Electronic Payments and Economic Growth - Visa CEMEA

the virtuous circle:
Electronic Payments
and Economic Growth
june 2003

the virtuous circle:
ELECTRONIC PAYMENTS AND ECONOMIC GROWTH
june 2003
a white paper prepared by
VISA INTERNATIONAL
GLOBAL INSIGHT, INC.
Editor’s note:
“The Virtuous Circle: Electronic Payments and Economic Growth” is the first in a series
of white papers exploring the social and economic benefits of electronic payments.
This white paper is based in part on research performed by Global Insight, an econometric
forecasting agency. This work was commissioned by Visa International. For more details
on Global Insight’s methodology, please see the Methodology Appendix on page 20.

Contents
4 executive summary
Electronic payments are a key driver of economic growth and vitality.
6 history’s lesson about payments:
people drive change
Dynamic economies depend on widely accepted forms of money and efficient payment systems.
7 electronic payments:
lower cost, higher value
Since their inception in the mid-20th century, electronic payments have accrued increasing levels
of benefits to all parties in the transaction chain.
10 the big picture:
macroeconomic value of payments
It has long been clear that electronic transactions offer benefits to consumers and businesses.
What can now be quantitatively demonstrated are the benefits that accrue to domestic economies.
13 the big tent:
the democratisation of payments
Roughly two-thirds of the world’s population is unbanked. Payment card products are
drawing them into the banking system – promoting financial inclusion, institutional trust,
and capital accumulation.
16 a global payments network:
the private sector model
The joint venture model is the most efficient vehicle for capturing the benefits of electronic
payments because it utilises the competencies of the private sector in a decentralised,
self-regulating structure that fosters competition and innovation.
18 conclusions
National currencies will remain, but money and payment technologies continue to evolve.
During this evolution, the underlying electronic payments system is critical to facilitate
transactions in the global, digital economy.
20 appendix
Research methodology and sources

· 4 ·
executive summary
over thousands of years, the way we pay for
goods and services has evolved dramatically —
from shells, to coins, to paper, to data capable
of moving around the world in the blink of an eye.
The nature of payments constantly evolves for
the most basic of reasons – because human
beings are innovative, resourceful and pragmatic.
We embrace new techniques and technologies
that offer greater efficiency, convenience, and
value creation, and discard those that do not. The
history of payments – the ways in which humans
exchange value for goods and services – has been
dynamic, fluid and driven by the marketplace.
Today, that human determination to innovate and
adapt – the same spirit that once drove us to
shift from using bushels of corn to sacks of gold
as a form of exchange – is powering the growth
of a global electronic payments network, created
largely through private-sector joint ventures
such as Visa. It is a dynamic, innovative system
that maximises economic growth by providing
fundamental benefits such as a safe, sound, and
predictable international payments network
connecting buyers and sellers; ever-increasing
levels of security and consumer empowerment;
greater economic transparency; increased
economic stimulation; and widened participation
in the banking system. This network accrues
benefits to economies and people around the world.
Payments are the lifeblood of economies. The
widespread adoption of electronic payments 1 has
significantly expanded the sales volume of goods
and services, reduced the barriers to immediate
credit and liquidity, and eased geographic restrictions
to trade and exchange. The economic value
of electronic payments has been measurable
and substantial.
increased domestic
economic activity
In the U.S., according to research conducted
by Global Insight, 2 growth in electronic payments
has added an additional US$6.5 trillion to real
consumer spending (adjusted for inflation) over
the last two decades. The cumulative gain was
almost US$10 trillion, a growth increase of 0.5
1 For purposes of this paper, the term “electronic payment” refers to all card-based transactions (credit, debit, prepaid and commercial both branded and
private-label); the term “electronic payment network” refers to the processing, clearing and settlement systems that underlie all electronic payment
networks (i.e., ACH, GIRO, Swift).
2 For an explanation of the methodology used to calculate the economic benefits of electronic payments, please see appendix on page 20.
3 Argentina, Austria, Australia, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece,
Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Malaysia, Mexico, Morocco, Netherlands, New Zealand, Norway, Peru, Philippines,
Poland, Portugal, Puerto Rico, Russia, Saudi Arabia, Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, United Arab Emirates, Taiwan,
Thailand, Turkey, United Kingdom, United States, Venezuela

Payments are the lifeblood of economies.
percentage points per year, or the equivalent
of 1.3 million new jobs.
increased global
economic activity
Based on an analysis of a cross-section of
50 countries 3 , increasing the existing share of
electronic payments in a country by a margin
of just 10 percent will generate an increase of
0.5 percent in consumer spending. For example,
in a country that has a 20 percent card share of
US$30 billion in consumer spending, enlarging
that share to 22 percent will generate roughly
US$150 million in incremental consumer spending.
cost savings
Electronic payment networks have the potential
to provide cost savings of at least 1 percent of
GDP annually over paper-based systems through
increased velocity, reduced friction and lower costs.
For the U.S. economy, that translates into roughly
US$60 billion in annual savings. In the U.K., savings
would be on the order of US$10 billion annually.
capital accumulation
Electronic payment products can act as gateways
into the banking system for unbanked segments –
which make up as much as 70 percent of the
world’s population. For individuals, inclusion in
the banking system helps improve money management
and leads to enhanced financial empowerment.
For economies, this creates a potentially
powerful engine for growth – drawing cash into
bank accounts where it can provide low-cost
funds for lending and investment. Consider this:
In a simulation of the U.S. economy, a 10 percent
shift of currency into deposits or other reserves
that can be used for loans increased GDP by
more than 1 percent annually. Although only
measured in the U.S. for this paper, this multiplier
effect is relevant in any market.
The benefits of electronic payment systems
are clear. So is the most efficient vehicle for
maximising them – the self-regulating, joint venture
model represented by member associations
such as Visa International. Global cooperative
associations combine the competition and
innovation of the private sector with economies
of scale, shared technology and infrastructure,
and interoperability. All of these traits are
essential to an efficient global payment network –
a network capable of fully supporting both
domestic and international commerce.
Electronic payments are at a critical threshold of
growth. In developed economies, the continued
expansion of payment options will be a key
factor in reducing friction and creating economic
efficiencies. In developing or transitional economies,
electronic payment systems can play a powerful
role in modernising financial systems, creating
economic transparency, and contributing to
greater predictability, liquidity and stability.
In economies of all stages of development there
is an opportunity for electronic payments and
economic growth to build on each other and
form an ongoing virtuous circle, to help sustain
economic development over the long term.
· 5 ·

· 6 ·
History’s Lesson About Payments:
People drive change
dynamic economies depend on widely accepted forms of money
and efficient payment systems. one of the keys to acceptance
has been standardisation.
History demonstrates a compelling need to standardise
payment forms to enhance their utility. Examples are as
ancient as the Qin Dynasty in China (221-207 B.C.), when
the Emperor unified three or four forms of currency into
one coin, and as contemporary as the creation of the euro
in the 21st Century.
But the development of money is not dependent solely
on objective characteristics. Subjective valuations play a
critical role. Ultimately, consumers determine what form
of money is most desirable – people simply substitute
cheaper and more convenient forms of money for
expensive and inconvenient forms. It is ultimately through
this substitution in use that new money forms embed
themselves in the marketplace.
The organic nature of payments was first explored by the
19th-century Austrian economist Carl Menger. He built on
the work of the classical British economists – particularly
Adam Smith – by adding an important human dimension.
Menger recognised that Smith, the ever-pragmatic Scot,
was obsessed with the objective costs of production, but
that he had overlooked the subjective influence of consumers.
Smith, in fact, never accounted for the ever-shifting valuations
and preferences of the consumer, which are the basis of all
economic activity. So Menger developed the principle of
subjective value, which led him into an investigation of
money and payment systems.
4 “Stretch Your Boundaries,” speech by Hans van der Velde, President, Visa EU, Budapest, Nov. 14, 2002
Up until that time it was assumed that money – and payment
systems – had been invented and imposed by the state.
Menger argued otherwise. Money, he stated, is a social
phenomenon, with its roots in the barter economy. Payment
systems evolved out of the barter economy – and empowered
buyers and sellers – with the development of money as a
medium of exchange. Buyers and sellers recognised that
doing business became much more efficient if everyone
used a commonly accepted form of payment.
Since that time, we have seen the notion of money continue
to evolve, driven by overwhelming marketplace preference
for increased convenience and efficiency, and decreasing
risk and costs. The modern payment card system is an
excellent example of this organic, socially driven growth –
the creation of new forms of exchange that continue to make
life easier and more efficient. So long as the human condition
continues to change, payment systems will continue to
evolve, driven by these powerful market forces. 4
Ultimately, consumers determine what
form of money is most desirable –
people simply substitute cheaper and
more convenient forms of money for
expensive and inconvenient forms.
5 “U-Commerce – Leading the New World of Payments”; a white paper prepared by Stephen Schapp, Visa International and Richard Cornelius, Accenture; 2001

Electronic Payments:
Lower cost, higher value
since their inception in the mid-20th century, electronic payments
have accrued increasing levels of benefits to all parties in the
transaction chain.
The introduction of charge cards in the early 1900s, beginning
with Western Union in 1914, represented a breakthrough in
payments. But while these cards enhanced customer loyalty
and stimulated repeat buying behavior, they were generally
limited to the local market or in-store use.
In 1958, Bank of America took a major step forward,
introducing what eventually became the modern credit card.
Based on extensive test marketing in Fresno, California it
became clear there was a large market for a general-purpose
bank card featuring a revolving credit facility and wide
acceptance. With the launch of Bank of America’s card,
the consumer was not tied to one merchant or product but
was now free to make credit purchases at a wide range of
outlets. As the adoption of the bank card increased among
consumers, merchants, and banks, the potential size of the
market for transactions expanded geometrically. It was a
profound turning point in the history of money.
The development of the modern electronic payment network
took an important step forward in the mid-1970s with the
creation of a global joint venture that would eventually
be known as Visa. Through shared investments, the Visa
association created a global system to authorise transactions,
clear and settle electronic payments, codify operating regulations
to protect consumers and merchants alike, and set
interoperability standards to ensure that, unlike cash and
cheques, a Visa card could be used anywhere in the world.
Two developments in the 1990s further broadened the
utility of electronic payments:
■ debit cards, a popular “pay now” product, allowed
consumers to access funds in a demand deposit account
to conduct a transaction at the point of sale; and,
■ e-commerce emerged as a mainstream business channel,
both relying on and stimulating electronic payments.
The rapid adoption of these relatively recent developments
demonstrate the speed at which the payments landscape is
changing. Looking forward, there is broad experimentation in
ways to migrate electronic payment functions into consumer
devices such as mobile phones, PDAs and other popular
electronic products. This process is well underway in some
European and Asian markets where mobile phones are nearly
as ubiquitous as payment cards. Visa describes this new
range of payment choices as “u-commerce,” or universal
commerce – the ability to conduct commerce anywhere,
anytime, or any way. 5
This shift in consumer preference is driving major changes in
Personal Consumer Expenditures (PCE). The growth in card
usage as a share of PCE continues to expand relative to
cash and cheques. (See Figure 1)
figure 1: future of consumer payments
Source: Visa International, 2003
Other
Cheque
Cash
Card
1997
2001 2005 2010
100%
75%
50%
25%
Data is only Consumer to Business Spending ($21.5 T in 2001) – does include
non PCE spend, such as repayment of interest on debt – est. at $2.5T
0
· 7 ·

· 8 ·
figure 2: growth of personal spending
by payment type
Source: Global Insight, March 2003
Cards
Cash
Cheques
US
Canada
Asia
Pacific
Also, in most markets around the world, the use of cash
and cheques is declining, a trend that is likely to continue.
(See Figure 2) The trend away from cash and cheques is
driven by the well-established benefits of electronic payments
to all parties.
Benefits to Buyers
Latin
America EU
CEMEA
15%
10%
-5%
-10%
■ The convenience of global acceptance, a wide range of
payment options, and enhanced financial management tools.
■ Enhanced security and reduced liability for stolen or
misused cards.
■ Consumer protection through an established system of
dispute resolution.
■ Convenient and immediate access to funds on deposit
via debit cards.
■ Accessibility to immediate credit. Intuitively, the comparative
cost of arranging for a consumer loan relative to the
ability to obtain credit at the point of sale is substantial in
considering both the direct processing costs as well as the
implicit opportunity costs to borrower and lender.
5%
0
CAGR (’96 - ’01)
Benefits to Sellers
■ Speed and security of the transaction processing chain,
from verification and authorisation to clearing
and settlement.
■ Freedom from more costly labor, materials, and accounting
services that are required in paper-based processing.
■ Better management of cash flow, inventory,
and financial planning due to swift bank payment.
■ Incremental purchasing power on the part of
the consumer.
■ Cost and risk savings by eliminating the need to
run an in-house credit facility.
A dramatic example of the efficiencies created by electronic
payments can be seen in the public sector, where governments
have used innovations such as purchasing cards to reduce
paperwork, enhance financial controls, and create more
robust accounting and financial data.
Convenience
Anyone who has searched through pockets for exact change
for parking, fumbled with foreign currency, paid exorbitant
foreign exchange commissions, tried to cash a cheque in another
country, or been concerned about carrying a large roll of
banknotes can appreciate the convenience of payment cards.
Fundamental to this convenience is virtually ubiquitous
acceptance and utility – whether it’s an apparel store
in Paris or a crafts shop in Nepal. Payment cards work in
brick-and-mortar environments, over the phone, on the
Internet, and through the post. Applications are underway
that support new uses such as recurring payments, insurance
and payroll disbursements, rent and utility bills, and smallticket
transactions such as vending machines and car parks.

Consumers place an enormous value on convenience –
although this paper has not attempted to measure it. The
sheer convenience of being able to access cash at an ATM
or conduct a transaction directly at the point of sale
with a credit or debit card clearly has had an impact
on economic growth.
Security
A lost or stolen card is replaceable – lost or stolen cash isn’t.
The guarantee that associations provide against misuse
or theft of cards is something that consumers value. The
electronic payment system provides additional insurance
by facilitating dispute resolution in the case of unsatisfactory
receipt of goods and services. This takes on increasing
importance with the expansion of e-commerce.
Sellers also gain from the security of electronic payments.
A secure electronic system reduces risks of theft and loss to
payments and receipts, and curbs the potential for pilferage
and misplaced funds throughout the cash chain.
Card associations such as Visa have created a broad range
of security features that are embedded in individual cards,
at the channel level or through third parties.
THE EFFICIENT ENTERPRISE
A politician once said about government spending: “A
million here, a million there, pretty soon it adds up to real
money.” Electronic payments are making it possible for
governments and other organisations to save real money.
The savings can be so significant that the U.K. government,
for instance, is moving all basic purchasing and travel
spending to cards. HM Secretary of the Treasury Paul
Boateng estimates that the U.K. government will save
£300 million over five years’ use of Visa purchasing and
travel cards. The U.K. program – and similar Visa programs
in nearly 20 other countries – is built on a U.S. government
model that now saves over US$1.2 billion per year just
from use of Visa purchasing, fleet, and travel cards.
Throughout the 1980s and 1990s, companies and government
agencies of all sizes began investing in information
systems and process improvements that could slash
costs and boost efficiency. CFOs have automated manual
processes from inventory to financial forecasting to payroll,
and recognise that the traditional methods of cash,
cheque, and wire payments are cumbersome and costly.
Take for example one department’s purchase of six months’
worth of photocopy toner. In the past, this “simple”
transaction might have taken nearly 50 separate process
steps – generating paper purchase orders, tracking by the
accounts payable department, adjusting available budgets,
cutting and mailing cheques, reviewing and filing the final
invoice, reconciling the transaction, completing manual data
entry – often over two hours of direct labor spread over a
month, not to mention the payment delays on the seller’s end.
By contrast, the same transaction with a corporate
purchasing card can drop to less than 30 minutes of total
direct labor. It may be more than 70 percent less costly to
manage. And it can be integrated into real-time spending
information for financial managers. All of the purchase order
and payment processes can be combined in a single step.
Approvals can be routed and signed off electronically.
Invoice-level detail, including tax information, item
descriptions, and quantities, can be seamlessly delivered
into the accounting system. Accounting functions such
as account reconciliation and management functions
such as budget forecasting can be updated automatically.
What’s more, spending with individual vendors can be
tracked and evaluated, enabling effective negotiation and
subsequent management of preferred pricing. The process
is more environmentally friendly, as well, by eliminating
what often amounts to a half-dozen sheets of paper or
more per transaction.
From the seller’s perspective, they get faster payment and
lower overhead, both improving their bottom line. The time
to receive payment, for instance, has been cut from 30 or
60 days to as little as 24 hours. And ordering, invoicing,
and receipt of payment can be combined into a single
automated e-commerce process through a website or
online marketplace.
Because of the thousands of transactions that organisations
make over the course of a year, the savings can add up to
staggering sums.
· 9 ·

· 10 ·
The Big Picture:
Macroeconomic value
of electronic payments
it has long been clear that card payment products offer
benefits to all parties — consumers, merchants, and financial
institutions. what can now be quantitatively demonstrated
are the benefits to macroeconomies.
Because electronic payment networks have grown to
their current scale – Visa International alone accounts for
upwards of US$2.5 trillion in annual global sales volume – it
is now possible to identify and measure the macroeconomic
benefits of electronic payments in ways that could not have
been done five or ten years ago. This analysis shows that
electronic payment systems offer significant stimulation
to economic growth.
Several studies that measure the cost of electronic payment
systems relative to cheques indicate the superior efficiency of
electronic technologies. The efficiency advantage from scale
effects and reduced friction is enormous. Studies indicate
that an electronic payment system generally costs in the
range of one-half to one-third of a paper-based system.
This translates into a beneficial aggregate cost savings of at
least 1% of GDP. 6 For the U.S. economy that is worth roughly
US$60 billion annually, or US$700 billion over a decade. In
the U.K., the savings would be on the order of US$10 billion
annually, reaching nearly US$120 billion over the span
of 10 years. 7
figure 3: payment system costs in iceland and belgium
Source: University of Leuven
Total System Costs
(US$ Millions)
Transaction Volume
(Millions)
Cost Per
Transaction (US$)
These efficiencies reflect a crucial difference between cash
and cards. The cash-based system is a physical system
driven by variable costs, so that transaction costs decline
only slightly as volume increases. The payment card system,
however, is more of an information system, whose cost
structure is driven primarily by the fixed costs of setting up
its interconnected components. The greater the volume of
transactions carried over an electronic network, the lower
the average cost per transaction.
An excellent example of the potential impact of electronic
payment efficiencies is provided in a study examining the
payments systems in Iceland and Belgium focused on cardbased
versus cash-based transactions. 8 As Figure 3 shows, a
majority of transactions in Iceland are made using payment
cards, not cash. Therefore, because of the sheer volume of
transactions, the total cost of the card system (US$23.9
million) understandably exceeds the cost of the cash system
(US$18.5 million). However, the more relevant cost per
cash transaction (US$2.57) is roughly four times higher
than that of the payment card system (US$0.61).
Average Value of
Transaction (US$)
Cost Per Value of
Transaction (%)
Iceland:
Cash $ 18.5 7 $ 2.57 NA NA
Card $ 23.9 39 $ 0.61 $ 38.00 1.6%
Belgium:
Cash $ 1,579.6 3,000 $ 0.52 $ 5.81 9.0%
Card $ 232.3 370 $ 0.60 $ 47.69 1.3%
6 Humphrey, David, Magnus Willesson, Ted Lindblom, and Goran Bergendahl, “What Does It Cost To Make A Payment?”, Working Paper, Department of
Finance, Florida State University.
7 These measures are in constant US$ dollars.
8 See “The Costs of Cash and Cards Compared, The Cases of Iceland and Belgium,” De Grauwe, Paul, Erik Buyst, and Laura Rinaldi, University of Leuven, 2000.
9 Estimates are in constant dollar (inflation-adjusted) measurements.

In contrast, most of the transactions in Belgium are cashbased.
But the electronic transactions tend to be higher-value,
averaging US$47.69 in contrast to US$5.81 for a cash
transaction. The relatively low use of the payment card
system in Belgium results in a cost per transaction of US$0.60,
higher than the cash cost of US$0.52 – because low volume
does not allow for maximum exploitation of the fixed costs.
In a study designed to quantify the global links between
electronic payments and consumer spending, Global Insight
examined the economic growth, real consumer spending
and diffusion of card payments in a sample of 50 countries.
These countries included large, developed economies such as
the U.S. and those in Western Europe, newly industrialised
countries, and transitional economy countries.
What is apparent is that there is wide divergence in the
rate of adoption of electronic payments. The variance of
adoption rates across countries, shown in Figure 4, is striking
and suggests that the global economy has to travel a bit
further down the digital road to fully capture the benefits
of electronic payments.
The Global Insight study directly quantified the relationship
between real spending and the share of card payments over
all countries as well as for each country individually. The
results indicate that on average a 10% increase in the share
of electronic payments translates into a 0.5% increase in
real consumer spending. For example, in a country that has
a 20% card share and US$30 billion of consumer spending,
increasing the electronic payment share to 22% can be
expected to increase consumer spending by US$150 million
on average. Moreover, we found that as the quantitative
impact of electronic payment share on spending increased,
the relationship between real spending and share of electronic
payments grows, as shown in Figure 5.
This is a powerful result because it implies that as the
adoption of electronic payments becomes more widespread,
its frequency of use for transactions will likely also increase,
and more channels will become available for a wider range
of goods and services. For example, smart cards are rapidly
becoming the payment method of choice in mass transit
systems. Those same cards can be adapted to hold other
figure 4:
global card payments adoption (2001)
Source: Global Insight, Inc.
45
Median Share = 15%
Egypt
India
New Zealand
Germany
Chile
Thailand
China
Ireland
Philippines
Taiwan
Russia
figure 5:
impact on real spending
Japan
Finland
Impact on Spending
payment functions and will be readily usable in the purchase
of other goods and services at some point during the same
trip. Commerce is amplified to the benefit of all users
and merchants.
Global Insight investigated the additional spending that
would be expected to result from the growth and diffusion
of electronic payments in the United States, measured by
PCE share at the point-of-sale. Based on a quantification of
the link between real consumer spending and card usage,
the electronic share of PCE is calculated to have grown from
18% in 1980 to almost 30% in 2002. Figure 6 shows that
absent this growth, the overall path of consumer spending 9
would have been lower by US$6.5 trillion – 8 percent of total
consumer spending over the period. Consumer spending
would have also grown at a somewhat lower rate.
Mexico
Greece
France
US
Singapore
UK
40
35
30
25
20
15
10
5
0
Strength of the Impact
Share of E-Payments (%)
· 11 ·

figure 6:
the economic value of card payments
Source: Global Insight, Inc.
· 12 ·
Spending at 1980 Share
Actual Spending
’74 ’81 ’88 ’95 ’02
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
The difference between the projection using 1980 shares
and actual spending during that period can be more vividly
seen in Figure 7, which corresponds to the area between
the actual consumption path and the projected path in
Figure 6. Figure 7 depicts the cumulative value of what
would have been foregone real consumer spending had there
been an absence of growth in the share of electronic payments
since 1980.
Had the U.S. economy not experienced this contribution to
growth, real GDP would have been almost US$10 trillion less
during that period. The loss in output would have reduced real
economic growth on average by approximately 0.5 percentage
points per year – a substantial reduction.
Results from Global Insight’s U.S. study indicate that there
is a direct link between the diffusion of electronic payments
and the level of consumer spending. The strength of this link
depends on several critical factors, including the propensity
of consumers to spend and the ability of the economy to
produce and distribute a sufficient amount of goods and
services. However, to effectively convert electronic payments
into real growth depends on the convergence of consumer
substitution of currency and paper forms, widespread
adoption by merchants, and the effectiveness of the design
and interoperability of the system itself. These features
magnify the impact of spending, and ultimately growth.
Quantifying the link between the efficiency of electronic
payments and economic performance as measured by
0
Real Consumer Spending ($B)
figure 7:
the economic value of card payments
Source: Global Insight, Inc.
’84
’87
’90
$6.5 Trillion
0
’93 ’96 ’99 ’02
the growth in transactions has important implications for
economic policy. Virtually all economies have stated policy
goals that include achieving maximum growth. Shown in this
paper, electronic payments can be a key factor in facilitating
and maximising growth; therefore there should be a clear
policy interest in fostering the expansion of electronic payments
as part of a pro-growth platform. Optimally, a highperformance
economy can be expected to be accompanied
by a high rate of electronic payments diffusion, because it
can both maximise growth and achieve maximum efficiency
in payments.
The link between economic performance and the efficiency
of the underlying payments system is important in any country.
The real economy grows through capital formation and then
accumulation, utilising technology and labor resources. An
efficient payments system is likewise of paramount importance
for clearing current-period transactions and channeling
savings and investment flows for future growth. Undeniably,
countries differ in their economic development, but most
are moving towards the economic models of the developed
world in which real sector production and growth translates
into consumer and commercial well being. But real economic
growth will be limited if the underlying payments system
lags in innovation and the adoption of electronic payments.
A critical challenge for many economies is drawing more
people – and their capital – into the banking system. The
question for policy-makers is: How do we get people into
the big economic tent?
10 A study of retail payments systems indicates that 70% of the money supply of Egypt is in currency in circulation and 30% in bank deposits.
The converse is the case in the United States.
11 Source: Global Insight, Inc.
$800
$700
$600
$500
$400
$300
$200
$100
Foregone Real Spending ($B)

GDP Per Capita
The Big Tent:
The democratisation of payments
roughly two-thirds of the world’s population is unbanked.
payment card products help to draw the unbanked into the
banking system — promoting financial inclusion, institutional
trust and capital accumulation, all of which build the foundation
of a strong economy.
When consumers transact in a world of cash, or in any
form outside of the banking system, there is an immense
loss both to them and to society. Individuals are excluded
from the potential wealth gains that come from saving in an
institutional world; the effective size of commercial markets
is reduced; and credit for potential economic expansion
is restricted because of an inability to funnel savings into
investment. A cash-dominant economy is a diminished
economy, unable to generate sustained wealth and growth.
In developed economies, 60%-85% of the population holds
bank accounts. Contrast that with less developed countries
in which there is but 15%-25% penetration. 10
The stock of currency held outside of the banking system
constitutes a potential source of unproductive economic
resources because these cash stores are not available for
credit expansion. Growth in currency holdings relative to
bank deposit growth reduces the reserve base of the banking
system, thereby impeding monetary growth. Emphasis
on cash use is a drain on a country’s economic potential.
Countries that wish to maximise growth must develop
non-cash alternatives that will bring capital into the banking
system where it can be converted into credit that will fuel
the economy – moving money from under mattresses and
into bank accounts. The goal: Achieving greater credit
figure 8:
the importance of banking the unbanked
$40,000
$30,000
$20,000
$10,000
0
20 40 60 80 100
Percent Banked Across Countries
expansion through the deposit multiplier process while
reducing the social costs of cash-dominant economy. Indeed
even in a developed economy, capital infusions into the
banking system result in deposit expansion and potentially
an increase in GDP and growth. In a simulation of the U.S.
economy, Global Insight found that a 10% shift of currency into
lendable reserves increases GDP by just above 1% annually.
The implementation of electronic payment systems can be
expected to bring more transactions into the mainstream
economy and reduce the influence and prevalence of
underground or gray economies, as has occurred in South
Korea. Electronic payments expand the available options
for the secure receipt of wages and income as well as for
spending. Also, electronic payments, particularly crossborder
transactions, ensure that receipts and payments
reflect transparent currency exchange rates and avoid
those in the parallel market.
As the transition to electronic payment systems takes place,
cash reserves that were outside of the banking system are
integrated into it, expanding the deposit base of the monetary
system and the potential credit expansion afforded by the
increased reserves and the multiplier process. Multiplier
estimates range from 10 to 15 per money unit of deposit. 11
Not only does the increased transparency elicit more
confidence in the financial system, but it also extends
greater monetary control to the central bank. Expanded
use of electronic payments in the system reduces friction
and increases the velocity of transactions. Finally, the fiscal
health of a domestic economy is enhanced since more
transparent transactions will ensure greater tax revenue
growth and compliance with the tax regulations. Ensuring
equal compliance among taxpayers and justice in the
economic system enhances trust.
There is an obvious trade-off for governments that rely on
capturing the benefits of currency creation, but evidence
time and again demonstrates that the total social costs of
· 13 ·

· 14 ·
Customisation in electronic payment adds to the total social value
of these payment products because it brings particular services in line
with the value of specific needs of a user segment.
a cash system are far greater than those of an electronic
payment system. 12
Customisation
Democratisation of the payments system also includes
customising its products to consumers with unique needs,
including groups that have traditionally been disadvantaged
in the banking process, such as small enterprises and
sole proprietorships.
When it comes to customisation, cash is a poor medium. It
comes in one form and performs one function, regardless of
who holds it. Cheques can be customised slightly with personal
information and choice of designs. The growth of electronic
payments, on the other hand, has resulted in a wide range
of customised products. Electronic systems are able to provide
a higher level of choice and customisation because the
underlying system is capable of producing multiple offerings
utilising the same operational capital. 13 These systems subsume
an immense investment of physical and intellectual
capital but permit production of a variety of products through
multiple, competing financial institutions. Because the
capital is able to be shared with incremental costs that are
low relative to the fixed capital cost of the system, scale
and scope permit more efficient production of an array
of differentiated products than if each were developed on
a stand-alone basis. Newer payment products established
by card associations such as Visa have been designed for
specific market segments with particular needs. 14
The payroll card is an example of a product developed to
meet the needs of a specific segment – the unbanked. Wages
are disbursed electronically with workers able to access
their accounts by way of the payroll card. These virtual
paycheques save paper costs and time costs to both employer
and worker. They also provide social value as they draw
the unbanked into the mainstream economy.
Customisation in electronic payment products adds to
the total social value of these payment systems because it
brings particular services in line with the value of specific
needs of a user segment. Services that are more tailored to
individual needs eliminate the pricing distortions created
12 “Retail Payment Systems – A Vision for Egypt,” prepared for Visa International by William R. Donges.
by bundling irrelevant services. For example, some users
may prefer, and would be willing to pay for, services that
permit efficient payments for procurement and wholesale
distribution transactions. Such users would be adversely
affected if forced to accept a bundle that included services
for travel and entertainment and general business spending.
Hence, customised, unbundled services enhance the value
of services to user segments and to society as a whole.
The trend toward customisation is accelerating. Credit and
debit cards that offer features of high value to specific user
segments are proliferating. Some of these features cater to
users of particular consumer products or services such as
travel, dining, financial services, and medical services.
In the commercial arena, payment products are customised
to meet the need of both large and small enterprises. Access
to adequate capital is necessary for economic development,
growth and stability by building not just large enterprises,
but small entrepreneurs who are able to transform ideas,
hopes and dreams into commercial realities. Traditionally,
many potential sole proprietorships and small businesses
have faced capital constraints, with typical minimum loan
requirements beyond their needs and abilities. Many of the
customised services that branded electronic payment system
providers have made available are directed toward this business
group, integrating features that ensure secure and reliable
receipt of payments with working capital and loan management.
Successful small enterprises soon learn that growth brings
challenges. One of the biggest challenges is that continued
growth is limited by enterprise size and access to new or
larger customers requires additional resources. Major electronic
payment providers offer tailored packages to expanding
businesses that permit seamless domestic and international
e-business payments in multiple currencies. These global
electronic payment systems permit access to wider markets
with greater functionality and better terms than currency
and paper-based systems.
At the same time, large organisations face their own unique
needs, such as increased costs from misallocation of resources
and inefficient spending flows. From an economic perspective,
13 Payment technologies that have the same underlying common infrastructure may have this common capability of permitting multiple products tailored
to incrementally diverse buyers. See Stavins, Joanna, “Who Uses Electronic Check Products: A Look at Depository Institutions,” New England Economic
Review, Third Quarter 2002, pp. 3-16.
14 One example is Visa Business, a card product that enables smaller businesses to receive payments securely and in multiple currencies for physical,
telephone and Internet transactions. This eliminates costly check clearing and obviates the need for item-by-item currency conversions.

these costs typically result from an information problem:
information is either unavailable or not integrated efficiently.
Electronic payment providers have played a major role in developing
and implementing Enterprise Resource Planning (ERP) and
Customer Relationship Management (CRM) systems that seamlessly
integrate corporate or organisational accounting and marketing
systems with their own backbone payments infrastructure.
Consumer Empowerment
Electronic payments empower the consumer in several fundamental
ways that cash and cheques cannot. One of the clearest
ways is the security that dispute resolution provides, offering
consumers a form of insurance against purchases of faulty goods
or services that are not delivered or lower in quality than
expected. Insurance against lost, stolen or otherwise unauthorised
use allows consumers to quickly shield themselves from liability,
at zero cost in some markets, unlike lost cash or cheques.
Electronic payments also provide the ability to control
payment for goods and services over time by allowing buyers
to pay now, pay later, or prepay. Credit cards provide liquidity
through pre-approved credit availability, something that
transaction-specific loans cannot do. This works favorably for
consumers, merchants, and banks because the process facilitates
current period sales while minimising the cost of obtaining
credit. Debit cards offer convenient and immediate access to
funds on deposit. Globally branded electronic payments have
the ubiquitous and interoperable features that lend themselves
to immediate acceptability by consumers and businesses.
Despite the value that consumers place on electronic payments,
and the benefits that extend to economies from the underlying
system, concerns are sometimes raised about abuse of credit
and erosion of consumer wealth. Often these concerns are
raised in the context of new regulations that would raise barriers
to consumer access to credit and are based on an implicit
assertion that expanded credit availability and use produces
widespread harm to consumers. However, with the application
of an objective analysis quite a different picture emerges. An
in-depth study of consumer behavior in Australia provides
some insights into the level and sophistication of payment usage
and clearly shows that consumers have a high level of understanding
of payments and responsibly manage revolving credit.
THE
EMPOWERED
CONSUMER
An analysis of consumer spending trends
in Australia conducted by Visa International
revealed the extent to which contemporary
consumers – at all income levels – are responsibly
managing revolving credit.
■ Consumers are paying off credit card spending
quicker than five years ago. In the year to June
2002, for every A$100 spent on credit cards
Australians paid off A$98 (in December 1985,
A$57.90 of every A$100 spent on credit cards
was repaid by the due date).
■ Low-income earners (A$15,000 per year or less)
represent only 5% of cardholders and account
for only 4% of interest-bearing debt.
■ Approximately six out of 10 cardholders across
all income groups pay off their card bills in full
by the next due date.
■ Default rates are continuing to fall. The
current Australian default rate (1.93%) is
40% less than it was five years ago, and
is trending downward.
■ The interest-bearing portion of credit
card debt accounts for just 3.8% of total
household debt.
■ There is no evidence of systemic excessive
credit card use. In the average month, nearly
24% of cardholders will not spend on their
credit cards. Of those who do spend on
credit cards, 38% spend less than A$500
and around 6% spend A$5,000 or more in
an average month.
■ Between June 1994 and June 2002, the
average annual fee for standard credit cards
increased by 19%, while the price of food
increased by 31%, the price of transport
increased by 21%, and the price of health
services by 28%.
· 15 ·

· 16 ·
A Global Payments Network:
The private sector model
the joint venture model is the most efficient vehicle for
capturing the benefits of electronic payments because it utilises
the competencies of the private sector in a decentralised, self-
regulating structure that fosters competition and innovation.
From its inception, the card association was envisioned
as a democratic partnership of financial institutions working
together to manage and settle electronic payment transactions
from any place in the world. 15 It is instructive to use the
Visa International organisation as an example of how this
joint venture works and the benefits it provides – not only
to its member network, but also to the wider marketplace.
As a cooperative association, a central structure at Visa
provides stewardship to the system (e.g., brand and risk
management), within the bounds of the by-laws, in a
democratic manner. The association maximises the advantages
of shared infrastructure and technology and scale, and
ensures interoperability. As a highly decentralised entity, Visa
permits a great degree of autonomy to member institutions
in product development, product management, pricing, and
promotion. The unique characteristics of this governance
structure enable the central organisation to ensure cooperative
efforts in the management of common assets, while fostering
a competitive market model at the retail institutional level.
While the common benefits of system sharing are conferred
on all members, greater product innovation, quality and
diversity are achieved at lower prices locally.
There are considerable benefits in maximising joint assets
and ensuring interoperability in the payment system. Huge
investments in physical and knowledge capital are required
to establish and maintain the infrastructure that drives the
flow of international transactions – including instantaneous
authorisation, ongoing risk management processes, and daily
clearing and settlement. The nature of the system’s cost
structure, with high fixed costs relative to low marginal costs,
requires a substantial volume of transactions to warrant the
infrastructure investment. But it is through the interoperability
of the system that common benefits are produced with
larger volumes. This results in efficient sharing of common
resources, fully utilising the fixed assets of the business,
and exploiting economies of scale and scope.
The joint venture form of governance yields another benefit
that is subtle but very important. The highly decentralised
structure within the joint venture model gives rise to a unique
relationship between the competitive members and the
common, organising body. It provides an innovative, selfregulating
form that maintains a common, global operating
platform on which the individual member financial institutions
can vigorously compete. This model stands in stark contrast
to the hierarchical, regulatory framework that governs, or is
otherwise imposed on, many large, centralised industries in
which innovation is inert and competition is lacking.
Members of the association compete in pricing their services
by setting annual fees, interest rates, and payment terms.
Through the competitive incentives offered at the institutional
level, individual members can develop product and pricing
plans that are suitable to their own profit-maximising goals.
The competitive model has yielded more efficiency overall
because it enables individual members to make decisions
that are in their interests and the interests of their customers.
Individual institutions are able to capitalise on regional and
cultural preferences in local markets without the undue
constraints imposed by a corporate superstructure. They
are also able to establish prices that are more consistent
with the value of services by users in a specific market.
The result? A greater degree of innovation and greater
diversity of products. At the same time, members are
better able to operate efficiently by setting charges in
line with firm-level variable costs.
Just as innovation in money and payments technologies
developed in response to evolution in real economic
exchanges, the growth in digital transactions has also
15 “Complexity and Organizational Structure: Internet and Visa International as Prototypes for the Corporation of the Future” from The Dance of Change:
The Challenges to Sustaining Momentum in Learning Organizations; Peter M. Senge, et al; 1999
16 It has been reported that more than 60 percent of peak hour riders of the Metro system in Washington, D.C. are utilising stored-value smart cards
rather than the older magnetic strip cards. (Technology Review, December 2002/January 2003, MIT). Similar systems exist or are being developed in
Poland, Ghana, and Hong Kong.

spawned new transaction technologies. A
plethora of payment innovations is emerging
and their growth signals an enlarged set of
transaction opportunities. Microchip-based
payment devices, such as smart cards, and
new technologies, such as transponders, are
being used in many parts of the world. 16
The potential of digital wireless technologies
in transactions remains untapped, but it
is very likely to emerge as a prominent
transaction-enabling vehicle as telecommunications
and computer technologies
converge in devices. All of these technological
possibilities expand the possible number
of transaction channels.
But these new channels and devices will
only be adopted if they are interoperable –
not only with each other, but also with
the existing payment infrastructure.
The association model helps to drive innovation
and adoption through the creation of
product platforms – specifications that ensure
key operating features such as security and
interoperability. The association’s members
then customise the platform to build products
for their customer base. A classic example
is the smart card. A major breakthrough in
the development of smart card technology
at Visa was the creation of Open Platform,
a set of specifications for smart cards. Visa
made a significant investment in the Open
Platform specifications, and then essentially
donated the technology to the marketplace
through the creation of an independent, third
party organisation called GlobalPlatform. The
result was the creation of a new technology,
open to all players, that is enabling development
of a variety of new payment and valueadded
services for consumers and businesses.
The myriad innovations in electronic financial
services offered across cultures, income,
age, gender, and occupation are examples
of the responsiveness of regional and local
entities that are able to operate independently
within this vast association model.
FROM RUBLES
TO CHIPS
Encouraging Russians to place their savings in a commercial bank
is no easy task. Longstanding uncertainty over the economic
environment has resulted in major resistance to bank savings.
In fact, over 70 percent of deposits are currently held with the
state-owned banks. Commercial banks, critical to the successful
restructuring of the economy, have found it difficult to increase
their share of deposits, thereby limiting the amounts they can
lend for economic regeneration.
Visa and the Bank of Moscow last year partnered with the Moscow
city government to generate new banking customers. How? By
developing a sophisticated multi-application card that provided
a variety of services, such as pension payments, access to medical
insurance and government subsidies, and public transit.
City residents are offered a personalised smart card that contains
a combination of benefits, and payment and other information.
For those who receive government aid – students, pensioners,
members of the armed forces and others – the card enables
them to receive discounts on certain purchases. The smart card
can even tell the retailer the level of discount that should be
provided. It is also able to store health and insurance related
information so that cardholders can use it in pharmacies and
health clinics to collect prescription drugs.
With more than three million people in Moscow receiving state
benefits the potential for this ‘social’ card is enormous. Add the
fact that most Muscovites receive other government benefits,
such as health insurance, medical care and schooling, and it
becomes clear that the system could have a major economic and
social impact. Although in the initial stages, Moscow City Council
is expecting to see a significant reduction in the administration
costs of their benefits system. Those receiving benefits will gain
from the improved speed, security and convenience of smart
card technology.
A major driver for this program was the urgent need to stem
the high level of fraud taking place on the city’s student travel
pass system. With the introduction of the smart card, students
were no longer able to pass paper vouchers on to other users.
The Moscow Metro saw savings of some US$30 million and an
increase in revenue of 20 percent.
From a long-term economic perspective, the real value lies in
the card’s ability to encourage people to place their funds
in a commercial bank account, providing much needed capital
for economic development. It is a program that is seen as an
ideal way to introduce large segments of the population to
modern payments across Eastern Europe and Central Asia
and is being viewed as a possible template by authorities
throughout the CIS.
· 17 ·

· 18 ·
Conclusions
Trends are clearly favoring the use
of electronic payments. This will prove
advantageous to the global economy.
National currencies will remain but payment technologies
continue to evolve. No matter what the physical vehicle
used to transmit the information – whether credit card,
debit card, PC, PDA, mobile phone, or smart card – the
underlying electronic payments system is critical to facilitate
transactions in the global, digital economy.
To begin with, we will see cost and efficiency advantages
due to reduced friction. As cash and cheques give way to
electronic transactions, scale economies will be realised
globally. A potential savings of 1% of GDP annually, as
determined by Global Insight, is a substantial amount
to any economy, at any stage of development.
We will see advantages in economic growth. The Global
Insight study estimating that electronic payments yielded
US$10 trillion in value to the U.S. economy over the 1980s and
1990s demonstrates the strong linkage between the expenditure
stream and the electronic payments system in the
U.S. economy. This is a trend that can be replicated globally,
as another Global Insight study indicates, demonstrating that
increasing the electronic payments share of transactions by
10% could result in 0.5% additional real consumer spending.
That study also indicated that the greater the electronic
link in the spending stream, the stronger that relationship
became. The clear implication is that electronic payments
are critical in facilitating the growth process, and that it
is in the economic interests of all countries – particularly
those that wish to participate in the global economy –
to encourage the development of these systems.
Doing so will help to build trust in financial and governmental
institutions, particularly in cash-oriented economies, where
it is crucial to get those who are outside or at the margins of
the formal economy into the economic tent. Relying on the
deposit multiplier effect, more resources become available for
economic development.
Increasingly, cash and even cheques represent a legacy
form of payment that act as a drag on economic efficiency,
present significant levels of security risk, and have no
capacity to support the type of value-added payment functions
that are now expected among consumers, small- and mediumsized
enterprises, corporations, and the public sector. The
establishment of advanced financial and governmental systems
requires immense capital and knowledge resources that
rest on interoperability, standardisation, and transparency.
Participants in the electronic payments system require
secure payments and efficient transactions. Adoption of
electronic systems virtually ensures that shadow economies
will be reduced in magnitude and that governments will
have greater fiscal control.
But for these electronic systems to be established and
to realise the full potential of their enabling economic
power, a proper governance structure is necessary. The
self-regulating association model serves as a beacon for the
optimal approach. In this structure, competitive entities
serve also as associates, each contributing to the overall
governance of the association. Yet the decentralised nature of
the structure permits local control over product development,
pricing policy, and strategic direction. Local control and
competition fosters more responsiveness to local consumers,
businesses, merchants, and governments. It enables members
to be quicker to market and to local preferences.

Why is this important for economic growth? Real economic
growth is driven by the combination of technology, capital,
materials, labor resources, and entrepreneurship – all real
economic factors. But real economic transactions and payments
cannot take place without an efficient, interoperable
payment system. As real growth takes place, the payment
system must be resilient, responsive, and offer the kind of
scale and scope needed to facilitate an expanding economy.
Only an electronic payments system can support that need,
and the self-regulating, association model provides the
greatest scale and scope, flexibility, and accommodation
to organic growth.
Quite simply, an economy that permits private initiatives
in developing electronic payments systems will enjoy wider
diversity of choice for buyers and greater innovation and
competition among suppliers and payment systems – in
short, stronger economic growth.
The clear implication is that
electronic payments are critical in
facilitating the growth process, and
that it is in the economic interests
of all countries – and particularly
those that wish to participate in the
global economy – to encourage the
development of these systems.
· 19 ·

· 20 ·
Appendix – Methodology
U.S. Consumer Expenditure Model
The objective of this investigation was to quantify the potential
impact of electronic payments on consumer expenditure and
ultimately on the economy as a whole. Global Insight developed
a dynamic econometric model of real, constant-dollar consumer
expenditure for the U.S. economy using annual data from 1960
through 2002 that was explicitly structured to include the share
of card-based payments as a driver. Specifying the model in terms
of real, constant-dollar consumer expenditure permits removing
the impact of price inflation in the measure of spending. Using
a nominal value would tend to inflate the impact of electronic
payments and attribute a much greater dollar value effect than by
using price-adjusted data. Card payment share was used as a driver
to proxy total point-of-sale (POS) electronic payments. Data on this
series is readily available and for virtually all of the time periods
used in the sample.
The essence of our approach was to ask in a quantitative way what
the impact of card share has been on personal consumer expenditure.
To assess this required that we be able to compare the difference
between what might have been the impact of card payments based
on some baseline share, to what we actually measure to have been
the historical response of spending to card technology adoption.
The difference would give a quantitative measure of the isolated
impact of cards on spending over time.
To develop this estimate, a series of steps was implemented. First,
a dynamic model of real consumer expenditure was specified with
card payment share as a key driver. The model was then estimated
using annual data from 1960 through 2002 and predicted values
for consumer expenditure were derived allowing for the historical
development of card payment share throughout the sample period.
Therefore the predicted values for consumer spending from this
baseline model reflected the influence of key economic elements
of consumer expenditure and the historical growth in card
payment adoption.
We then stepped back in time, quantitatively speaking, and
re-estimated the model for just the first 20 years, 1960 to 1980.
At this point we were able to quantitatively ask “what would
personal consumer expenditure have been had card payment share
remained at 1980 levels?” 17 To answer the question quantitatively
we then forecasted consumer expenditure from 1980 through 2002
using the reestimated model but holding card payment share
constant throughout the forecast period at 1980 levels (18%).
By comparing the initial predicted values of consumer expenditure
from the baseline model that allowed for full adoption of card
payments, to the ex-post forecast holding card share at 1980 levels,
allowed us to isolate the impact of card share alone on consumer
expenditure. 18
Once we had estimates of consumer expenditures under both
card payment scenarios, we were then able to calculate estimated
impact on the economy as a whole. Using the relationship between
real consumer expenditure and real GDP we were able to assess the
incremental value of GDP at respective levels of personal consumption.
With historical patterns of card adoption, consumer spending
rose accordingly. Indeed this is exactly what the model captures.
As consumer spending rose throughout the 1980-2002 period,
economic activity and sales followed leading in turn to higher GDP.
However when consumers were restricted in adopting cards – the
1980 card share remained constant throughout the 1980-2002
period – the level of economic activity and GDP was smaller,
consistent with the smaller level of personal consumer spending.
The ten-year difference between the two levels of consumer spending
was estimated to be US$6.5 trillion. The level of GDP reflects
the chain-reaction of economic activity from consumer spending
through sales and production as was described above. The ten-year
difference between the level of GDP generated by the higher degree
of card adoption and consumer spending and the restricted level
of cards and consumer spending was US$10 trillion.
Global Consumer Expenditure Model
Looking beyond the U.S., we wished to address the global impact
of electronic payments on personal consumer expenditure. 19 Ideally
we would be able to distinguish differences among countries in
order to draw inferences about the relative efficacy of electronic
payments across countries. Global Insight developed a model similar
to that developed for the U.S. study. We constructed a dynamic
model that specified card payment share to be a critical driver
in the model in order to measure the influence of that payment
technology on spending.
Using annual data from 1993 to 2002 for 50 countries we estimated
a pooled econometric model to link constant dollar consumer
expenditures to card payment share. 20 Our particular approach
provided two benefits. First it permitted the use of cross-country
data with observations over time for each country, thereby offering
a rich set of statistical information. It also allowed us to identify
country-specific estimates of the sensitivity of personal consumer
expenditures to changes in the adoption of card payments. This
gave us insight into country effects rather than merely looking
at broad international averages. In our analysis we graphically
showed the variation in card share impact across countries.
17 We chose 1980 as the break point for the ex-post analysis because it appears that card payment adoption grew substantially in the period
beyond 1980 and we wanted to capture that effect quantitatively.
18 The quantitative comparison was derived using estimates from 1984 through 2002 because we wanted to remove the distortions of the
double-dip recessions of the 1981-83 period and we wanted to capture that effect quantitatively.

The measures of this impact were the estimated coefficients from
our model that related personal consumer expenditures to card
share for each country. Using statistical results we also noted that
the impact of card share on spending became stronger the greater
the adoption of card payment share.
Estimating the Efficiency Savings in GDP
from Electronic Payments
The basis for this estimate comes from a study by Humphrey,
Willesson and Bergendahl cited in the text. We applied the study’s
1% savings to the value of GDP in the U.S. and U.K. respectively.
This yielded the estimate of US$60 billon, or US$700 billion over
a decade for the U.S. and US$10 billion annually, or US$120 billion
over ten years for the U.K.
Estimating the Impact of Cash Injections
into the Economy
A rudimentary principle of monetary economics is that in a fractional
reserve system operated within the auspices of a central bank, deposits
to the banking system creates a potential for credit expansion and further
deposit creation. The fundamental reason for this lies in the fact
that when a bank receives a deposit it is required to keep only
a fraction as reserves; the balance in excess of required reserves
becomes a liquid asset. Typically holding excess reserves is costly and
if the economic and business conditions are favorable, the bank has
an incentive to find a profitable use for them. Excess reserves provide
a measure of credit availability to the bank.
In the aggregate, an injection of deposits into the banking system
creates an opportunity for credit expansion in the system. Indeed this
is the basic model that illustrates how the central bank can exert
control of liquidity in the economy. The banking system is central
to this control because it is central to the flows of funds and credit
in the economy. The maximum potential amount of credit expansion
is mathematically a multiple of the reserve requirement. 21
Global Insight measured the impact of a cash infusion through reserve
increases on the U.S. economy. Increases in liquidity and credit
expansion will have an impact on the economy through increases
in spending, asset accumulation and capital values, income and
employment. Utilising our U.S. macro econometric model we allowed
for a 10% increase in cash reserves to flow through the economy.
We found that real GDP increased in each period by the end of the
five-year forecast horizon, after a series of adjustment lags, the level
of real GDP was seen to increase by just over 1% per quarter. Over
the entire horizon the average increase was nearly 1%.
Appendix – Sources
19 Our mission was limited to estimating the impact of card share on personal consumer expenditure. Estimating the impact on GDP by country was
beyond the scope of the work.
20 Country expenditures were measured in common U.S. dollar terms and adjusted for inflation.
Burns, Peter and Anne Stanley,
“Innovations in Small Dollar Payments,”
Discussion Paper, Payment Cards Center,
Federal Reserve Bank of Philadelphia,
October 2001.
Burns, Peter and Anne Stanley,
“Fraud Management in the Credit Card
Industry,” Discussion Paper, Payment
Cards Center, Federal Reserve Bank of
Philadelphia, April 2002.
Chakravorti, Sujit and Ted To,
“A Theory of Credit Cards,” Conference
on Innovation in Financial Services and
Payments, Federal Reserve Bank of
Philadelphia, May 2002.
Paul Chutkow,
Visa: The Power of an Idea,
Harcourt, 2001.
De Grauwe, Paul, Erik Buyst,
and Laura Rinaldi,
“The Costs of Cash and Cards Compared
– The Cases of Iceland and Belgium,”
University of Leuven, 2000.
Donges, William R.,
“Retail Payment Systems –
A Vision for Egypt,” prepared for
Visa International, 2002.
Federal Reserve Bank,
Retail Payments Research Project, 2000.
Furletti, Mark,
“An Overview of Smart Card Technology
and Markets,” Discussion Paper,
Payment Cards Center, Federal Reserve
Bank of Philadelphia, April 2002.
Gerdes, Geoffrey R. and Jack K. Walton II,
“The Use of Cheques and Other
Noncash Payment Instruments in the
United States,” Federal Reserve Bulletin,
August 2002, pp. 360-374.
Goldfinger, Charles,
“Intangible Economy and Electronic
Money,” Chapter 4 in The Future of
Money, OECD, 2002, pp. 73-86.
Gowrisankaran, Gautam
and Joanna Stavins,
“Network Externalities and Technology
Adoption: Lessons from Electronic
Payments,” Conference on Innovation in
Financial Services and Payments, Federal
Reserve Bank of Philadelphia, May 2002.
Humphrey, David B.,
“U.S. Cash and Card Payments Over 25
Years,” Conference on Innovation in
Financial Services and Payments, Federal
Reserve Bank of Philadelphia, May 2002.
Humphrey, David, Magnus Willesson,
Ted Lindblom, and Goran Bergendahl,
“What does It Cost to Make A
Payment?” Working Paper, Department
of Finance, Florida State University.
Ingham, Geoffrey,
“New Monetary Spaces?”
Chapter 5 in The Future of Money,
OECD, 2002, pp. 123-146.
Miller, Riel, Wolfgang Michalski
and Barrie Stevens,
“The Future of Money,”
Chapter 1 in The Future of Money,
OECD, 2002, pp. 11-30.
Retail Payments Research
Report, A Snapshot of the U.S.
Payments Landscape,
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Fall 2002, pp. 32-42.
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“How You’ll Pay,” Technology Review,
December 2002/January 2003, pp. 50-56.
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August 2001.
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“Who Uses Electronic Check Products:
A Look at Depository Institutions,”
New England Economic Review,
Third Quarter 2002, pp.3-16.
Tumin, Zachary,
“The Future Technology of Money,”
in The Future of Money, OECD, 2002,
pp.73-86.
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21 It must be emphasised that this textbook multiplier process is not likely to result in all circumstances. Banks do not fully loan out excess reserves
and individually and collectively they typically do not. Other economic and business reasons including capital risks, deposit outflow risk, etc.
weigh on asset management decisions as well.
· 21 ·

· 22 ·
Notes

About Visa
Visa is the world’s leading payment brand generating more than U.S$2.5 trillion in annual card
sales volume. Visa has unsurpassed acceptance in more than 150 countries. The Visa organisation
plays a pivotal role in developing innovative payment products and technologies to benefit its 21,000
member financial institutions and their cardholders. Visa is a leader in Internet based payments and
is pioneering the creation of u-commerce, or universal commerce-the ability to conduct commerce
anywhere, anytime, and any way. For more information, visit www.corporate.visa.com.
About Global Insight
Global Insight, Inc. (www.globalinsight.com) was formed to unite the two most respected economic
and financial information companies in the world, DRI and WEFA. Global Insight collects and delivers
economic and financial information to clients and provides the most comprehensive economic coverage
of countries, regions and industries available, using a unique combination of expertise, models, data
and software within a common analytical framework to support planning and decision-making.
Global Insight also provides a broad range of consulting capabilities covering market analysis,
business planning, investment strategy, risk assessment, infrastructure analysis, policy evaluation,
and economic development and impact. The combination of industry expertise, modeling assets,
data repository, and analytical software tools deliver actionable solutions that address specific
client needs. Its sister company, World Markets Research Centre, provides the world’s first same-day
country analysis and risk assessment service covering 185 countries, providing insightful analysis
of market conditions and key events around the world.
The company has over 3,300 clients in industry, finance and government around the world with
24 offices in 13 countries covering North and South America, Europe, Africa, the Middle East and Asia.
the virtuous circle:
ELECTRONIC PAYMENTS AND ECONOMIC GROWTH
june 2003
· 23 ·

visa international
po box 8999
san francisco, california, 94128
for additional copies of this white paper
contact visa international corporate relations at lcooperm@visa.com

figure 1: future of consumer payments
Source: Visa International, 2003
Other
Cheque
Cash
Card
1997
2001 2005 2010
100%
75%
50%
25%
Data is only Consumer to Business Spending ($21.5 T in 2001) – does include
non PCE spend, such as repayment of interest on debt – est. at $2.5T
0

figure 2: growth of personal spending
by payment type
Source: Global Insight, March 2003
Cards
Cash
Cheques
US
Canada
Asia
Pacific
Latin
America EU
CEMEA
15%
10%
5%
0
-5%
-10%
CAGR (’96 - ’01)

figure 4:
global card payments adoption (2001)
Source: Global Insight, Inc.
Median Share = 15%
Egypt
India
New Zealand
Germany
Chile
Thailand
China
Ireland
Philippines
Taiwan
Russia
Mexico
Greece
France
US
Singapore
UK
45
40
35
30
25
20
15
10
5
0
Share of E-Payments (%)

figure 5:
impact on real spending
Japan
Finland
Impact on Spending
Strength of the Impact

figure 6:
the economic value of card payments
Source: Global Insight, Inc.
Spending at 1980 Share
Actual Spending
’74 ’81 ’88 ’95 ’02
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
0
Real Consumer Spending ($B)

figure 7:
the economic value of card payments
Source: Global Insight, Inc.
’84
’87
’90
$6.5 Trillion
0
’93 ’96 ’99 ’02
$800
$700
$600
$500
$400
$300
$200
$100
Foregone Real Spending ($B)

GDP Per Capita
figure 8:
the importance of banking the unbanked
$40,000
$30,000
$20,000
$10,000
0
20 40 60 80 100
Percent Banked Across Countries