Would you pay more for soap when purchasing with mobile money?

Jean Lee, Jonathan Morduch, Abu Shonchoy

Imagine that someone approached you and asked how much you would be willing to pay for a bar of soap or a bag of potato chips? It seems like a simple question.

You would probably, though, ask which bar of soap and which potato chips? Think a bit longer, and you might be asking “pay for them how?”

Researchers have found that the last question – about the form of payment -- matters. For example, paying by credit card rather than cash changes how consumers spend: Studies suggest that using plastic induces consumers to pay higher tips at restaurants, buy more junk food, and pay more for a chance to see a pro basketball game. These results are not always robust, and studies struggle to separate the liquidity effect of credit cards from the psychological effect of using plastic vs. cold, hard cash. Still, the weight of the evidence suggests that people spend more when using credit cards (or even when thinking about credit cards) for reasons that are at least partly psychological.

The digital financial revolution prompts us to update the question: As mobile money widens in use, will it also influence spending choices in the way that plastic has? Or is digital in fact different?

In 2014, we started a project on the impacts of mobile money in Bangladesh. The study focuses on users of mobile money in northern villages and Dhaka neighborhoods. Mobile money has spread extremely fast in Bangladesh, largely due to the growth of bKash and its competitors. The mobile money sector is one of Bangladesh’s great recent economic success stories, and bKash alone now provides mobile money services to over 20 million customers.

Midway through the study, with financial support from IMTFI, we asked two randomly-chosen groups of people questions about their willingness to pay for household basics and some small luxuries. We asked the study participants how much they would be willing to pay for a quantity of fine rice, a good bar of soap, particular pieces of clothing (a salwar kameez and a lungi), a bag of potato chips, and a packet of biscuits (cookies). We asked the participants to respond (hypothetically) in contexts when using cash or mobile money.

Given the set-up and the fact that the questions were hypothetical, we did not expect to see much difference. But, as the table shows (which is from our urban sample), in 5 of the 6 cases respondents indicated that they would be willing to pay a higher price when using mobile money to facilitate the transaction.

Summary Statistics for Willingness to Pay (WTP) in Taka

Variable	Cash Mean	Mobile Money Mean	Cash Median	Mobile Money Median
WTP for rice	392	403	400	400
WTP for Beauty Soap	89	75	30	30
WTP for Salwar Kameez	701	750	700	700
WTP for Lungi	330	346	300	350
WTP for Potato Chips	39	41	30	30
WTP for Biscuits	74	79	50	60

To dig deeper, we ran a set of regressions to control for the respondent’s age, education, income, work status and other key variables. The regressions again show that in 5 of the 6 cases respondents indicated that they would be willing to pay a higher price when using mobile money to facilitate the transaction. (The negative signs mean that they would not be willing to pay as much when using cash.) The standard errors are fairly wide, however, and only in three of the cases are the differences statistically significant with 95 percent confidence.

Regression Results for Willingness to Pay, With Controls

	(1)	(2)	(3)	(4)	(5)	(6)
	Rice	Beauty Soap	Salwar Kameez	Lungi	Potato Chips	Biscuits
Cash	-11.1**	9.9	-49.0**	-14.9**	-1.8	-3.6
Treatment	(5.4)	(8.0)	(24.4)	(6.8)	(2.8)	(4.0)
Observations	812	813	812	812	811	811

Standard errors in parentheses^* p < 0.10, ^** p < 0.05, ^*** p < 0.01

Since the same participants answered questions about each of the 6 items, there is little concern that a given respondent was considering different qualities of items in the two scenarios. Like much of the earlier literature, however, we cannot distinguish the liquidity effect from psychological effects.

Half a year before, we had introduced mobile money to the first group. Our research team had trained members how to use mobile money, and many had started using it. The second group was an experimental control, and we provided them with no training nor discussion of mobile money. Our initial results suggest that the training and exposure to bKash (and the greater likelihood of its subsequent use) strongly narrowed the difference in willingness to pay between cash and mobile money. The main differences in spending patterns with cash versus mobile money thus come from the control group, and it is possible that their preferences will narrow too with greater exposure to mobile money.

We are now analyzing the rural sample, and the initial results are opposite to the urban sample: In the village, there is greater willingness to pay in cash. Our next step is to investigate why, including whether the result reflects a lack of stores that accept digital payment in the villages (rather than a hypothetical willingness to pay), or whether the result stems from unfamiliarity with mobile banking.

Economists generally assume that money is fungible, a dollar is a dollar, a taka is a taka. However, in both our urban and rural samples, the form of payment clearly makes a difference. There does seem to be something different about holding 20-taka on your mobile phone rather than holding a 20-taka banknote in your hand. In Dhaka, being able to pay by phone appears to raise the price that customers are willing to pay for household goods. If these results stand, retailers may now have another reason to encourage their customers to use mobile money.

Read their Final Report

Jean Lee is an economist at the Millennium Challenge Corporation and was a Post-Doctoral Research Fellow at NYU. Jonathan Morduch is Professor of Public Policy and Economics at the Robert Wagner Graduate School of Public Service at NYU. Abu Shonchoy is Research Fellow at the Institute of Developing Economies (IDE-JETRO) in Chiba, Japan and a Visiting Scholar at NYU (2016-18).