Submission to Senate Committee on Small Business Finance

Inquiry into Access of Small Business to Finance


The structure of the financial system means that large business and governments have easier access to finance than small business.  Finance for small business is costly and difficult to obtain. 

Finance costs can be substantially reduced by reducing the cost of credit and making it more accessible to all businesses both big and small. The cost of credit can divided into two parts. There is the risk that the credit will be dishonoured and there is the cost of money itself.

Most Australian dollars are created as a result of banks creating interest bearing loans secured against existing assets.  Most interest bearing loans are issued by the commercial banks. The Reserve Bank also makes interest bearing loans to banks but this is a small percentage of the loans, and hence money, on issue. Because money is created through interest bearing loans this means that there is a fixed cost of providing money that is in addition to the costs associated with the use of the money. The Reserve Bank also creates notes and coins. These attract no interest. Because notes and coins attract no interest the cost of payments using them is lower than the cost of payments using electronic money. Removing interest from electronic money used for payments will reduce the cost of doing business – particularly for small business.

The reason the financial system generates money through loans backed by existing assets is to ensure that loans get repaid. That is, if the loan is not repaid then the issuing bank can seize the asset and sell it and so repay the loan. 

However, money can be created without monetizing existing assets. We can create interest free loans and ensure that the money gets repaid by putting conditions on the use of the money.  With modern technology we can ensure that recipients of loan money with conditions, automatically comply with the conditions on the use of the money.

We can use interest free loans judiciously to remove the current disadvantages suffered by small business. These loans will not alter the existing financial system which will continue to provide financial services without interruptions.

Exchange of Value

If the money used to exchange value is NEVER loaned then there is NO risk to the money. Because it is not loaned then it earns no interest. We can create interest free money with the provision that this money only ever moves into other interest free trading accounts.

If interest free money for trading is introduced into the financial system then it can eliminate interest costs on money for trading for small businesses including farmers.  It does NOT eliminate credit fees, which may be in the form of interest on the credit, but it eliminates interest on money used for trading.  It is the electronic equivalent of cash and will remove the need for most short term overdrafts.   

The system works by the credit risk of trades being taken by suppliers rather than banks through overdrafts. Any business that now offers credit to its customers does this today. Any small business that does not get paid immediately by governments and large organisations does this today. With interest free money that can never earn interest the supplier can use their own credit to finance purchases from their suppliers. Large businesses, and governments, typically delay payments while insisting on rapid payments from small business and individuals.  Interest free credit levels the playing field.

If a customer does not pay a supplier the supplier has to take a loss on the bad loan – just as they do today. The difference is that the bank has not had to replace any money. The interest free money that was used and passed between participating entities is still in the system and so does not have to be replaced by the bank. If a customer does not pay a supplier in effect the debt has passed to the supplier and the supplier has used some of their credit without compensation. Suppliers will be careful with issuing credit and will only issue credit to those who are likely to pay.

Payments systems that operate along these lines are sometimes called mutual credit systems or Peer to Peer financing. The Swiss WIR business network has operated this way since 1934. The network has 60,000 Swiss businesses.

A variation on this system that takes advantage of modern communications and computing technology could be easily set up in Australia. The following outlines one possible way it might be implemented.

Any bank, or all banks, that wish to participate can join the system.  Businesses and consumers signup to participate in the system. If we assume the fractional reserve for a bank is 10% then the borrower deposits 10% of the credit they need in an interest free account. Initially there will be a limit on the amount of credit that any person or entity can create. Let us assume that it is $5000 for individuals and $100,000 for small business. Governments will lead the way by agreeing to accept payments for taxes and other fees and charges with money from these interest free accounts.

The limit on the total amount of credit available to any borrower is determined by the willingness of other parties to offer credit – not by the availability of money.  Suppliers will not offer credit if the buyer is too heavily in debt and so suppliers will rarely increase the money supply to accommodate bad risk buyers. 

This credit money can only be used be used for the transfer of value between participating businesses. The money cannot be lent nor can it earn interest. Because the loan does not earn interest it has a value of zero on the books of the bank and it can be transferred between bank accounts without affecting the books of the bank.

Some businesses will accumulate more interest free money than they need for trading with other parties. They can sell this money back to people who need credit. Because a business has to deposit money to get credit and because credit will dry up if a business has too many loans it will be more attractive for businesses to purchase excess credit money from other businesses than it is to create more credit money.

The net effect of this approach will be that money used for credit between participating businesses will have no interest charges.  Credit itself may have an interest charge but that is a matter between the business offering credit and the business borrowing.

Banks still offer a service of overdrafts and they can assist businesses assess the credit worthiness of other potential borrowers and they will charge transaction fees on the movement of money. Banks may find the new system more profitable because they do not have to assess the credit worthiness of each business nor do they take a risk on credit.

Interest free credit is an alternative to credit and debit cards for individuals. 

The system is voluntary and does not need any new legislation or new initiatives. It just needs a bank to start offering the service.

Equity Investment

Conceptually equity investment is the same as exchange of value but on a longer time scale. Here, instead of goods being traded, ownership of assets is traded. The current financial system creates money through giving credit by exchanging part ownership of existing assets.  This works well for existing assets as the ability of the assets to generate income enables the borrower to fund the credit.

However, credit is generally not available to build future assets. This means that to build new assets money has to be obtained from savings or from loans on existing assets. This increases the financial cost to build new assets as the builder of the new asset has to pay the cost of money plus the cost of the risk of the new asset failing to generate income. It  means that relatively little money is available for expansion of assets compared to the amount of money available to purchase existing assets because there is no loans mechanism available to fund new assets. 

The lack of money to build new assets stifles productivity gains because productivity improvements come from investments.  The lack of money is particularly acute for small business as they do not have the asset base on which to generate money for investment through the creation of loans.

The problem of funding new investment can be overcome by the community (government) providing no interest money for equity investment in NEW assets through the issuing of no interest credit to construct new assets. The money from these loans must be invested in new assets. That is, the money purchases ownership or gives equity in the new assets. How much ownership is transferred and the value of that ownership is a matter between the buyer and the seller.

The main problems with this scheme is that there has to be a limit on how many interest free loans are created and who gets the right to take out interest free loans for investment purposes.

This is an area for government policy.  The approach can be used to direct investment in areas of community need where private investment through traditional equity markets is not providing the funds needed to build new productive assets. Small business investment is one area where interest free loans can be given for new investments and the Federal Government is already doing this through the Department of Innovation, Industry,  Science and Research with its commercialisation loans for small business. Unfortunately there is little money available and the administration overheads in running this program are very high – but the principle has been established.

This approach could be broaden to the wider community through giving the right to take out interest free loans to all the population.  The money from these loans is required to be invested in areas of need in the community. Such an area is investment in new renewable energy assets or in ways to save energy or to reduce the level of greenhouse gas in the atmosphere. With interest free loans almost all renewable energy investments will be immediately profitable because most of the costs of investment in renewables are finance costs of interest and repayments. Repayments would still be made but there would be no interest costs.

The approach could be made even more effective if the right to loans was given to the population in inverse proportion to their consumption of mains electricity. This would provide positive feedback where the less energy consumed the more investment is made in ways to save energy.

This approach would be particularly important to small business because small business is better able to take advantage of new technologies and to give higher returns to investors. 

After the approach is shown to work by reducing greenhouse gas emissions other areas that desperately need investment, such as housing for the homeless, investments in conserving water, public transport and education could all be addressed through the same mechanism.  If the right to equity loans is distributed widely throughout the community then small business will be able to compete on an equal footing to large business.

Interest Free Equity Loans requires a government to back the system. The reason is that the decision on where to invest the interest free loans and who is to get the right to such loans is a political decision rather than an economic decision. 

Banks Role in Money Creation

Commercial Banks today create most of the money in circulation in the economy. Almost all the money is created through monetizing existing assets with loans secured against property. When the loans are repaid then the amount of money in circulation reduces in the same way it was created.

If interest free money through selected interest free loans is introduced into the system then the incentive for banks to monetize existing assets to increase the money supply will be reduced. That is, it will become more profitable for banks to lend money they have on deposit and not increase the money supply with any loans. The reason it is more profitable is that banks will take no risk on the money and will only have to ensure that they lend at a higher interest rate than they pay on deposits. The risk of the loans going bad will be taken by the depositors, who may still use the banks to assess the risks, but banks will be paid for those services and not for taking risks themselves.

Banks will also earn fees from the distribution of money generated by no interest loans but again with no risk for the banks on the failure of the equity loans to earn a profit. That risk is taken by the borrowers and for the borrowers it is a lost opportunity cost rather than a direct financial cost.

Government Revenues and Government Infrastructure

Many governments pay a large proportion of their taxes to cover interest payments on infrastructure investments. If governments fund infrastructure with interest free loans they will slowly be relieved of the burden of interest payments. Governments may even choose to pay off debt by issuing their own interest free loans to purchase debt. Interest free loans will not reduce government income but it will make a society that decides to adopt this approach more competitive and no longer reliant on external capital to fund sound investments in its own community. That is it will reduce the need for the Australian economy to borrow money from overseas.

However, it is best if governments themselves do not get interest free loans because there will always be the temptation not to invest in infrastructure but to divert the money to some other purpose.  A better way is to give the interest free loans to the population and let the population invest the money. 

As an example, suppose a government wants to fund the construction of a large water storage dam to increase the availability of water to a community. The government could give interest free loans to its citizens who in turn have to invest the money in the dam.  Rather than simply give all citizens the same amount each citizen could be given an amount that is inversely proportion to the person’s mains water consumption.  This would encourage water conservation and the process could be continued over many years to fund other water saving investments. This process would soon eliminate the need for water restrictions as individuals changed their behaviour to earn water loans.

Costs and Social Outcomes

These systems are inexpensive to implement and could be operational within a few months once the political decision has been made to implement them. The running costs would be less than the cost of existing systems because risk is dispersed and most processes will be automated. 

Costs are minimised because the existing monetary system remains intact and there are no changes to the existing system. This means there is no disruption to commerce.

As well as benefiting small business these systems can be constructed to benefit all individuals in our society. This contrasts with the current financial system which gives great advantage to wealthy people and large business, at the expense of individuals and small business. This comes about because the wealthy and large business have much greater access to loans than the rest of the society.

It does not disadvantage the wealthy or big business but rather it enables everyone to share more equally in new wealth and in the profits from day to day trading.

Submission to Senate Enquiry to Healthcare Identifiers Bill 2010

“The purpose of the Healthcare Identifiers Bill 2010 (‘the Bill’) is to implement a national system for consistently identifying consumers and healthcare providers and to set out clear purposes for which healthcare identifiers can be used. ”

later it states

“Using an individual healthcare identifier will provide a way for healthcare providers to more accurately match the right records to the person they are treating and improve accuracy when communicating information with other healthcare providers.”

The Bill assumes that the individual healthcare identifier is a number.

The Health Care Identifier Bill details how an identifier number will be used and the restrictions and use of the ID number. The introduction of a Health ID number is seen as a necessary precondition to the development of a comprehensive ehealth information system.

An alternative healthcare identifier

Modern computing and communications technologies do NOT require an identifier number to “consistently identify consumers and healthcare providers”. An alternative is an electronic health identifier for both consumers and providers. The electronic health identifier is an electronic record of information about a person that uniquely identifies them. In Australia there already exists, in electronic form, many records about each person. An electronic health identifier provides links to this information and it is the combination of links that provides the uniqueness that enables the person to be identified – without the need for yet another identifier number. An outline of an existing implementation of an electronic identifier is given later in this submission. Electronic identifiers, as described in this document, have been in use in Australia for two years and are starting to gain acceptance in the financial sector as the preferred way for organisations to identify people so that organisations comply with Anti Money Laundering and Counter Terrorism Financing legislation. Demonstrations of the use and utility of electronic identifiers can be provided.

A health care identifier NUMBER is a VERY expensive approach to matching records across databases because it requires all existing and future health care record systems to include space for a health care identifier number. This means all existing health care record systems have to be changed. It requires this legislation and the ongoing compliance costs to ensure that the id number is not misused.

An electronic health identifier requires NO CHANGE to the structure of existing health record systems because it links to, not changes, existing records. Because there is no new identifier number there are NO ADDITIONAL compliance costs IF the electronic health identifier is controlled by the individual being identified.

Because of the need to change existing systems the introduction of an identifier number based system will be slow. An identifier number used across many databases gives rise to privacy issues because the health care id number will enable the matching of health care records without the knowledge or approval of the person involved.

By contrast, an electronic health identifier, is inexpensive to implement because construction can be directed by the individual themselves. It keeps silos of information separate and hence there is no increase in compliance costs.

An electronic health identifier can be implemented immediately, the matching of records can commence tomorrow and there is no need for legislation to enable this to happen. The cost of introducing an electronic health identifier will be many times cheaper than the cost of a introducing a health care identifier number. An electronic health identifier is extendible in ways that will give greater utility for less cost to the Health industry. The concept is easily transferrable to other Australian and State government identification projects with resulting savings.

For these reasons it is recommended that a health care identifier NUMBER be abandoned and replaced with an electronic healthcare identifier.

If it is isn’t abandoned then it is recommended that an electronic health identifier, as outlined below, be established in parallel with the introduction of a health care identifier number. The Bill, as it stands, will impede the introduction of an electronic health identifier because it will hinder electronic access by individuals to their own health care records.

If the Bill is not abandoned it should include the right of an individual to electronically access any factual personal information held electronically about them by any registered health care provider. Individuals already have this right as part of privacy principle 6 but for administrative reasons it will be necessary to explicitly mention the right to electronic access. If it is not explicitly included, the bureaucracy is unlikely to facilitate electronic access by an individual to their own data. This is currently the case with many government departments and agencies. The Bill, as it stands, will put yet another barrier in the way of individuals accessing their own data electronically.

The electronic health identifier technology can be used by other departments such as Education who could implement an electronic education identifier instead of student id number, the Passport Office who could use an electronic passport identifier as a way of introducing electronic passports, Social Security as a way of solving their identification problems with which they are currently wrestling, Taxation with a taxation electronic identifier to simplify the collection of financial dealings and remove the need for organisations like banks to store the taxation id number, and help the Defence force introduce a more secure identification system for its members. Electronic identifiers will reduce the cost of identification systems many times over current plans which are mainly based around the idea of using NUMBERS to identify people ACROSS databases.

An electronic identifier

An electronic identifier is a computer record of links to other records about a person held in other databases. The links in an electronic identifier are often existing identification numbers. No personal information about a person need be held in the electronic identifier. The electronic identifier record is controlled by a computer program. This computer program is part of the electronic identifier and makes it smart. Access to this computer program and to the links to other databases is RESTRICTED to the individual concerned and to anyone the individual authorises.

The links in an electronic identifier are created by an individual asserting that other organisations hold information about them then proving the links through the use of “secrets”. Secrets are extra pieces of information held by an organisation about a person that other people are unlikely to know. Examples could be the balance of a bank account on a particular day, or the last date and country where the person’s passport was used, or the full set of benefits a person is currently receiving from Social Security, or the serial number of the weapon issued to a Defence employee.

An electronic identifier can ask other individuals if they agree that they know the person represented by the electronic identifier. This agreement might be the identification of a photograph or via some other information passed between individuals – such as a verbal request using a non electronic channel.

The more links to organisations and other individuals an electronic identifier establishes the more confidence there is that the electronic identifier represents a particular individual. As electronic identifiers will be used in day to day transactions the confidence in an electronic identifier will grow. This contrasts to the use of an id number. The more an id number is used the more likely it is to be stolen and compromised.

Access to the electronic identifier is achieved through some form of biometric, secret or physical device that is under the control of the individual. Common forms of access are passwords, pins, access to telephones, access to emails, possession of smart cards, voice prints, photographs and fingerprints. The level of security of access can be established by multiplying the different access methods used by the individual. Using two access methods is called two factor authentication which is rapidly becoming standard in banking. However, it becomes easy to implement multi-factor authentication with the assistance of a smart electronic identifier. Using a telephone, analysing the voice characteristics and the semantics of what is being spoken can be handled by an electronic identifier, and give three factor identification without entering any codes or passwords. This will help prevent identity theft.

Identity theft happens incrementally and is typically done with an id number. A person steals credit card information and is able to become the person who owns the credit card. This is difficult to do with an electronic identifier because the electronic identifier program has knowledge about the person that the thief is unlikely to know. It knows how they speak, their approximate physical location, and ways they typically transact. The electronic identifier program can alert the person if their pattern of behaviour changes in significant ways. A common example in today’s world is the use of a credit card in several different countries at nearly the same time. This prompts most credit card companies to alert the individual who owns the card.

Much of the functionality envisaged in ehealth can be embedded inside electronic identifiers. For example, because the electronic health identifier can get access to information held about the individual across several databases, it can check for drug incompatibilities at the point of prescription rather than the point of dispensation. This approach to implementation is less expensive than traditional methods and is easily scalable and adaptable. This will result in even more savings for the ehealth initiative. Another example is the payment for ehealth services and the checking for benefits. At the point of delivery bills can be paid, rebates given, taxation records updated, and benefits all checked. This ability to communicate across many different areas instantly is the easiest way to reduce administrative costs.

It is difficult to estimate the level of savings that can be obtained with an electronic identifier instead of id number but electronic identifiers will mean the implementation of ehealth will be a small percentage of the cost of implementing using a Health ID number. The subsequent benefits arising from ehealth are likely to be increased rather than decreased.

An overview of the idea, and planned developments, of an existing electronic identifier can be viewed on YouTube

Part 1 –
Part 2 –