A couple of weeks ago in London I was on a panel at a banker’s conference. While representing bitcoin, others such as Paypal, bank of Tokyo-Mitsubishi UFJ, and BNP Paribas also spoke. The subject of discussion being the contenders for electronic and mobile payments.
Only myself and Mike Jones from PayPal didn’t have a tie. One member of the audience didn’t wear a black suite. He had a grey one. All that was missing were bowler caps and umbrellas. This conservatism was embodied in the speaker for BNP Paribas. His entire argument could be summarized thusly: banks have always been here, people will always need them, thank you for your time.
I’ve just returned from speaking at a payment processing conference in Riga, Latvia. Another speaker (this time from an IT company that sells to banks) was talking about how to reduce credit card fraud using 3D-Secure. In summary, the industry wants credit card users to enter more details and use stronger passwords when making payments with cards. The consequences of this being I must enter my details (address, name, card no., security code etc.) two or more times when buying something like train tickets. This is an understandable solution to remedy the limitation of credit cards and fight chargebacks. However, instead of focusing on the symptoms and adding friction to payments, the only way to solve this problem reasonably seems to be a restructuring of the traditional payment system.
Over these last few weeks what I have witnessed is an entire industry complacent in the conviction that they are indispensable to society. Unconcerned with what people actually do or want because “hey, we’re the banks.” Such is their confidence, that they envision a future where every means of payment, card or other electronic forms all go through them, the cashless society, the banker’s wet dream, the middle men of the future.
Change is coming, and the cosy position that banks as institutions have enjoyed for so long is not secure, finding themselves tomorrow’s dinosaurs; huge, powerful, unwieldy, and eventually extinct. Overtaken by hordes of smaller creatures, nimbler and better able to adapt.
Sometime in 1995 the Internet opened for business and grew to about 8% of all consumer spending, estimated to be worth $279 billion by 2015 in the US alone.
The credit card became the default method of payment for this massive market, not because it was the best option, but the only option. For the last 15 years, if you wanted to buy something online, you eiher used credit cards, or you didn’t buy.
In their effort to stamp out card fraud (between 10-15% of all transactions) payment processors get consumers to give up their name, card number, security code, address, expiry date, and date of birth to every site they buy from (is it any wonder there is so much fraud) Their latest innovation is to require users to enter this information two or more times. Worse than useless, it’s actively harmful, costing users time, risking identity and losing money.
What about merchants? They pay for fraud twice over when it happens, losing both goods and payment after the card company does a chargeback. Considerable expense and time is needed to open a merchant account, when finally done processing fees that range from 3 to over 30%, depending on the goods bought and a minimum fee for each transaction. These added costs are all passed on to the consumer with higher prices. Regardless of what is advertised, no one actually has free fraud protection on their credit card. In fact, a hidden percentage of every single transaction that the merchant must include in the final price directly pays for that service.
The solution to all this is not as the banks hope for, the move to a cashless society, but back to cash which has none of these problems. Only cash cannot be spent over the internet. At least not till today. Now we have a kind of cash that works on the internet and between all electronic devices.
This new digital cash is Bitcoin, a massive evolutionary step forward, it takes two related but separate things; banking and cash, and combines the best of both. The resulting entity provides worldwide, fast payment processing and transfers, the ability to do these things without giving out personal information (you don’t normally give your supermarket your address each time you shop do you), involving no paperwork, eliminating the risk of fraud for merchants, and doing it at incredibly low cost.
While banks and traditional payment processors need offices, branches, ATM’s, security, armies of staff, and massive as well as complex I.T. systems, bitcoin does not. There is only the bitcoin network, a cluster of powerful computers spread across the world (the most powerful of it’s type) tended by a select body of tech priests, day and night processing transactions across the globe.
For the consumer:
- Convenient payment – the only question are: pay to whom? and how much
- Lower cost – lower merchant solutions mean lower prices
- More privacy
- It’s your money- not a number in the bank
For the merchant:
- No payment fraud
- Tiny processing fees right now less than 0.01%
- More sales – no 7steps to payment tango.
- No paper work, no merchant accounts.
Since the industrial revolution, mechanisation and automation have increased what one person could produce by incredible amounts. One farmer with a tractor can take the place of thousands with horses. One factory can replace the productive output of an entire nation from at the beginning of the 1700′s in textiles.
What this process means is that there is more for everyone, and at less cost. Now even poor are able to afford mobile phones, radio’s and TV’s. Computers that once cost millions, took up entire buildings, with less power than a modern calculator and were only available to governments. Now are available to everyone.
Why not introduce this same process to banking and money? Why pay the cost of teams of people adding numbers, typing numbers on computers, and smiling for you at the counter? Automated banking and digital cash are here, this is the financial revolution.
Of course it’s easy to understand why the bankers don’t seem too threatened. They have seen digital currencies come and go for over ten years now. The ability to zip money affordably across the planet doesn’t change the status quo if the governments restrict the transfer of wealth to a select few. What bitcoin brings that is new is the ability to send payments, person to person, without a central party. In that way it is truly the first digital currency and not just a fiat currency layered in digital space and controlled by a 3rd party.