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Thursday, November 1, 2012

Innovative Value Transfer Systems For Government

There is potential to improve government transfer payments through innovative payment systems that make it easier to issue funds, spend the benefit and automatically capture the accounting information. Such a system could be used for government transfer payments for a wide variety of purposes.
Advantages include:-
  • Recipients would use a common method of receiving and spending many different payment types.
  • A recipient would be immediately aware of having received the benefit and the value of the benefit.
  • A controlled market could be created to capture the advantages of market economies while restricting products and services to the types intended.
  • The funds associated with the benefit are not spent until the service provider claims from the government.
  • Transfer payments not consumed by the recipient will automatically evaporate. 

Government Transfer Payments

A transfer payment is made without any exchange of goods or services. Examples of transfer payments include welfare (financial aid), social security and government making subsidies for certain businesses. 

The Henry Tax Review [1]  considered transfer payments and concluded "A coordinated approach should extend to the consideration of housing assistance, access to aged care and transfers that are tied to expenditure on other goods and services. A coordinated approach would support greater equity between transfer recipients, reduce the inherent disincentives to work created by taxes and transfers and underpin a better client experience of the tax and transfer system." The  tax review describes several classes of transfer payments:-
  • family-related payments 
  • child care, housing assistance
  • transfers tied to goods and services
  • aged care
Transfer payments are intended to achieve a social purpose. Those tied most narrowly are where "governments also provide other transfers in the form of concessions or payments that are linked to the purchase, or supply, of a particular good or service"[1] but others including childcare,  housing assistance and some aged care services are also intended for quite narrow purposes. Governments currently employ a variety of methods to ensure payments are directed towards the desired purpose.

Innovative Value Transfer Systems

Innovative value transfer systems have been slow to develop in the information age and many have failed. "While electronic money has been an interesting problem for cryptography .., to date, the use of e-money has been relatively low-scale."  Probably the most widely used  information age payment system, Paypal is grafted on to previously existing card payment networks and provides barely distinguishable services.

Strategic Review of Innovation in the Payments System - RBA

The Australian Reserve Bank has an interest in fostering innovation in Australian payment systems and government transfer payments should be part of that innovation.  The recently completed Strategic Review of Innovation in the Payments System had "the objective of identifying areas in which innovation in the Australian payments system could be fostered through more effective cooperation between stakeholders and regulators."[2]

The review sees "the potential to unlock significant future innovation, resulting in ongoing improvements to the efficiency of the payments system.... the Board intends to be more proactive in setting out strategic objectives for the payments system, that is, its expectations for the services that the payments system should be able to offer in the future." 
The review considers the key attributes of payment systems to be:-
  • Timeliness
  • Accessibility
  • Ease of use
  • Ease of integration with other processes
  • Safety and reliability
As government transfer payments represent an important component of the payment system there is an opportunity to influence the direction of innovation in partnership with commercial partners.

Fungible Value

In standard payment systems value is fungible, meaning it is transferable for any purpose, but many government transfer payments are intended for a particular purpose and it is in this area that innovative payment systems can contribute. An innovative payment system could be used to create a closed economy where a payment can only be made to approved suppliers for intended purposes. Within that closed economy normal trading can occur. This is ideal for government transfers in the form of concessions or payments that are intended for the purchase, or supply, of a particular class of good or service e.g. laptops for school aged children.

An Innovative Example - Bitcoin

Bitcoin is a new payment system that is often though of as libertarian but it has characteristics that could be utilised for government transfer payments. Variants of Bitcoin, known as alt-coins could be used for transfer payments or aspects copied in alternative value transfer mechanisms. Most importantly, Bitcoin has been shown to work, is in active use and has a suite of tools and services under development. A level of granularity in transaction data and payment flows down to individual items or services is achievable and separate alt-coin currencies can be generated for each class of transfer payment. It is at least useful for exploring what is possible and the desirable characteristics of value transfer systems.

Characteristics Of Bitcoin

Simple To Use

The underlying mechanism is invisible to users making it simple to understand and use. It usually requires an internet connection and payment device which can be a PC application,  a web browser app or smart phone app. However, paper based transactions are also possible.

A person is presented with a bill, can use their smart phone camera to read the bill and can authorise the transaction with a key press. In the future it is likely that, using OpenPay, a consumer will be able to spend bitcoins at any merchant that is able to accept Visa or Mastercard.

Preserves Privacy

Because transactions are broadcast to the entire network, they are inherently public. Privacy is maintained through anonymous account numbers.

Simple Accounting

Transaction data is captured as part of the transaction without requiring additional reporting. If the mapping is known, transactions can be traced from account numbers to individuals. In a government transfer system the government issuer would create that mapping.

Others

Bitcoin is an innovative payment system gaining traction but there are many others as described in the Electronic Money Wikipedia article and the RBA's Strategic Review[2] provides a model for real-time retail payment and settlement hubs which includes a list of desirable characteristics.

Current Mechanisms For Transfer Payments

Direct Payments

Most direct payments are not linked to the purchase, or supply, of a particular good or service and work well with current payment systems.

The BasicsCard

The BasicsCard is a stored value EFTPOS card provided by the Department of Human Services that allows purchases for authorised items from authorised merchants.
The merchant enforces the restriction to authorised items and the EFTPOS system can't create an audit trail to verify this restriction. It has attracted some controversy but Jenny Macklin, the Minister for Families, advises "We've had it now operating for a few years; we know that it's helpful. The individual stories are very positive." It's proven there is a desire for government transfer payments to be directed to particular areas but the BasicsCard is limited to the options provided by the existing EFTPOS system and is not suitable for many forms of transfer payment, for example Renewable Energy Certificates. Innovative value transfer technologies can extend the BasicsCard concept.

Tax Benefits

Some transfer payments are claimed through the tax return. This method is cumbersome, creates a delay between incurring the expense and claiming the benefit and puts a substantial administrative burden on claimants. An example is the Schoolkids Bonus formerly known as the Education Tax Refund. It is intended for expenses such as uniforms, books, school excursions, stationery and other costs like music lessons and sports registration fees. Previously, proof of expenditure was required by claimants but to reduce the administrative burden the requirement was removed so that the benefit is only notionally provided for the intended purpose. Innovative value transfer technologies could restore the original concept of directing the payment to the intended purpose and make the benefit available in an attractive form that can be spent rather than received as a refund.

Direct Provision of Goods and Services

Sometimes governments directly provide goods and services when a superior outcome could be achieved by a transfer payment combined with market mechanisms. An excellent example is the laptops for schools program. Some students never got a machine. The machines supplied required tendering and administrative processes that introduced massive delays. There was a transfer from parents to government of the burden of ensuring responsible use and the $1,000 per machine supplied by the federal government proved insufficient to cover the machine and program costs so that in extreme cases parents were asked to contribute more per machine than the cost of a similar machine from a retailer. Use of the existing supply chain with an innovative transfer payment solution would have achieved a better result.

Voucher Systems

Renewable Energy Certificates (RECs) are a tradeable voucher for encouraging investment in green energy initiatives. "Eligible renewable energy sources are entitled to create certificates based on the amount of electricity they produce or displace. These certificates can be created in the REC Registry and sold to buyers."
These vouchers are quite different to payment systems like the BasicsCard but to an innovative value transfer system RECs would appear as just another value type and be traded in the same way a beneficiary trades their laptops for schools benefit. The trading system would automatically perform the function of the REC registry.

References

1. Australia's Future Tax System Review; Chapter 9: The transfer system; Australian Government; May 2010.
2. Strategic Review of Innovation in the Payments System: Conclusions
June 2012; Reserve Bank of Australia

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