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Exploring the link between payment schemes and customer fraud: a mental accounting perspective

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Abstract

Containing customer fraud has great economic relevance. This research proposes a fresh approach, derived from mental accounting theory and behavioral pricing research. Large-scale field data from more than 100,000 insurance customers and a follow-up experiment reveal that payment schemes influence customer fraud. Specifically, customers with annual payment schedules submit more rejected claims soon after their lump sum payments, and customers with monthly payment schedules exhibit greater customer fraud, in an effect that increases over time and decreases with greater category involvement. Customers who actively pay using money transfers submit about 40% more claims that get rejected than those who rely on more passive payment methods, such as autopay or direct debit. Marketing practitioners thus should reconsider frequent payment schedules and active payment options and monitor customer behavior after lump sum payments. For marketing research, this study opens a new research avenue, linking customer misbehavior and behavioral pricing research within a mental accounting framework.

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Notes

  1. The search spans Journal of Marketing Research, Journal of Marketing, Journal of Consumer Research, Marketing Science, Journal of the Academy of Marketing Science, Journal of Applied Psychology, International Journal of Research in Marketing, Journal of Retailing, Journal of Service Research, Journal of Product Innovation Management, Journal of Consumer Psychology, Journal of Business Ethics, and Journal of Risk & Insurance.

  2. Household content insurance applies to an entire household. Our data refer to the contracting customer, which could be either spouse for couples.

  3. Consistent with our directional hypotheses, we use one-tailed testing. According to Cho and Abe (2013, p. 1265), using two-tailed tests for directional hypotheses bears the risk of drawing “inaccurate or mistaken empirical conclusions at a given level of significance α.”

  4. The insurance company charges an additional 6% for the monthly payment option, to compensate for the forgone interest income that annual upfront payments generate for it. The average interest rate in the investment market has been relatively low, so a rational customer has an incentive to choose an annual payment schedule; the decision to opt for monthly payment likely indicates financial constraints.

  5. We reran the same model with an adjusted price level variable, for which we added a 6% surcharge to the price level of monthly paying customers, to account for the requirement that monthly paying customers pay an additional 6% fee over their annual premiums. The results of the hypotheses tests remain stable, in further support for the robustness of our results.

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  1. Marketing Department, University of Wuppertal, Gaußstr. 20, 42119, Wuppertal, Germany

    Ina Garnefeld

  2. Marketing Department, University of Paderborn, Warburger Strasse 100, 33098, Paderborn, Germany

    Andreas Eggert, Markus Husemann-Kopetzky & Eva Böhm

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  1. Ina Garnefeld
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Table 11 Measurement scales (follow-up experiment)
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Garnefeld, I., Eggert, A., Husemann-Kopetzky, M. et al. Exploring the link between payment schemes and customer fraud: a mental accounting perspective. J. of the Acad. Mark. Sci. 47, 595–616 (2019). https://doi.org/10.1007/s11747-019-00653-x

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