Study shows direct correlation between digital payments and GDP growth

A working paper published by the Bank for International Settlements (BIS) has found that there is a direct empirical relationship between the use of digital payments and economic growth. 

The authors said that based on their findings, governments should encourage the adoption of digital payments as that is likely to support economic growth, financial inclusion and access to credit.  

BIS is an international financial institution which is owned by member central banks. 

The authors noted that the widespread use of digital payments will encourage households to open a bank account and induce greater engagement with the formal financial sector.  

Data presented by the paper showed that with every percentage point increase in the use of digital payments, there is a corresponding 0.10 percentage rise in per capita gross domestic product (GDP) over two years (equivalent to 0.05 percentage points annually) within an economy.

The authors also observed that over the same two-year period, digital payments have reduced informal employment. With every one percentage point increase in digital payment use, informal employment falls by 0.06 per cent. 

The study also showed that a one percentage point increase in the share of the number of citizens using digital payments leads to a 0.07 percentage point rise in the number of people with bank accounts and a 0.05 percentage point rise in the number of people borrowing from formal financial institutions. 

Setting the context 

Setting the context of the data and conclusions, the authors noted that both advanced and developing economies have seen an increasing digitisation of payments. 

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World Bank Findex data, which the authors quoted, showed a significant surge in digital payment usage among adults in developing countries, with a jump from 35 per cent in 2014 to 57 per cent in 2021. 

The data further showed that almost two-thirds of digital payment recipients use their accounts to store money for cash management; about 40 per cent use their accounts for savings; and 40 per cent of payment recipients borrowed formally. 

The BIS study observed that this trend underscores a global shift towards the use of digital channels for payment. 

Giving some examples of digital payment methods being adopted, the study noted that in China, private digital payment platforms like Alipay and WeChat Pay have successfully integrated into the retail landscape, minimising the use of cash for everyday transactions. 

These platforms utilise digital wallets and QR codes, providing convenient and accessible payment solutions. 

Similarly, Kenya's M-Pesa, a mobile money system launched in 2007, has transformed the retail payment sector in the country. India's Unified Payments Interface (UPI) has also achieved widespread adoption, facilitating seamless digital transactions. 

Brazil's government-led initiative, Pix, a retail fast payments system, has seen rapid and widespread acceptance among the population. This demonstrates the potential of government-backed digital payment systems to drive financial inclusion and modernise payment infrastructure, the study said. 

Furthermore, the issuance of Central Bank Digital Currencies (CBDCs) is gaining traction in developing economies. The Bahamas, Eastern Caribbean, Jamaica, and Nigeria have all launched operational CBDCs, indicating a growing interest in exploring digital currencies as a means of enhancing payment systems and promoting financial innovation, the study noted. 

The authors contend that digital payment proponents, including private providers, argue that the adoption of digital payments can boost economic growth in several ways.  

Cheaper, faster, and more efficient 

Digital payments are faster, cheaper, and more efficient than cash or cheques, and reduce deadweight costs for merchants and the economy. As a result, digital facilitates online purchases and the development of e-commerce, the report notes.  

Secondly, for many people in various countries whose sole financial assets are banknotes and coins, using digital payments can encourage them to open financial accounts, thus creating more opportunities for saving and credit.  

Thirdly, widespread adoption of digital payments can encourage informal sector enterprises to become formal, as a "data trail" is created. This leads to larger firms with credit records (and access to credit) and investment, the authors note. 

Fourthly, using digital payments for payroll can help formalise informally employed workers, promoting financial inclusion for households and greater productivity for firms as they move into the formal sector.  

As a result, a virtuous circle is created where informal employers and employees enter the formal sector, encouraged first by the convenience of digital payments and then by the benefits of using financial services.  

In theory, this could then support growth and productivity by these firms, the study observed. 

Finally, digital payments can improve government finances by enabling better revenue collection (including by reducing the informal sector) and facilitating transfer payments. Stronger fiscal positions help support public investment and increase debt sustainability, both of which support economic growth. 

The BIS study findings supported government policies to encourage the use of digital payments.  

The study also found significant correlations among digital payments, access to financial accounts and internet penetration, the authors added.