Rising card payments drive economic growth.
Payment cards are not just convenient but also play a crucial role in stimulating economic growth in countries around the world – according to a new report by Moody’s Analytics.
Over the last 50 years, the rapid proliferation of electronic payments—in particular credit, debit and prepaid cards—has changed how consumers pay for goods and services, how merchants manage their businesses, and how governments make and collect all sorts of payments.
Electronic payments provide consumers with convenient and secure access to their funds, reduce cash and check handling for merchants, and expand the pool of customers who are guaranteed to pay. Importantly, they also promote greater financial inclusion, giving those without access to the formal banking system an introduction to formal financial services.
Electronic payments also give governments a greater ability to collect additional tax revenue by reducing the number of unreported transactions in the gray economy. All of this reduces friction in the overall economy and leads to increased spending on goods and services. That, in turn, creates a virtuous economic cycle whereby increased consumption translates into increased production, more jobs, higher incomes and greater economic prosperity.
But just how much has the expansion of electronic payments contributed to global economic growth in recent years? What has been the impact on GDP and employment, and has this impact differed between developed countries and emerging markets?
Moody’s Analytics set out to answer these questions by examining the impact that the migration toward electronic payments has had on 70 countries around the globe over a five-year period between 2011 and 2015.
Together, these economies make up almost 95% of world gross domestic product.
Overall, Moody’s Analytics found that:
- Electronic payments added $296 billion in real (U.S.) dollars to GDP in the 70 countries studied between 2011 and 2015. That is equivalent to the creation of about 2.6 million jobs on average per year over the five-year period, or about 0.4% of total employment in the 70 countries.
- Countries with the largest increases in card usage experienced the biggest contributions to growth. For example big increases in GDP were recorded in Hungary (0.25%), the United Arab Emirates (0.23%), Chile (0.23%), Ireland (0.2%), Poland (0.19%) and Australia (0.19%). In most countries, card usage increased regardless of economic performance. Only in the case of Finland, Greece and Tunisia did card usage decline when economic performance deteriorated or other macro events affected activity. As a result, consumption was weaker than it would have been had card penetration increased or remained unchanged.
- Increased electronic payments resulted in roughly the same percentage increase in GDP between 2011 and 2015 for emerging markets (0.11%) as for developed countries (0.08%). However, when card usage increases by 1% across countries, developed countries experience a larger percentage increase in GDP (0.04%) than do emerging markets (0.02%). This suggests there is a compounding benefit for advanced countries as electronic payments usage deepens.
- The expansion of electronic payments could have a significant, positive effect on future economic growth. Across the 70 countries in the study, we found that each 1% increase in usage of electronic payments produces, on average, an annual increase of approximately $104 billion in the consumption of goods and services, or a 0.04% increase in GDP, assuming all other factors remain the same.
- Electronic payments could also have a significant improvement on spending habits. Given recent card penetration rates, growth rates and the additive effects, Moody’s Analytics calculated that consumption was 0.4% higher between 2011 and 2015 than it would have been if electronic payments had not increased; total consumption increased on average by 2.3% over the sample period. Because consumption growth is on average faster in emerging economies, emerging economies have more to gain by increasing electronic payments usage to speed consumption growth even further. Consumption growth in both emerging economies and developed countries benefits from additional card usage.
This study marks the third time that Moody’s Analytics has conducted this analysis and the results suggest again that both emerging economies and developed countries benefit from increasing electronic payments. However, penetration in and of itself will not necessarily spur growth. Successful penetration goes hand in hand with a well-developed financial system and a healthy economy.