BUSINESS

Clear incentives for greater card use

NICK MALKOUTZIS

TAGS: Analysis, Finance

Since last week, tens of thousands of extra businesses in Greece have joined the ranks of those which are obliged by law to be able accept payments by debit or credit card. The deadline for them to install card machines passed on July 28 and any which are not able to accept electronic payment from customers face fines of up to 1,500 euros.

The ministerial decision introducing this measure applies to around 400,000 firms or individuals in 85 professions and represents another important step in broadening the use of e-payments and, consequently, reducing the level of undeclared income and increasing state revenues.

Greece recently marked two years since the imposition of capital controls, which dealt a painful blow to the weak local economy. However, it also triggered a marked increase in the use of bank cards by Greeks, who had previously preferred to deal almost exclusively in cash.

According to the most recent data published by the Bank of Greece, there was an 11.2 percent rise in the number of payment cards issued by banks in the second half of 2015, after capital controls were introduced. There was a further 3 percent increase in the first half of 2016, taking the total number of cards issued by local lenders to 14.6 million. Of this total, 81 percent were debit cards and 19 percent credit cards.

The greater prevalence of these cards and the electronic transactions made with them is believed to have played a significant part in helping the Greek government raise revenues, particularly in the case of value-added tax. VAT revenue in 2016 grew at double-digit rates compared to the previous year, while the tax base was shrinking. This was referred to as a “puzzle” in a recent Bank of Greece working paper written by George Hondroyiannis and Dimitris Papaoikonomou.

The two authors suggest that the “increased intensity of card payments” could be one of the factors that led to the rise in VAT revenue. “Before July 2015, the share of private consumption spent using payment cards ranged from a low of 2.2 percent in 2002 to a peak of 5.4 percent in 2007, while during 2010-2014 it lingered close to the period average of 4.4 percent,” according to the authors.

“The imposition of restrictions on cash withdrawals in July 2015, however, triggered a surge in the use of card payments. During the second half of 2015, the share of card payments in private consumption more than doubled on a yearly basis, reaching 9.5 percent, rising further to 11.2 percent by Q2 2016,” they add.

There is reason to believe that cash transactions significantly facilitate tax evasion so the wider use of payment cards is an important tool in the efforts Greece needs to make to address this long-standing problem. Through their research, Hondroyiannis and Papaoikonomou were able to put a figure on the difference being made to state revenues by card payments.

“We find that compliance has more than compensated for the negative contributions of the tax base and the tax rates and has been positively affected by the intensified use of card payments,” they reveal in their paper. “Our estimates suggest that a 1 percentage point increase in the share of card payments in private consumption results in approximately 1 percent higher revenue through increased compliance.”

The direct correlation identified by the two authors highlights the benefits that Greece can hope to reap in terms of revenues as card use becomes more widespread. However, a few caveats must be added. The first is pointed out by Hondroyiannis and Papaoikonomou. They warn that the eventual lifting of capital controls could also lead to card use declining and the trend seen over the last couple of years being reversed.

“While card payments are unambiguously found to have contributed to the recent revenue growth, it remains an open question whether card penetration growth can be expected to continue going forward,” they write. “If the observed surge in card payments reflects an act of necessity triggered by the restricted access to cash, rather than a genuine preference shift, there is a risk that card payments – and revenue – will recede when the cash restrictions are lifted.”

The pair argue that since Greece should have lifted restrictions on capital movements and withdrawals by the time it exits its program in August 2018, more incentives should be introduced to encourage card use. Although there are income tax benefits for Greeks who use payment cards, the two men propose that there needs to be greater focus on industries that are particularly prone to tax evasion.

This may be where the latest measure could have a welcome impact as the professions that now must have PoS machines include doctors, dentists, plumbers and electricians, which are considered high-risk for tax evasion because of the widespread use of cash by patients and customers. Perhaps, though, authorities will have to think of ways to incentivize the use of the newly acquired machines to ensure that they do not end up sitting in dark corners, gathering dust.

The other proviso that must be considered is that Greece cannot hope to keep boosting public revenues by the greater use of payment cards; the economy is going to have to do some of the work as well. Ultimately, if there is no growth then no matter how many cards are issued by the banks, the government will struggle to gather the revenues it needs.

This is highlighted by the fact that although in the second half of 2016 there was, according to the Bank of Greece, no change in the average number of card transactions compared to the same period in 2015, the average value of transactions per card shrank by 10 percent to 1,781 euros.

Amid the economic bleakness of recent years, the uptick in card use has delivered a double boost. It has helped public revenue stay on track and has made tax evasion more difficult. However, it is clear that for there to be further progress in both of these areas, more momentum will be needed. This can be delivered by a growing economy and smart incentives for the use of payment cards. It would be criminal for the advances made in the area of electronic payments to go to waste once cash becomes more readily available in Greece.

Online