The rising use of credit and debit cards boosts economic activity and creates jobs, but can also exacerbate downturns when consumer credit levels are too high, according to a study by Moody's Analytics.
The study, commissioned by Visa Inc., found that alternatives to cash and cheques added a total of $296-billion (U.S.) to the global economy between 2011 and 2015, and generated an average of 2.6 million new jobs a year – 17,000 of them in Canada.
"The availability of electronic payment systems leads to a virtuous economic cycle whereby increased consumption leads to increased production, more jobs, greater income, and, ultimately, stronger economic growth," Moody's said.
Specifically, electronic payments gives consumers access to funds whenever they need them and opens the door to online shopping. For merchants, cards lower labour costs, particularly at self-service checkouts, and attracts consumers who might not have sufficient cash on hand. And for central banks, lower demand for physical cash improves the efficiency of commerce.
The study lands amid tremendous change in the way consumers pay, particularly in Canada. Cash usage is declining and alternatives – such as payment apps that allow consumers to pay for inexpensive items with their smartphones – are gaining traction.
Moody's concluded that card usage among the 70 countries it examined added 0.1 percentage points to global domestic product over the five-year period and accounted for 0.4 points of the growth in consumption.
Countries with the biggest increase in card usage, such as Hungary, Chile and Australia, saw the biggest contributions to GDP growth. Canada was in line with the average.
"The increase in card usage is a good proxy for a reduction in transaction costs," said Mark Zandi, chief economist of Moody's Analytics. "Lower transaction costs facilitate more spending and ultimately a bigger economy."
However, the study found that Finland and Greece saw card usage decline with their economic performance, exacerbating the weakness in consumption in the two countries.
This raises the question of whether credit cards – and rising consumer debt – can drag on economic activity during downturns.
Canada's household debt has been hitting a succession of record highs, rising to 163.7 per cent of disposable income in the third quarter of 2015 and prompting warnings from the Bank of Canada.
On Tuesday, the Financial Consumer Agency of Canada highlighted what it called "worrisome" growth in long-term car loans. It noted that Canada's auto finance market has nearly doubled over the past eight years, with consumers assuming longer-term loans that now average more than 72 months for new cars, up from an average of 65 months in 2010.
"You can have excessive credit growth, and ultimately that will do-in an economy," Mr. Zandi said, pointing to Greece and the U.S. housing bubble prior to the Great Recession.
"It's important that card usage is consistent with the growth in the economy, incomes and profits. That is an issue that needs to be watched carefully," he said.
However, he made a distinction between credit card debt that requires monthly interest payments on outstanding balances and debt that is paid in full each month and merely reflects a greater volume of transactions.
Brian Weiner, head of product and innovation at Visa Canada, added that it is also important to keep in mind that credit-card-related debt in Canada accounts for a relatively small share of total household debt.
"Here in Canada, most of the debt is typically related to residential mortgages," he said.