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Financial Friction: Feel the Rub and Reduce Spending

Updated: Nov 13, 2023

Settlers of Catan teaches financial friction

If you are a fan of the board game, Settlers of Catan, you are intimately aware of the concept of friction. You spent a lot of time and energy to acquire your current flock of sheep, but now it’s time to build your first settlem

ent and you aren’t producing any bricks; it’s time to barter. You offer your neighbor one sheep for one of his bricks but he counters and says that his brick is worth at least two of your sheep. After a short back-and-forth, you relinquish two of your sheep for one of his bricks. Now you have the materials you need to build your first settlement. And you are painfully aware of the transactional friction.

But when was the last time it was that difficult to get something that you needed? We haven’t bartered in this country for hundreds of years, though that is how humanity has operated for thousands of years. People have felt the weight of the transaction, the giving up of something to get something else, for generations. This, however, was awfully ineffective. Different cultures addressed the problem at different times and in different ways. The people of the Mesopotamia first introduced the shekel about 5,000 years ago[1]. Rome used the Denarius, a coin with the emperor’s image stamped on it, from about 211 BC to the early 3rd century AD[2].

Coins had heft. They took up space. And so, paper money slowly began to replace it as the primary form of currency. In the US, paper money was first printed on February 3, 1690, as the Massachusetts Bay Colony issued 40,000 pounds worth of paper (these were referred to as “bills of credit” and thus the dollar “bill” became the name that stuck) that could later be redeemed for coins[3]. This paper was easier to carry and took up less room.

But this isn’t a lesson in the history of world currencies. The above simply illustrates that it wasn’t as easy to buy your cake and eat it too as it is today. As a result, consumers experienced financial friction every time they conducted a transaction. Fast forward to September 2, 1969 and the introduction of the ATM[4] (Automated Teller Machine in case you were born after the 70s) and we have reduced friction yet again. I don’t need to interact with anyone to get my cash. Swipe this fancy new card at this fancy new machine and out pops my $40. Let’s do a little more fast forwarding:

Debit Cards: You no longer need to carry cash to buy.

Reduced friction.

Credit Cards: You don’t need the money to make your purchase, just pay it back later.

Reduced friction.

Online Purchasing: No need to walk to a store. Just click and buy from home.

Reduced friction.

One-Click Purchase: Why go through the hassle of the checkout cart? Plug in your info once and buy without any hiccups forever.

Reduced friction.

Apple Pay…from your watch: No cards to carry. Just link your card to your apple account.

Reduced Friction.

Klarna, the reemergence of buy now, pay later: No need to pay for your goods. Just walk out of the store with it and Klarna and similar services will bill you for them later.

Reduced friction.

Amazon One Pay: No need to carry anything with you for payment, ever. Simply swipe the palm of your hand as you leave the grocery store, and your goods have been charged to your linked cards or accounts.

Reduced friction.

If you’ve seen the Tom Cruise classic, Minority Report, this might start to feel a little too sci-fi for you, but that last one isn’t from the movies. Amazon has literally launched Amazon One in their Whole Foods stores nation wide and plans on having the service available in every Whole Foods by the end of 2023. There is literally zero friction to make this transaction, financial or physical friction.

Why does it matter?

After all this ranting, who cares!? Great question. Making the ease of transactions a priority has not been motivated by a sort of decluttering of your wallet that Marie Kondo would ask if it “sparks joy?” No. Plain and simple, it’s about profit. The easier it is for the consumer to spend money, the more likely they are to spend…and to spend a lot more.

Klarna, a popular buy-now-pay-later service, states right on their marketing page for businesses, “Payment methods that increase sales.” A little farther down,

“How we help grow business.

45% increase on average order value from shoppers paying with 4 Installments.

Customers who choose Klarna shop 20% more often and purchase 45% more per transaction on average.

44% of users would have abandoned their purchase if 4 Installments weren’t available[5].”

You and I spend 45% MORE on average when using this service, whether it is financially wise or not! Imagine if your grocery budget, eating out budget, online shopping budget, and entertainment budget all increased by 45% this month! You nearly double the amount of money leaving your pocket!

And ask yourself, did I really want whatever it was that I bought?

Now, I’m not here to rag on Klarna. They are providing a service that is filling a void in the marketplace. I’m simply calling your attention to how reduced friction affects your spending, which in turn affects your disposable income, which in turn affects your ability to save, which in turn affects you charitable giving, which in turns affects…

Friction. How much or how little the consumer feels the impact of a transaction. It’s not just about Klarna and Tom Cruise’s futuristic blockbusters. Credit Card usage was studied by MIT. Yes, the Massachusetts Institute of Technology where some of the smartest people on the planet go to get their degrees. The skinny is that they took fMRIs to see how the brain responded to credit card purchases versus cash purchases. Here is what they found:

Credit Card purchases engage the reward networks of the brain and generate dopamine, thus leading to greater spending.

Cash purchases do not activate the reward network in the brain and thus do not incentivize spending. It actually engages the pain center of the brain.

Financial firms are exploring ways to stimulate spending through new contactless payment systems as well as how people are informed of payments due that would modify a consumer’s response so that it stimulates pleasure and thus reinforces spending[6].

What can I do about it?

The first step to doing something is knowing that there is something to be done. Now you know. The next step is to simply become intentional. Do financial things on purpose, including your spending. It could be as simple as planning out your meals (in a study of people who accumulated a million dollars of net worth, 85% made and used a Grocery List[7]. Check out the free meal planner download in the resources).

Otherwise, keep getting data. Use a zero-based budget to understand where your money is going and what your money habits look like. Here is an example of a zero-based budget:

A budget increases financial friction and reduces spending
Zero-Based Budget

As you can see, the zero-based budget doesn’t mean that you spend all of your money each month. In this example, a total of $700 is going into savings. What this style of budget does, however, is greatly increase the amount intentionality by making sure that each month plans out where the incoming funds will go.

The more you know, the more you can act. Start budgeting to begin to understand what you are dealing with and how much progress you are making.


7. The National Study of Millionaires


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