Is it time governments adopted payment technology that allows for instant payout to citizens to support economic activity more efficiently?
Today, people expect to be able to access resources and services quickly and effectively. The public sector is no different, instant access to funds can be essential to ensure the safe and speedy financial recovery of individuals, particularly in a crisis.
Some governments have already acted. The Australian government, for instance, developed a new real-time payments platform some years ago that enables its citizen to get faster access to government payments. In a crisis, such as flooding or forest fires, citizens can receive financial assistance in a matter of seconds. Such immediate action is now a key part of the country’s emergency response.
In the US, the resilience of the country’s payment infrastructure, FedNow Service, was put to the test as billions of dollars in COVID emergency relief payments were issued nationwide. Emergency relief payments were particularly important for households and small businesses with cash flow constraints.
When a crisis occurs, it’s important to have a well-functioning government to citizen payment system in place. However, the benefits reach far beyond this.
Governments that provide access to digital solutions and payments bring inclusion to society, by supporting the unbanked, often the poorest demographic in a county. This enables payments to be made, for instance, into accounts or pre-paid cards. In Pakistan, for example, the government has recently announced the launch of Raast, an instant digital payment system. This will be used for government payments, including pensions as well as national financial support programs.
Even if financial inclusion is not a prime goal, by switching from cash to electronic government payments, support for national retail payment systems becomes inherent. Such a structural impact will undoubtedly lead to a stronger case for improved access and usage of transaction accounts.
The move to cashless societies and the growing interest in Central Bank Digital Currencies (CBDS) – a digital form of cash issued by a central bank and backed by country reserves –should also be an important consideration.
Many governments are investigating the possibility of creating their own digital currencies, such as the Swedish e-krona. CBDC’s would enable citizens and indeed businesses to have accounts linked directly to central banks from which government can make direct payments. Again, this would offer inclusivity to the unbanked. The same accounts could be linked to commercial banks to ensure governments are not competing with the private sector.
No matter what happens, the rise of virtual currencies has meant that for many governments it has become a question of when rather than if to launch a CBDC. With that in mind, any new payment infrastructure development should support them. Extending the use of central bank money, i.e., CBDCs could allow central banks to meet future payment requirements and enhance cross-border payments, while promoting new innovations.
By looking at user behaviour we can see that typically, somebody who receives government payments withdraws the full amount once it’s deposited. One reason for this is the nature of the payment products used. These tend to be basic single payment services with limited functionality, in other words, they are not user-centric. However, research by the World Bank found that when able to choose a service provider, a recipient of government payments is far more likely to keep a certain amount of funds in their accounts. Furthermore, they are likely to remain a customer of the service provider and test different digital features connected to the account.
To that end, for the good of the market, it’s vital that a single closed-loop payment scheme is not able to dominate a market. Markets require an open, interoperable national payment infrastructure that can be leveraged by any market participant – banks, payment service providers and businesses. An open infrastructure like this can ensure citizens have the opportunity to choose their preferred way to receive payments.
The way in which government payment programs impact and influence public welfare should not be underestimated. From supporting the unbanked to granting instant access in a crisis to changing the way citizens interact with government payments, they all make an enormous difference to society.
At the same time, governments also have a role to play in stimulating the investments being made in instant payment infrastructures, which will ultimately also have a positive impact on citizens.
At TietoEVRY we understand what is required to build reliable and robust payment infrastructures that serve the needs of a nation. Developing a new payment scheme is complex but when done correctly, offers many benefits. Our experts can help you design the right system for your needs based on benchmarks from around the world.
From strategic plans to launch and maintenance, we make sure you and your citizens benefit from instant payments, long-term. Reach out to us today to find out more.
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