Card Spending Juices GDP, Especially in Emerging Markets

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Published February 07, 2013

| FOXBusiness

First on FOX Business: A new study provides further evidence that credit and debit card payments actually contribute billions of dollars to global economic growth, especially in emerging economies where millions of residents are underbanked, many operating in underground economies.

The results, which analyze data from 56 countries that together make up 93% of global gross domestic product, were pulled from 2008 through 2012, a time defined by deleveraging.

Mark Zandi, chief economist of Moody’s Analytics, argues card contribution to global GDP could have been even greater had the U.S. not been in the clutches of the Great Recession, which gave birth to a cautious consumer focused on paying down debt and led banks to tighten lending standards, making it difficult for people to take out loans or increase borrowing lines.

“The economic benefits are small in any given year but they do add up over time,” he said. “For some countries, it’s very meaningful in terms of the benefit, particularly in emerging economies.”

During the heart of the financial crisis, electronic payments, which include both debit and credit, added $983 billion to the global economy, which is the equivalent of creating 1.9 million jobs, according to a report released Thursday morning by Moody’s and Visa (V).

Global real GDP at that time was a paltry 1.8% per annum, but better than the 1.6% it would have been without increased card usage. While card payments contributed less to developed markets, electronic payments help GDP jump in some emerging economies – by as much as 4.89% in China, 1.28% in Chile and 1.15% in Brazil – amid greater card penetration.

“Electronic payments helped to mitigate what would otherwise have been an even slower recovery from the global recession as card penetration and usage provided an important and measurable boost to economies,” said Visa CEO Charlie Scharf.

Despite the turbulent economic period, credit and debit cards did contribute to economic activity, and continue to, providing individuals and small businesses the opportunity to spend more than they might otherwise have been able to.

“Anytime we provide consumers/small business owners with access to greater flexibility of payments, it increases economic activity,” said Russell Price, senior economist at Ameriprise Financial (AMP).

While cards only contributed 0.3% to U.S. GDP during the four-year period of 2008-2012, translating to $127 billion, the growth is nevertheless a sign that people continued to spend despite the bearish market.

At the same time, credit utilization rates, or the amount of outstanding balances on all credit cards as a percentage of the card’s limit, expanded in 2008 and 2009, according to the Federal Deposit Insurance Corporation’s Quarterly Banking Profile. That means that in the U.S., despite the fact that card companies were lowering credit lines and households were deleveraging, more people were utilizing their available credit.

“Credit cards allow people the opportunity to utilize the credit line they’ve been provided to maintain some spending,” Price said. “GDP didn’t go down as much as it would have if people didn’t have access to that credit.”

One reason why the contribution of cards to GDP growth wasn’t as high in the U.S. compared with its emerging neighbors is because there is already such a high penetration of electronic payments in domestic markets. At the same time, the U.S. was the epicenter of the Great Recession, leaving both banks and consumers cautious.

“There’s less of a benefit to developed economies like the U.S. because people are already pretty efficient with the way they make payments and card penetration is pretty high,” Zandi said. “In the emerging world, [there is] an economic bang from an improvement in the payment process.”

Of course, while having the ability to spend on credit can be a great resource, incurring too much debt can obviously end up backfiring on consumers and companies alike.

It varies country by country, but in developing regions there are still many people who don’t have access to a physical bank, let alone electronic payments, which often forces them to store wads of cash in their homes or travel far to make payments. That has opened the door for companies like Visa and MasterCard (MA) that specialize in e-payments to issue cards so that they can better control their funds.

In these cases, where the underbanked become banked through credit and debit cards, transactions are easier and safer. Zandi said it often encourages greater spending, boosting consumption while shuffling more residents into the broader domestic economy, which helps raise tax revenues for governments.

“In these developing markets, they are able to spend up to a higher level than they otherwise would have,” Price said.

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http://www.foxbusiness.com/industries/2013/02/07/credit-cards-drive-economic-activity-especially-abroad/