Clear in­cen­tives for greater card use

Rise in elec­tronic pay­ments has had a pos­i­tive im­pact but state needs to en­sure mo­men­tum is main­tained

Kathimerini English - - Focus - BY NICK MALKOUTZIS

ANAL­Y­SIS 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 high­risk 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.

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