An easy to use, efficient method of purchasing goods and services is essential to a well-functioning economy. Payment methods have evolved throughout human history, from barter to primitive forms of money, to full-bodied coins and precious metals, to bank notes, to national fiat currency and checks. Each advance has brought with it additional economic efficiency, productivity, and integration. More recently, various types of electronic payment mechanisms have become an increasingly large share of total transaction volume. Electronic payments are highly efficient, offering advantages such as speed, reduced costs, and accuracy. These enhancements have contributed significantly to the expansion of the US economy, increasing liquidity and stimulating personal consumption.
The essential rationale for the theory that improved efficiency in transactions processing generates economic benefits lies in two basic concepts, both of which have been known since long before economics emerged as a discipline. First, as transactions costs are reduced, there is an incentive to engage in exchange more frequently. This notion has been widely accepted for many millennia, and Aristotle wrote extensively about it. Simply said, the idea is that because it is so easy and convenient to pay for purchases thanks to the electronic payments system, we are more likely to buy things.
The second key idea is the "equation of exchange," which notes that the product of the quantity of money and its turnover rate (velocity) equals the total volume of activity that can be supported. Nicolas Copernicus set forth the theory in the early 1500s; it was explored at length by philosopher John Locke in the late 17th century and formalized into economics in the early 19th century. Although often identified with the Monetarist school of thought, it is actually fundamental to all major strains of economic analysis. For present purposes, it illustrates that improvements in the technology available to process transactions allow additional activity to occur with a given money supply. Moving payments more efficiently through the system effectively increases the available supply of money, enhancing economic growth.
The electronic transaction payments system has increased efficiency by acting as a convenient method of payment, reducing payment processing costs and time, providing greater payment security, establishing globally accepted forms of payment, and creating greater transparency. All of these benefits generate economic growth in a number of ways. Convenience encourages consumption both domestically and globally, and about 80% of all consumer spending is now non-cash based.
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We were recently asked by MasterCard to evaluate the size of the impact of electronic payments on the economies of the United States and the 50 states. (A report presenting the findings from this our analysis is available for free download on our website at www.perrymangroup.com.) The short answer is that the beneficial effects have been substantial, and we estimate that the US economy is more than 12 percent larger (as measured by real gross product) than it would be in the absence of the electronic payment system.
Our study measures the economic benefits of electronic payments system two ways. First, we looked at US economic performance (as of 2014) compared to where we would be if no electronic payments mechanism had ever existed. Second, we looked at benefits resulting from growth in the use of the electronic payments system over the past 10 years (2004-2014), which is basically the time frame when debit cards came into widespread usage. In each case, we measured the overall economic impacts (including the multiplier or ripple effects through the economy) of both the stimulus to real personal consumption and the efficiency gains that are observed across the entire economy. We adjusted the results for changes in productivity over the relevant time horizon where necessary. We also expressed monetary values in constant (2009) dollars for consistency with available data and to eliminate the effects of inflation.
Compared to the results if no such system existed, electronic payment systems have led to gains in business activity in the United States for 2014 of an estimated $1.760 trillion in gross product and almost 23.2 million permanent jobs. Looking over the entire 1970 to 2014 period, the cumulative increase in gross product is $34.314 trillion in gross product and 387.5 million person-years of employment (which is simply one person working for one year).
To put those figures in context, electronic payments systems and associated efficiencies increased the size of the US economy by more than 12 percent (as measured by gross product as of 2014), increased personal consumption expenditures by almost 17 percent, and raised employment by 20 percent. That’s one in five jobs, and future advances stand to increase the benefits of the system even more over time.
Focusing on the benefits of the increased usage of electronic payments from 2004 to 2014 (the debit-card era), we found gains in business activity of $432.927 billion in gross product and nearly 5.7 million permanent US jobs for 2014. Moreover, the industry continues to innovate, and further technological advances are certain to occur. As electronic payment mechanisms evolve, they will promote business expansion on an ongoing basis.
In short, the electronic payment system increases efficiency by making payments faster and easier. As a result, consumer spending has been enhanced, production has been facilitated, and the economies of the US and every state have been able to grow at a faster pace than they would have otherwise.
Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com). He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.