Points of View
Rossoff & Company’s Points of View is a forum for industry experts, leading finance professionals and senior Rossoff & Co. professionals to provide insights and commentary on current news stories, financial market themes and industry dynamics.
Big Apple Pay
While the announcement of Apple Pay may seem big for the Tech World and Apple fans, it will have huge impacts beyond the tech world and could move the needle on global GDP as a whole.
Wait a second, Global? Yup, global! And that is not just because there is a cool new way to shop (OK yeah it is cool) not just because it is fast-one click on your phone with instantaneous approval, not just because it offers a radical leap in security and privacy not even perhaps because Apple has partnered with credit card issuing banks, but because it will lead to more rapid turnover of the money supply. (The same applies to other smart phone based payment systems).
The process of paying by credit or debit card can often take 30 or more seconds. The time involved, between handing over your card, its authorization, approval and signing can seem endless- not to mention sometimes also fraught with uncertainty for both merchants and consumers. You can chat up the clerk, but both they and you would rather get on with the day, right? Even after it is done, the uncertainty remains principally because credit and debit card transactions are highly insecure. With Apple Pay those uncertainties go away and the time required to make and process a payment gets cut dramatically.
All good things. But why is that going to have a global impact? In economics, the oldest of equations or (tautologies really) is that the price level times the number of transactions in any period equals the money supply times the number of times that money supply turns over - i.e the velocity of money. Going back to the invention of a money based economy, the introduction of more efficient ways to exchange money (literally to hand it over) has lead to rapid increases in productivity and wealth. Two great examples are the creation of paper money and credit cards. Both made it easier, more convenient and more secure to pay. Wealth bloomed as money turned over more quickly.
In 2008, the world economy went into a tail spin-the Great Recession. In the run up to the financial crisis, the Fed was cutting the growth of the money supply from around 3.0% to zero, while the velocity of money-the number of times per year consumers spent a dollar-was increasing from around eight and three quarter times to almost ten times. In the period before the crisis, the increasing velocity of money suggests consumer over confidence and speculation, which undermined feeble Fed attempts to restrain the economy. After the crisis began, the Fed reversed course and increased the money supply at ever faster rates hoping to stimulate the economy, but the velocity of money fell-from a turnover of nine times per year to around six and a half times. The economic bounce that the Fed expected did not materialize -at least to the extent the Fed hoped for, because the increase in money landed on a decreasing velocity of money. Here's a comparison of the velocity of money with the growth rates of GDP and Money Supply (M1-demand deposits plus cash in circulation).
So, tell me what is the big connection between Apple Pay and the velocity of money? By making payments more secure and speeding them up, Apple Pay will have a huge positive benefit on the velocity of money and therefore on GDP as a whole. In economist language, it means an increase in the money side of the economy and has the same inflationary effect as an increase in M1. Arguably, a similar increase in velocity in the mid 2000's resulted from an explosive rise in internet purchases. The impact of Apple Pay will could be even more dramatic, as it will speed up and make more secure transactions from all iPhone (and soon Apple Watch) owners. It won't happen all at once, it will require the adoption of iPhone 6 and later phones. No doubt, Google and Amazon will figure out how to get on board with the new standard (because that is what it is) that the banks and Apple have worked out, so the leadership created by Apple Pay will lead to faster, more secure transactions throughout the economy and the world as a whole. I don't have the statistical tools to predict how much of an increase in the velocity of money will result from the introduction of Apple Pay but it will be substantial and last far into the future. So yes, pretty cool.