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Can the digitalization of money provide more innovative monetary tools to governments?

Due to the Covid crisis, we have arrived in a major global recession. Not only were there the enormous impacts on the economy of the (semi) lock-downs, but consumption dropped also enormously as consumers are worried of getting infected while shopping, don’t like the shopping experience due to the different sanitary measures or they prefer to increase their safety cushion by saving more money, as they fear for the future (e.g. fear of increasing taxes or losing their jobs).
While such a postponement of consumer spending makes perfect sense at a micro-scale (at the level of an individual), at a macro-scale this is the ideal ingredient for accelerating and worsening the economic crisis.

Governments are well aware of this phenomenon and do everything in their power to boost the short-term consumption, via:

  • All kind of subsidies and fiscal stimuli helping to promote investments (e.g. subsidies for house renovations or business investments)

  • All kind of measures to avoid liquidity issues for (small and medium-sized) businesses and individuals, like special (government-backed) loans and programs of loan capital repayment holidays

  • Support measures to the most impacted sectors, like lowering taxes (e.g. lowering VAT for the horeca), simplifying the rules for using technical unemployment or monetary compensations for the losses incurred during the period(s), when forced to be closed

  • All kind of pre-paid vouchers offered by different levels of governments (handed out by the government to certain citizens or made fiscally interesting for employers to offer to their employees), such as the consumption voucher in Belgium, city vouchers, tourism vouchers…​

  • Huge government deficits will be accepted, allowing governments to spend more money on investments (like infrastructure works), allowing to compensate for the lower spending of consumers and businesses

  • Interest rates are kept very low (lower than inflation), meaning that money not consumed now or not invested in the real economy (via equity) will lose its value. This forces people to activate their money now.

  • …​

In all countries in the world, we see the above recipes promoted by economists and implemented in different flavors.
Of course given the short time to respond to this crisis, it is logical that recipes which have proven their success in the past, are reused.

Nonetheless we should also use this crisis to reflect if the new paradigm of digital money (i.e. the Covid crisis has made many counties nearly cashless in a very short period) cannot provide new (and better) government-backed techniques for boosting consumption.

In particular I see 2 techniques, which governments could explore thanks to the digitalization of payments and the phenomenon of Open Banking:

  • Cash backs: provide automatic cash backs paid by the government, when payments are identified, which are the result of a consumption at a merchant the government wants to stimulate (e.g. ecological, local shopping…​)

  • Rule-based money: governments could give more incentives to companies, when they pay out part of their salaries on rule-based accounts. This rule-based money would follow a number of rules, i.e. the money would be split up in buckets each having a rule by when and at which shop(s) or for which products it should be consumed.
    The bank could then automatically identify if a payment transaction (still paid with the standard current account) meets the rules of one of these buckets and if so automatically credit (reimburse) the current account with money of the particular bucket on this rule-based account. This means the customer can continue to pay with all his existing payment methods, but banks automatically repay from the rule-based account. As such these configurable rule-based accounts can force a specific spending pattern.
    In a first phase, this would only be based on the merchant identifier, but thanks to an Open Retail initiative, it could become possible for the bank to know more details of each payment transaction, allowing a reimbursement at product level.
    Furthermore governments can push for a faster consumption, as each bucket can also have an end date. After this end date, the money could expire (e.g. going back to the government as a sort of tax) or the remaining amount could be converted to the current account (meaning money without any restrictions) after a penalty of X% has been deducted (which could also be a sort of tax to the government).

This mechanism would be a very flexible way to push for short-term well-targeted consumption and could provide a new tool to fight (upcoming) economic recessions.

Check out all my blogs on https://bankloch.blogspot.com/

 

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Joris Lochy

Joris Lochy

Product Manager at Intix | Co-founder

Capilever

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05 Apr 2017

Location

Brussels

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This post is from a series of posts in the group:

Payments strategies 2015-2020-2030

Payments systems visions, strategies, trends, pilots, forecasting, and planning for the short-, medium-, and far-term.


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