Wednesday 21 March 2018

Taking cash out of the equation offers €2bn opportunity

Conor Langford, Visa's top man in Ireland, believes the best way to tackle the shadow economy is by increased use of card payments

CONOR LANGFORD: A 10 per cent increase in electronic payments over four years can shrink the shadow economy 5 per cent
CONOR LANGFORD: A 10 per cent increase in electronic payments over four years can shrink the shadow economy 5 per cent

Conor Langford

'The role of the Government in tackling the shadow economy is crucial as e-Government initiatives represent a critical element in changing old habits'

THERE is another option for tackling Ireland's fiscal deficit that isn't based on tax increases or spending cuts. It's much more innovative than that. It's tackling the shadow economy.

The shadow economy is a cash-based phenomenon that exists across Europe, driven by undeclared work and under-reporting. It is a blurry area of commerce that includes legal activity hidden deliberately from public authorities; we're all familiar with it and it's a part of everyday life almost everywhere.

If we were to reduce the shadow economy in Ireland, it would boost consumer confidence, boost prospects for legitimate businesses operating in sectors where under-reporting is rife, and generate new revenues from income tax and social security contributions for Government.

Here in Ireland, the sha-dow economy is currently approximately €20bn in size – the equivalent of 12 per cent of GDP.

While this is a considerable amount of lost money to the economy, in comparison to some of our European counterparts this is relatively low.

In fact, we have the sixth lowest level of shadow eco-nomy activity in Europe in relation to GDP – which is to be welcomed.

Ireland's low ranking is mainly attributed to our widespread card usage and acceptance of electronic payments. For example, €1 in every €7 of consumer spending in Ireland last year was spent on a Visa card – debit, credit or prepaid.

At Visa, we recently published research which shows that a more targeted use of electronic payments would help reduce the shadow economy by up to a tenth, or the equivalent of €2bn in Ireland.

A variety of initiatives such as the mandatory introduction of card terminals in sectors commonly associated with under-reporting, and the widespread introduction and promotion of a basic bank account, would help to achieve this goal.

Our analysis also shows that a 10 per cent increase in electronic payments over four consecutive years can shrink the shadow economy by up to 5 per cent.

As a result of the shadow economy in Ireland, the Government is losing revenue from income tax and social security contributions. It also has a negative impact for SMEs by creating an uneven playing field, which occurs when shadow services are significantly cheaper than those from the official economy.

The shadow economy is nurtured by several factors: the predominance of cash, a lack of understanding surrounding transactions, and limited enforcement.

Closing tax and legislative loopholes only goes so far and must be accompanied by efforts to improve the transparency of financial transactions. In this respect, it is mainly cash fuelling the shadow economy because it is easy to use and difficult to trace. Since cash payments cannot be traced, they are used for both undeclared work and under-reporting.

International experience suggests there is a clear correlation between the size of the shadow economy and the number of electronic payments which take place. For example, in countries where electronic payments are widely used, such as the UK, the size of the shadow economy is significantly smaller than in a country such as Bulgaria where electronic payments are not widely embedded.

While electronic payments are already widespread, with credit cards, debit cards and direct deposits representing common and accepted forms of payment, more has to be done to introduce innovative forms of electronic payments which effectively document transactions.

For example, banks and retailers are rolling out Visa contactless payments across Ireland at the moment. This new technology allows Visa cardholders to pay for transactions of €15 or less simply by holding their card near to the terminal without the need to enter their PIN, offering them a faster, more convenient and safe way to pay. They do not need to worry about delaying the queue by waiting to enter their PIN or fumbling for change in their pocket.

We estimate that two million contactless payments with Visa Debit cards will take place by the end of the year, eliminating approximately €10m in cash usage in the next six months.

We need to look at consumer segments, typically the unbanked, who do not use electronic payments and create new solutions for them. Similarly we need to target sectors commonly associated with under-reporting. The mandatory introduction of card terminals in these sectors would go a long way towards documenting and legalising income streams.

The role of the Irish Government in tackling the shadow economy is crucial as e-Government initiatives, particularly the ability to pay for various services in the public sector through electronic means, represent a critical element in changing old habits.

In this regard, the recent launch of Ireland's National Payments Plan should be welcomed as it will drive collaborative concentrated efforts around electronic payments and has the potential to have a tremendous impact.

We must not rest on our laurels, however, as its success is dependent on all actors in the economy working together.

Globally there are several promising examples of effective cash displacement. Sweden is a classic one in this respect. It introduced the world's first banknotes in 1661, but in more recent times the country has made significant moves to abolish cash. The value of all cash and notes in the country has now fallen below 3 per cent of GDP in comparison to 10 per cent of the Eurozone.

On visiting Sweden recently, I was amazed at the level of acceptance of cards. In fact, when I tried to pay cash in a bar, I was informed that it only accepted cards, which is completely the norm. Of the 780 branches of the three leading banks in Sweden, 530 no longer process or pay out cash.

In 2011, Italy made electronic payments mandatory for amounts over €1,000. Tax incentives for electronic payments at POS were introduced, combined with the threat of closure for retailers who failed to issue a sales receipt three times in a five-year period. Research found that €9.1bn has been raised in additional tax inflows.

Similar mandatory measures have been introduced in Spain (€2,500) and Greece (€1,500).

Reducing the shadow economy requires persistence, dedication and the collaboration of many stakeholders, but it is achievable. As our research indicates, this targeted use of electronic payments would help save approximately €2bn in Ireland. That speaks for itself.

Conor Langford is the country manager for

Visa in Ireland

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