A new saving and payments system

The interface between you and your bank used to be the branch. Today banks give your computer sufficient access to their computer over the net to let you do it all yourself.

“Reengineering of the interface” is happening everywhere as government agencies from the ABC to the ABS let us search and download their content anytime, anywhere. And in the UK where they’re sufficiently alive to such possibilities to have a “Minister for transformational government”, they’re taking things further.

For instance their National Archives are moving to “provide and enable” - so that your computer gets to mess with their computer. The archives are no longer to be a collection of documents. They’ll be a database of content which users can search, gather, repackage, “repurpose” and republish.

In a similar way we could transform another interface to build a simpler, safer financial architecture for our savings and payments, an architecture capable of keeping your money safe during the worst depression or financial crisis.

You deposit money in the bank because it’s safe (mostly), earns interest and can be paid to anyone in the banking system. But why don’t we deposit money with the Government? After all it’s safer. And the government typically pays money market lenders higher rates than are available from a bank account.

Actually you can still buy a bond from the Reserve Bank. And buying war bonds used to be a patriotic duty and household portfolios often held Board of Works paper.

But it’s pretty marginal now for two reasons. First, governments have had less debt to sell (they’ve been under-investing and running down assets, but that’s another story). And financial innovators have repackaged government paper providing liquidity and convenience in cash management trusts.

But the internet now allows governments to go one better at the blink of a cursor. A modern government could give citizens internet access to bonds and the liquidity of an at-call account somewhere near the overnight cash rate.

The functionality of our system is maintained only by the state’s implicit assurance that fiat money will be kept in sufficiently scarce supply. So it is odd for citizens who must hold that money to be denied a way of storing it with complete security at the going interest rate.

If we had such a system, we could let account holders pay each other by just logging onto their friendly government website and transferring the funds just as they do with bank accounts now. None of this should be subsidised. But the full cost could be met at be a tiny fraction of current bank margins or the 0.25 per cent commission the RBA charges to sell you a bond to cover the costs of its paper based system (or is it just to avoid competing with the banks?).

In fact most of us already have accounts with the government via the Tax Office. So all we need is a bit of “joined up government” and we’re on our way!

Meanwhile our existing payments system which is a paper based payments system supercharged with modern IT - Dickens on steroids - could continue whirring and whirling away with its 24-hour payment cycles, counterparty risks and high costs.

But the government system would create a competing payments system that was less comprehensive, but simpler, cheaper, faster (how’s instantaneous for fast?) and, on account of that, as safe as money itself.

It would also lower the cost of borrowing for the states, or improve the budget bottom line for the Feds. Right now the Feds keep borrowing $50 billion from the bond market not because they need the money, but to keep the bond market functioning to improve the health and security of the capital market. The money the Feds borrow ends up in the Future fund earning higher returns than the interest on the money.

The same goes for what I’ve proposed, which would likewise improve the health and security of the financial system, further swell the Future Fund and build higher government surpluses over time.

Why hasn’t anyone done this before? Well, it would be seriously unpopular with the custodians of the current monopoly payments system - the banks.

Still, just as banking worked out a bright future for itself the last time this kind of thing happened - as state fiat money displaced bank issued notes as the preferred medium of exchange - it would ultimately move to thriving where it was adding most value.

The share of the economy devoted to financial services has roughly doubled even as unit costs have plummeted since the seventies. So I doubt there’ll be any shortage of productive work for private financiers.