Payment Pulse – Ep. 4

Payment Pulse: The Power of Social Proof: Learn how influencer endorsements, online reviews, and peer behavior shape our buying habits.

Status Spending and Luxury Psychology: Understand why consumers use high-end payment methods to signal prestige and how brands capitalize on the “Keeping up with the Joneses” mentality.

FOMO and Impulse Purchases: Explore the role of limited-time offers and BNPL services in reducing purchase friction and triggering rapid spending.

Digital Trends on Social Media: See how platforms like Instagram, TikTok, and YouTube are revolutionizing product discovery and checkout experiences.

Cultural Influences on Spending: Discover how global payment preferences vary and why adapting to local norms is key for businesses expanding into new markets.

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Episode Transcript

Steve: Welcome to Payment Pulse, a podcast by Clearent by Xplor, where we have a goal of humanizing and simplifying the complex world of payments. My name is Steve, and as always, I’m here with my co-host Max. How we doing today, max?

Max: Good, I’m good. Really excited about today’s episode. It’s going to be one of the most important ones we discuss here on Payment Pulse, so really excited to get into it.

Steve: Yeah, absolutely. I feel like a lot of these are things in payments that we don’t commonly think about or realize. So again, that’s the goal of this podcast and jumping right in. We’re diving into how risk influences the way that consumer, consumers make payment decisions and spending behaviors. This is our third episode in this micro series that we’re doing, where we’re really breaking down and analyzing consumer decision making through the lens of payments.

Previously in the last couple episodes, we’ve discussed how Microeconomics provides a framework for explaining consumer decision making. And in another episode, we also broke down the social influence and the emotional spending and how the social settings different promotional offers, trigger impulsive buying and purchasing.

So this week we’re diving into the key drivers behind where and how we choose to consume. Every time we choose a payment method, we’re subconsciously evaluating the financial risk, security, and even social risk as well. But understanding these risks among other types of risks really help businesses build trust and improve the payment experience for their consumers.

Steve: Let’s start here, Max. With this scenario, let’s just break it down from real scenario perspective or a fake perspective or a scenario in this case. Imagine you’re at a counter and your card declines. The cashier looks at you and the people behind you start shifting impatiently and they’re getting worked up because they got somewhere to be and it’s taking an extra minute to get through the register there.

Your phone buzzes with a fraud alert from your bank. What do you do?

Max: That’s a good question. I mean, it’s like the, the one scenario you’re always worried that you’re going to experience. But it is a great example of social risk, right? That kind of embarrassing moment where you’re sitting in line, holding up everybody from getting where they want to go.

But it’s not just like the social risk of that moment happening. You’re also at the same time feeling this like financial risk. You know, am I going to lose my money because I transacted at this place. Is there security risk? Will my data be compromised in some way?

And honestly, like maybe you’re also in a rush too. Maybe there’s like a temporal risk which always annoys anyone. So yeah, these are, it’s the worst to all things.

Steve: Yeah. All things that I know, personally for me, like that was, that was one of my biggest anxiety triggers. But again, rushing and moving around, it’s, it’s something that we’ve all felt at some point. But yeah, these risks influence whether someone sticks to traditional payment methods or adopt new ones or maybe avoid ones that they were previously using altogether.

But these risks are really the focus of this conversation. And so, we’re going to break it down from that level. Again, with payments at the forefront of it. But really getting things rolling here. Let’s start at the ground floor by really defining risk perception.

Risk perception describes how people feel about a certain or potential outcome actually occurring, which differs from the likelihood or the probability of that outcome actually happening. So, there’s several psychological factors that influence human risk perception and just for example, here’s a few of them.

The biggest is availability bias. And so, for example, when we see fraud alerts that happen on the news we tend to overestimate the chance that we’ll be the next victim. And statistically it might actually be that the risk is pretty low in that case.

We’re overestimating that risk level. Then there’s loss aversion as well. And so people fear losing money more than they value an equivalent gain. This is why security breaches make consumers hesitant to try digital wallets or new FinTech apps. Even if it offers rewards or cashback.

The next one is, is trust instincts. Established brands like Apple Pay and PayPal. it feels a lot less safe to use these known, or it feels safer to use known startups as opposed to lesser known startups, even if both use the same security measures people default to what they trust ultimately.

And lastly here, it’s perceived control that we all believe to have a big, you know, a big role in this this case. And consumers feel safer when they can take actions. Like setting up two factor authentication or freezing their cards instantly. And, having technology that allows them to prevent these things a lot occur.

Max: Yeah, that’s a really good breakdown. And it’s really helpful to understand what are those underlying psychological and social pressures that we’re feeling as individuals around risk. Now that we know why people perceive risk the way we do, like you said, availability, bias, loss aversion, trust, and control.

We can now shift and say how does that apply to payments? There’s also kind of four main categories of risk that we think about in the payments industry from a consumer’s perspective. The biggest one is financial risk, as I said, like the fear of losing money to fraud, hidden fees, chargebacks, all that.

It’s like a major reason why consumers switch payment platforms annually. Something like 41% of consumers will switch what payment platforms they use to ensure that they’re getting the best security every year. Next up is like the security risk, I kind of mentioned in the example that you brought up that you just worry about like your data being out there roaming around without much control.

Something like 63% of consumers cite data breaches as a top concern. And, you know, people tend to shop at businesses or on payment platforms. Where the provider that is somewhere that someone that they can trust and where their data will be handled safely. Then I alluded to this earlier, social risk.

People want like a seamless, embarrassment free transaction. So when you tap your card, like you don’t want it to be declined. For something that’s not your fault. And if you go to a merchant, you go to your local grocery store, and for some reason, if you constantly have this problem, chances are that you’re going to change up where you go to shop because it’s just a, a brutal experience.

Max: Then last but not least is like just the time aspect. And that is what we call temporal risk is kind of what are you are losing out on in terms of time when you have to resolve issues associated with trying to get a refund or claw back money because of a fraud a false transaction or a dispute, you’d want to open a dispute. All these, these things that take time are also a big component of why we shop at one place or another.

Steve: Yeah, those are really good points. We’ve established that consumers perceive risk in different ways and there’s several types of risk that people consider when paying for these things. But I feel like there’s another key factor, you know, at play here. Trust. That’s a huge one. Trust is so critical in the payment space. Let’s talk about the relationship between risk and trust and when it comes to, you know, the payment methods being used.

Max: Yeah. And you alluded this to this earlier Steve in your breakdown of just human psychology. And that is like amongst how, like in all of the factors as humans that we use to make decisions in our lives that, that protect us essentially.

Trust. Is kind of this counterbalance to perceived risk. When a consumer trusts a payment system, they mentally discount the potential risks that come down the line.

So you said, you mentioned earlier like Apple Pay, PayPal have kind of great credibility and I would say that this extends to some of the other legacy brands out there. Visa or MasterCard, the likes and I would say like their higher adoption rates are probably because people trust them.

Just inherently trust them and even if it’s right or wrong, they will go back to them. Because they just know that they will, they’ve done their part to minimize the perceived risk of using their platforms. But this trust is really built on like three pillars, and that is competence, benevolence, and integrity.

Competence really means, a payment platform understands is technically reliable. It has the cogs and pulley. Technically not going to go into the details and expose my lack of engineering knowledge, but they have the right safety exposures and systems in place to protect you as a consumer.

Benevolence means the company has the consumer’s best interest in mind. When you think of a company that you feel cares about you find that reciprocal love for them. And, and then lastly is integrity, and that’s all about just like transparency and ethical practices.

We look for signs in the market for companies that are willing to show that they are transparent about what they’re doing and how they’re doing it. And when you bring all these things, three things, you build a really strong relationship with the consumer. And that consumer in turn is willing to take more risks, so to speak, in using your payment platform.

And so that’s why businesses invest so much in trust building mechanisms, you know, things like fraud protection, zero liability policies, consumer authentication, all reassure us as consumers that we’re going to be safe using their platform or their online store.

And we’re seeing developments all over the place, but security is a huge part of building that trust.

Steve: That makes a lot of sense. It’s a good breakdown. And I’m sure too brand consistency also plays a role here. You know, businesses that remain transparent and handle security instances properly and effectively can better maintain that trust even after a breach because unfortunately, it is bound to happen. But if a company tries to cover up the data breach, consumer confidence pretty much immediately plummets. You want to be transparent, you want to be open and that’s probably a rule for life, right? But trust is hard to rebuild, especially in the payment space.

Max: Yeah. You know, I think businesses can invest in security, transparency, customer, education, all these things and things can still happen. And so, the, the best, it’s kind of a thinkless industry in some ways. You know, we don’t think about all the work that’s happening in the risk side until something bad happens.

And so, all we can kind of encourage companies to do is to make sure that they’re either as a payment platform as a ISV, as a merchant to do their utmost to build the most trustworthy and transparent payment systems and payment methods and architectures they possibly can.

And when that happens and, and there’s, you know, full visibility into that, consumers are pretty likely to adopt.

Steve: Yeah, that’s a good point and I think we’ve talked a lot about the risk perception and, and how that shapes the payment behaviors. But one thing we haven’t touched on yet here is how different groups of people perceive risk differently.

So, let’s dig into the demographic trends that influence risk perception within payments.

Max: Yeah. I’ll kind of explain one piece, but I think you’re going to have kind of a good handle on, explaining some of this as well, Steve?

I think most people kind of see the generational differences in how we all spend. But to your point, to your question, consumers don’t weigh risk the same. Research shows that factors like age and gender and financial background all play a significant role in how people evaluate security and what their risk is. So, I mean, I guess if you were to think, like what are you seeing out there from like a kind of generational component? I think you have a pretty good handle on that, on that piece as a marketer.

Steve: Yeah. The generational differences they’re pretty significant, I would say.

You know, studies show that Gen Z and millennials who grew up with digital technology are generally less concerned about security risk in mobile and online payments compared to older generations. Gen Z it’s 60% less likely to cite security as a top concern compared to baby boomers.

It’s a pretty significant difference there. But here’s the paradox, you know, because they feel more comfortable with digital transactions. They’re 3.2x more likely to fall for phishing scams and social engineering attacks.

Unfortunately, I’ve seen a lot of social media videos kind of around that subject, believe it or not. But, you know, meanwhile, baby boomers and Gen X customers are more risk adverse and tend to prefer traditional banking and in-person transactions. They’re twice as likely as younger generations to avoid their banking accounts or avoid linking their banking accounts to digital wallets due to fraud concerns.

Max: Yeah that’s kind of what I expected is something along those lines that we just see differences in generation. I think that’s probably something that the industry is well aware of, but there’s also these differences in terms of income level and financial literacy.

Lower income consumers perceive that there’s a higher risk to digital payments because just of a greater fear of fraud and lack of control over their money. These consumers are also more likely to use cash or prepaid cards to avoid potential overdress or the hidden fees.

On the flip side, higher income consumers tend to be more trusting of financial institutions, but to your point often underestimate compliance risks.

And so, there’s only a certain amount of interest from high income consumers about what are the risks associated with paying on certain platforms. We can’t talk about all this without talking as well about geographic factors.

Consumers in rural areas perceive that there’s like a 54% higher technical risk in mobile payments due to inconsistent connectivity or basically set in layman’s terms, it’’s harder for them to pay for stuff online because it’s sometimes harder to get online.

Meanwhile, you know, you and I both live in big cities. US based urban consumers typically prioritize speed and convenience over some of this security. It creates this clear divide between rural areas between urban areas and obviously then between cash and traditional banking versus like this digital first approach.

So lots of interesting demographic components that we just mentioned.

Steve: Yeah. When I think about what the key takeaway here is, it’s really that perception or the risk perception is not a once size fits all, right? Like there’s different things that we have to consider, different demographics, different geographical locations.

But payment providers need to tailor their security messaging and features to different demographics. Businesses that take the time to understand demographics differences can really fine tune their payment solutions to better meet consumers needs and ultimately reduce perception of risk across all of the user groups.

But, let’s dive into this next one here. We talked a lot about risk perception and trust influence that is really influencing consumer behavior. But the payments landscape itself is evolving so rapidly, it’s changing every day.

What shifts are happening in the industry that are shaping how businesses approach risk reduction?

Max: There’s, there’s a lot here. I would say we probably start this conversation from what happens from like digital first payments. This is kind of something that we’ve now experienced for probably up to a decade, more than a decade where we’ve seen this move to mobile wallets, peer-to-peer payments, you know, embedded payment solutions within apps. It’s a way that businesses are addressing risk concerns and that is all those technologies I just mentioned use tokenization.

That means that instead of just transmitting actual card details during a transaction there’s a unique one time token. That is generated to kind of represent your information, if that’s intercepted, it’s useless to hackers. It means nothing. And that’s why mobile wallets like Apple Pay, Google Pay, uses this method, it helps reduce risk and therefore increase trust from consumers.

Steve: Yeah, that makes sense. Can you help explain like this other push as well? Like there’s a big push in biometric authentication, right? Like things like facial recognition and fingerprint scanning.

Max: Yeah, and this is one of the interesting developments in this space. We’re seeing biometrics being added as like this extra layer of security to reduce the need for passwords, whether it’s your pin or whether it’s just all your information so to speak.

But there are mixed opinions on whether consumers trust biometrics and feel that there’s like this fake information. We’re not sure that you know, there’s like mixed opinions and mixed data that shows how this changes risk perceptions.

But it certainly represents how the industry is evolving to try to meet the growing trust demands by consumers.

Steve: Yeah, I mean, that brings us to another hot topic today, right? AI and machine learning and fraud detection. How are businesses, how are businesses using AI? Do you know, mitigate risk and enhance trust?

Max: Yeah, so this is actually of all the evolution, like of all the things that are happening in this space of risk and consumer security, AI is definitely going to be one of the game changers for fraud prevention. Traditional fraud detection methods rely typically on static rules like flagging transactions over a certain dollar amount or from certain industries.

Max: But AI can do a lot, there’s just so much more bandwidth that AI can have on that process. You know, it can analyze so much more data in real-time and try to break down a single transaction based on certain patterns or anomalies. So, without having to overgeneralize our risk profiles or risk tolerances from an industry perspective, we will hopefully get to a place where each transaction is analyzed at a much more fine level so that we can make decisions that are smarter and more adaptive to the changing business landscape.

Steve: Right. Yeah, I mean that makes me think that businesses are really trying to strike this balance between security and convenience. But you know, what about consumer education?

How important is that in reducing perceived risk as well?

Max: Yeah, so I, we should have honestly put this at the very top, like, what can businesses do? What’s the most innovative technology that businesses can do to make their consumers feel the most secure? It’s to educate them. You know, consumers simply don’t understand like how secure modern payments work. So businesses that educate their consumers and make them feel comfortable, whether that’s through using applications or sending out alerts or just providing regular material to educate them, they’re going to see higher adoption rates. It’s how you build that brand trust.

And so, we can say all these things are evolving in the industry around. payment security, but the best thing that a business can do is to just be super honed in on educating their consumers around how they’re handling their data and payments.

Steve: Yeah, that’s a really big point. I think education and, and authenticity and authenticity especially today is, is so critical. It’s what people are looking for. Again, just trying to cut through the fluff of the nonsense. It’s the best way you can do it. But Max, let’s, let’s wrap it up here. You know, what’s the biggest takeaways for you from today’s discussion?

Max: Yeah, I would say there’s probably three. The first is, you know, risk perception, even if it’s not the real risk, so to speak, but the risk perception that consumers feel is an important risk to take into consideration. If you’re a merchant, if you’re ISV, ISO or a payment processor, people make decisions on how safe something feels, not just the facts of how safe it is.

The second is that risk perception varies across demographics. If you’re a certain age, if you’re living in a certain area or you have a certain income level, it’s all shaping how we as individuals evaluate payment risk.

And then third, you have this way for businesses to reduce perceived risk and increase trust. It probably starts with education and being really dialed in on educating your consumers on how you’re handling their data, their payments, all that stuff. But then there’s always going to be technology that’s going to be evolving to help increase your company or your business’ transparency security measures, and all the technical details of how you’re managing risk.

Steve: Yeah, solid summary there. I can feel as though we’re slowly starting to build a much clearer picture around the forces that are impacting consumer decision making around payments and shopping, and ultimately the influence and the decisions that they make based on that influence.

Last weeks episode we covered microeconomics. That theory is explaining how consumer decision making is impacted by the economy around you and the decisions and the tradeoffs that you must make.

Today’s conversation about risk perception served as another side to that piece as well and the decision-making framework.

Trying to bring it all together with this last piece because of how important the risk perception is. It clearly influences our preferences and helps us navigate with purchasing the products that we need with the highest risk adjusted return for our money.

And it’s interesting to see how that all comes together. With that being said, Max, again, really appreciate the time. Thank you everybody for tuning into Payment Pulse. That’s going to wrap it up for today’s episode. If you found value in the discussion subscribe.

Again, education around this one is critical, so really appreciate it. Can’t wait to see you next week.