Trends with bank card usage and household saving rates in Spain and the EU - Funcasblog
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Trends with bank card usage and household saving rates in Spain and the EU

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During the Spanish financial crisis, households began saving a larger portion of their disposable income. As a result, the household saving rate, household saving as a portion of disposable income, increased during this time.[i] IMF researchers have found that employment insecurity is strongly linked to higher household savings among advanced economies.[ii] As a result of the financial crisis, when Spain’s employment rate increased from 8.2% in 2007 to 26.1% in 2013, personal savings also increased, from 5.9% to 9.7%, reaching a high of 13.4% in 2008.[iii]

Spain’s economy is now on the upswing. Real estate prices are recovering, the GDP is growing steadily, and unemployment is the lowest it has been since 2008.[iv] Amidst these positive economic changes, Spaniards are now saving less money. By 2017, the household saving rate had lowered to 5.5%, the lowest level since Spain entered the European Monetary Union (see Graph 1). The trend is continuing, as Q2 2018 saving rates dropped further, to just 4.7% of disposable income.[v]

Graph 1

Source: ECB and own elaboration

Many European countries are also seeing a decline in household savings. Of the nine largest Eurozone economies (Germany, France, Italy, the Netherlands, Belgium, Austria, Ireland, Finland, and Spain), all but Germany and the Netherlands are down from their 2009 household saving rate peak (see Graph 2).

Because household savings are comprised of the remaining part of disposable income after household consumption, assuming income equal, the household saving rate declines when household spending increases.[vi] Since Spain’s recovery period in 2013, household consumption[vii] has grown faster than wages.[viii] Common explanations for increased consumer spending include the wealth effect (from higher asset prices, such as real estate), higher consumer confidence, and lower unemployment. However, observers have neglected the increase in bank card spending.

Graph 2

Source: ECB and own elaboration

A payment card is a device that allows a user to make payments and/or withdraw money in the form of debit or credit.[ix] A 2014 study on Italian households shows that increased debit card usage can be associated with increases in monthly household spending.[x] The authors theorize that consumers view items as cheaper when the availability of money is more cognitively accessible. For example, a €15 tee shirt seems cheaper when you pay for it with a bank account that has €1,500, or with a €2,300 credit line, as opposed to a wallet that has only €30.

Economists have observed this trend outside of Europe as well. Back in 2000, a study conducted by MIT researchers surveying the willingness of MBA students to buy baseball and basketball tickets with either cash or credit cards found that the students were willing to pay 113% more for Celtics (basketball) tickets in an auction when paying with a credit card versus cash, and 76% more for Red Sox (baseball) tickets under the same conditions.[xi] What both studies demonstrate is that there is a strong tendency for consumers to spend more money when using a card instead of cash.

Within Spain, bank card usage is on the rise. From 2002 to 2017, bank card spending increased 7.8% annually,[xii] whereas cash withdrawals from ATMs increased only 2.7% annually.[xiii] Because of this, the card-to-cash ratio (total value of card purchases to total value of cash withdrawals from ATMs) has more than doubled during this timeframe, from 0.66 to 1.36. This trend is occurring in the rest of Europe as well, where in the nine largest Eurozone economies card payments have grown 7.2% annually, compared to a 3.1% annual increase in ATM cash withdrawals.[xiv] The data show that Europeans are quickly adopting bank cards en lieu of cash.

Since 2002, the only year that card-to-cash spending in Spain did not increase was 2009, the same year that the household saving rate reached its peak (see Graph 3). During the pre-crisis period, from 2002 to 2008, Spain’s card-to-cash payment ratio was growing 5.1% annually. During the recession, from 2009-2013, the card-to-cash ratio slowed to 3.2% annual growth, and the household saving rate reached its highest level. Post-recession, from 2014 to 2017, the card-to-cash ratio was growing at an annual rate of 6.1%, the same period when the household saving rate reached its lowest level. From this observation, it is reasonable to hypothesize that card spending is bad for savings.

Graph 3

Data from ECB

The decrease in the household saving rate may have negative consequences for Spain. Household savings are necessary to provide stability for families, to relieve indebtedness, and to provide a safety net in case of recession or financial hardship.[xv] The short-term benefits which increased spending has for the economy may not be worth the long-term costs it may impose upon Spaniards’ savings.

The association between digital payment usage and increased household spending beckons further attention. As Spaniards and other Europeans continue to migrate from paper to electronic payments, there is a possibility that household spending will continue to increase. While the conveniences of digital spending abound, it is important that it is used with caution.

[i] European Central Bank  Household saving, non-financial investment, external financing and debt

[ii] Mody, Ohnsorge, and Sandri Precautionary Savings in the Great Recession

[iii] European Central Bank Household saving, non-financial investment, external financing and debt

[iv] European Central Bank  Unemployment rate

[v] European Central Bank Household saving, non-financial investment, external financing and debt

[vi] Economics Online Household spending

[vii] Federal Reserve Bank of Saint Louis Economic Data Private Final Consumption Expenditure in Spain

[viii] Organisation for Economic Co-operation and Development (OECD) Average annual wages

[ix] European Central Bank Glossary of term related to payment, clearing and settlement systems

[x] Mercatanti and Li Do debit cards increase household spending? Evidence from a semiparametric causal analysis of a survey

[xi] Prelec and Simester Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay

[xii] European Central Bank Value of payments at terminals POS transactions at terminals provided by resident PSPs

[xiii] European Central Bank  Value of cash withdrawals and loading/unloading transactions Cash withdrawals at ATMs provided by resident PSPs

[xiv] Note – This data excludes Austria, which does not have ECB card usage data prior to 2005

[xv] María Jesús Fernández Sánchez El ahorro de los hogares, en mínimos

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