Nothing brings money to top of mind like tax season — and tax refunds and stimulus payments, doled out in the wake of a pandemic known as the coronavirus.
The trillions of dollars in stimulus funding and tax refunds being extended to families, individuals and businesses is coming — but slowly.
Very slowly.
The first waves of $1,200 (for individuals) or $2,400 (for couples) and $500 checks (per child), for taxpayers, started hitting bank accounts earlier in the month.
But it will take weeks for all monies to get to everyone, a timeframe that will likely be pushed as paper checks get sent through the mail to the millions of recipients who don’t have direct deposit set up with the IRS. As the Federal Reserve reported last week, that timeframe could even become months due to the demands of processing a reported 5 million checks a week.
The check, then, is in the proverbial mail, less than optimally, for people who need access to funds right now.
Tax refunds? A significant percentage are being put on hold as the IRS grapples with tackling stimulus payments first. The IRS is also contending with inter-departmental communications and challenges of having everyone work from home.
In an interview with Karen Webster, Mike Cagney, CEO and co-founder of Figure Technologies, said the inefficiencies underscore the challenges of using creaky payments infrastructure, infrastructure for which “legacy” might be too kind a description, even by the government itself in an age where macro-economic crises are hitting with alarming breadth and frequency and payments are largely done online. The conversation was couched in the context of the financial services and payments infrastructure vulnerabilities that have surfaced as a result of coronavirus-related pressure points.
Cagney said that, for this reason, the stage may be set for an overhaul of the government’s payments status quo, quickened by innovation, and, particularly, by blockchain. It’s a heavy lift, but one that must be addressed sooner rather than later.
“Everything that’s happening could happen to anybody,” Cagney told Webster about the challenges wrought by the pandemic. “But for better or worse, the stimulus is going to be the catalyst to force that conversation to the forefront of things.”
The Digital Dollar
That conversation, Cagney noted, starts with the notion of the “digital dollarization” of payments, part of a larger infrastructure change that is he said is today more than just a passing topic of conversation in Washington.
“It’s something we’re very much committed to and trying to make headway on,” he said.
But the embrace of the digital dollar, he cautioned, likely will not be done through the path envisioned by some lawmakers, in an on-again-off-again push that has been a feature of recent stimulus bills.
Under those proposals, consumer bank accounts would be established at the Federal Reserve, enabling digital dollars to be issued and received.
“It’s not realistic to manage 20 million retail bank accounts” at the Fed, contended Cagney, especially with the infrastructure needed to support robust know-your-customer (KYC) and anti-money laundering (AML) activities. “That’s a nightmare waiting to happen with the amount of fraud that could occur there.”
Issuing digital dollars, Cagney said, means having an account at the Fed or another bank that holds that fiat, and a blockchain ledger for every individual, along with the right Bank Secrecy Act (BSA) and AML infrastructure in place.
Needed on top of that infrastructure, he said, is a fiat rail off that chain (ACH, NFC or application performance monitoring) that settles into the ledger or single account.
“This [approach] doesn’t put the Fed out of its comfort zone,” he said, “and this is right in the middle of what the Fed does.”
Among the advantages of a blockchain ledger, he added, is the fact that parties in a transaction do not have to pay an interchange fee. Transactions can be done through quick response (QR) codes or NFC-enabled transactions, with parties providing incentives to consumers to get them to use those rails.
Cagney called blockchain and digital dollars a “flip of the paradigm” that will eventually be overcome — despite nearly all of the consumer-facing retail payments schemes that have tried to build new rails that sidestep traditional card rails as a way to save fees and have largely failed. Consumers like their cards, their rewards and their ubiquitous acceptance.
Yet Cagney’s view is that merchants using this blockchain-underpinned system will have the money to encourage consumers to switch. Getting a few key “marquee” clients with large customer bases on board who interact within those ecosystems, he said, will be enough to get the flywheel going and build critical mass.
Even though, admittedly, he said, we’re a long way from that.
A more immediate use case that could also provide additional tailwinds, Cagney explained, is using blockchain rails and digital dollars to distribute food stamps, for example. That would go a long way toward eliminating a black market that currently exists for food stamps that are used to buy things like tobacco and alcohol.
What Lies Ahead
Cagney also pointed to the mortgage market as a microcosm of inefficiency inherent in the financial markets — a subset that can indeed be improved and streamlined by digital dollars and by blockchain.
He said that the challenge that the mortgage industry is seeing is that “you have no idea if the mortgages that you bought, whether those people are paying or not.”
Agencies including Fannie Mae and Freddie Mac sell what is known as a “55-day security,” which means that nearly two months after the mortgage was to be paid, investors get their cash.
“This introduces a huge amount of uncertainty,” he said.
Other markets, such as the prime jumbo mortgage market, have completely shut down (with disproportionate impact on U.S. coastal markets where such mortgages are rooted). That’s because banks are uncertain how to price those loans, where it takes 30 days to see cash arrive from a borrower payment, and secondary markets have dried up.
It all translates into a lack of transparency and price discovery, he said, not to mention a lack of liquidity. The ripple effect is that people are not able to tap cash that might be tied up in their homes through, say, home equity lines of credit.
“The idea where we are not at a ‘one day security’ where I have real-time visibility is crazy,” he told Webster.
Part of the problem stems from work left unfinished in the wake of the Great Recession, where financial services players had committed to improve transparency and timeliness of data, but a rebound in the economy had short-circuited those endeavors.
“The idea that we would go through this once a decade was never on anyone’s minds,” said Cagney.
But first things first. There are fires burning that need to be doused. This time is different, as measured in the magnitude of the financial meltdown confronting us. The financial markets, he said, tend to have a “reciprocal effect” on the real macro-economy, creating a negative feedback loop that can conceivably play out for quite some time.
Looking at the most immediate challenges, and with a nod toward the mortgage meltdown, Cagney said things are about to get really ugly.
We’ve never gone through an economic contraction like this, he noted, especially one that has been self-imposed via lockdowns and social distancing.
Cagney warned that there’s no way to flip a switch and get back to normal, not while the unemployment filings continue to cascade across all industries. On the agency side of the mortgage industry, as many as 5 percent to 10 percent of mortgage holders are currently in forbearance or requesting forbearance, he said.
That’s a bigger hit than had been seen in the Great Recession. And it’s anybody’s guess what comes next. But if there is anything for certain, it’s that the status quo will likely give way.
As Cagney told Webster: “Unfortunately, everything we were taught in macroeconomics 20 years ago proved to be wrong 10 years ago. And we can’t rely on it now.”
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