Clear incentives for greater card use in Greece

Since last week, dozens 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 almost 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.

Greek market 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 announced 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 an important 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 note 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 follow.

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 has 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.

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