it and need more of a background, are services that allow consumers to distribute the cost of a purchase over multiple payment cycles. Often with little to no interest. And from a microeconomic perspective, buy now, pay later shifts. That immediate trade off that you have to make in.

In and reduces the upfront financial burden of a purchase. So, just as we mentioned earlier in the shoes shoe example, let’s say you have a two, $200 shoe and you’re like, that doesn’t really fit within my budget at the moment, but the company you’re paying, you know, buying it from Nike, Reebok, whatever it might be, says, Hey, you can buy now and pay it over the course of time.

And it’ll be $20 increments every, you know, for the next 10 months. In your h or you know, or with a bit of, with a bit of interest in there in your head you might be like, oh, this, all of a sudden turned from a $200 purchase to a $20 purchase just here and now. And you know, this essentially spreads out the payments I.

And reduces the pain of paying associated with, you know, larger one-time purchases and encourages consumers to, to spend more freely, spend a bit more above their means and to take their budget line and say, oh, I have all of a sudden much more budget. In my in my, in my pocket. So, you know, it, it makes it more accessible to consumers psychologically, but of course it comes with the fear that, you know, the risk that, you know, that’s over the course of time and accumulating more and more buy now, pay later arrangements that you’re, you know, putting yourself in a pretty precarious spot as a consumer.

Steve: Yeah, it’s really, that one is so interesting. Again, because it’s so new, but they all pertain to, again, you know, the, the disbursement of payments and, and making it easier to pay ultimately and, and get people to actually complete a transaction. So, mm-hmm. All, you know, three really great payment technologies that are relevant to this subject.

So, you know, really appreciate the breakdown on that Max. Absolutely. But, let’s, let’s tie it all back together and, you know, we’re going to wrap up here with the, the kind of final thoughts.

Yeah. So, you know, the most important thing here, Steve, is, you know, the magic I, I’ll say of microeconomics is that when we compile all these decisions that a consumer makes, and we’ve spread across a population of people, you know, that.

Max: Provides us the insights into what is the demand for products. As we kind of mentioned, you know, the way I was framing a lot of these technologies and how they impact consumers is, you know, it, it creates you know, more demand for goods because all of a sudden people’s purchasing power has gone up.

And the big, you know, reminder for, for folks in the industry who are, or who are using payments technology, is that these technologies. Allow people to approach consumption more freely. Now, of course, it comes with some risks, but you know, if in a, in a world where there’s con continuously more and more change in how people spend, these can be really powerful tools to encourage folks to consume at your at your shop or using.

The technology that you’re using [00:18:00] across other merchants. So yeah, there’s a lot of great technologies out there and we’re getting, you know, the, the payments technology trend is only going towards expanding the reach of consumer spending. So really it is really exciting, a really exciting time.

Steve: Yeah. No, I, I appreciate that breakdown, max. I. It really is. It’s an interesting time and it’s, you know, really a fascinating subject on how, excuse me, on how Microeconomics provides that framework for understanding, you know, the choices that we make as consumers. You know, from deciding between shoes and hats to you know, weighing the value of essentials versus luxuries.

It’s all about trade-offs and, you know, maximizing, you know, satisfaction. So. Concepts like marginal rate of substitution help to explain why we make these decisions. And psychological accounting highlights how our mental framework, you know, shape the spending habits that we have. Yeah. Technologies like we talked about a, a second ago, online checkout, reduce friction, credit card points, reward our purchases, and buy now pay later shifts the burden of payments making it easier than ever.

For consumers to access what they want and, you know, get the things that they need with the budget that they have and the tradeoffs that they have to make. You know, ultimately by connecting these dots, you know, we not only better understand individual behavior, but we also gain insights into larger economic patterns like supply and demand.

And that’s really the magic of microeconomics and why it’s so relevant to the payments world today. You know, again, I, I don’t think it’s things that we often think about as, as business owners software providers, but it really is an interesting, you know, thing to consider and, and should be watched and monitored.

Absolutely. But yeah, Max kind of closing it out here. I think that was a really good episode. A lot of value in it. We do have more coming in this micro series that we mentioned as well. This is just the first that we wanted to break down as it’s really important. I. But yeah, let us know what you guys think your feedback on this episode and just kind of what your, your, your opinions are for this, this impact of microeconomics and, and the frameworks that we labeled out today.

So, let us know whether you’re watching on YouTube, check out our social media where we’re sharing these as well you know, really want this to be engaging and, and see how you guys feel about it. So, drop a comment and stay tuned for the future. Episodes coming every Friday. But yeah, we appreciate you guys and we’ll see you next week.