Southern European and Central and Eastern European (CEE) nations are losing between €8bn and €10bn due to a four-year delay in the European Commission (EC) conducting its ‘Cost of Cash’ study, according to research by London-based payments firm PSE Consulting.
The firm suggests that banks have been in limbo since 2009 waiting for the study results to confirm the basis of interchange, a key component that funds cash displacement through the use of cards by consumers. As a result, countries in the two European regions are losing out on value added tax (VAT) and corporation tax payments totaling between €8bn and €10 annually.
PSE adds that several countries struggling to improve tax collection have implemented legislation and controls to capture and reduce large cash payments and generate tax revenues but much more could be achieved if banks were on side.
“Europe has an unofficial economy cash mountain which, in some countries, exceeds 27% of gross domestic product (GDP),” said Peter Jones, managing director of PSE Consulting and author of the research paper. “Card payments could displace this by up to 10%, saving hard-pressed governments €8bn to €10bn per annum, but banks need clarity on the financials before this can happen. Until the Commission publishes its ‘Cost of Cash’ study, banks will remain in limbo.”
The EC’s first ‘Cost of Cash’ study was contracted in 2009 to clarify the Commission’s new model for interchange calculation. However narrow scoping and a limited budget of €300,000 meant that no meaningful results were produced. A larger study with a €2m budget was re-commissioned last and is due to report in Q213, but the delay “has already cost Europe billions”, says the firm.
Tensions over the delayed have risen with international and domestic card schemes claiming a lack of empirical studies to substantiate the Commission’s interchange rates imposed in 2009.
“The EC has been working outside its comfort zone,” said Jones. “However, the delays have been hugely costly for Europe’s governments and economies. Cash is expensive for all countries to handle. As well as lost tax revenues, potential efficiency savings of €10bn per annum have been lost. The Commission now needs to move quickly to resolve the situation.”
Jones also suggests that the EC’s own credibility has been damaged by the delay, as well as its commitment to the long-term cash displacement project and the revenues and efficiency that could be generated. “Clearly in this case it [the EC] lacks the ability to speedily back up new concepts with thorough and detailed research,” he says.
A persistent problem
PSE’s research paper cites academic analysis, which shows that the effectiveness of migrating cash to cards is strongly correlated with the size of the unofficial economy. Europe’s northern nations with low ‘grey economies’, where the incidence of cash in hand and untaxed payments to workers is less, have been most successful in reducing cash usage and consequently their cash mountains. Over the past five years, cash transactions have dropped in the UK, France, the Benelux countries and Scandinavia, to almost 60% of total payments.
By contrast in the Southern Europe nations, all with high unofficial economies, cash usage “remains stubbornly high” at close to 80%. In the Baltics and CEE nations, cash usage is 85% although displacement is accelerating.
“For all these countries lower cash usage through the implementation of electronic and card systems, which when combined with forensic analysis, have good potential to increase tax collection revenues,” the research paper notes.
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