Bitcoin: Banking Business Battle for Consumers’ Wallet

Today technology plays a key role in the performance of financial institutions. Financial institutions invest heavily into information technology to improve delivery channels as well as for compliance and risk management purposes. With the advent of Internet and mobile banking we can now access our accounts from home, work and just about anywhere. These new delivery channels reflect the changing needs and preferences of customers, coupled with growing technological innovations. At the same time these new channels have added to the ballooning cost of investments in technology for the banking sector.

According to Capgemini’s “Trends in Retail Banking Channels: Improving Client Service and Operating Costs” global IT spending on retail banking channels remained stagnant in 2009, but was expected to grow to $45.8bn at a compound annual growth rate of 4.2% through 2012. To combat the heavy cost associated with their investments in technology most banks are forced to look for cost saving measures particularly in their back office operations and this has resulted in the further automation. With the cost of investments in technology seeming growing unabated banks are now forced to seek out revenue enhancement measures to drive profitability.

The search by banks for revenue enhancing measures is taking place at the same time that Bitcoin and virtual currencies is building momentum towards more widespread adoption. In this post, I will argue that the momentum in Bitcoin has placed its development and adoption squarely on a trajectory that clashes with efforts by banks to increase their revenue streams.

The fact is banks want to control a great portion of a customer’s entire financial relationship or portfolio. They have invested heavily into costly technology and are now looking for ways to increase the share of consumers’ wallets. Banks are by their nature inefficient creatures as their legacy systems or antiquated systems are designed to collect and process information by product and transaction, and not necessarily by customer. Unlike, insurance companies that collect information on individual consumer so as to segment and price different types of risks, banks have done a poor job at collating customer information. One exception to this is the regulatory demand placed on banks during the post 911-era to collect more information on both corporate clients and individuals for the purposes of combating money laundering and terrorist financing. Even in this latter case, banks have had to either retrofit or discard legacy systems and invest in new technologies that allow for better capturing of clients’ information for the purposes of compliance with anti-money laundering and anti-terrorist financing rules and regulations.

What is the point? Banks are not just inefficient. They are also regarded as poor financial stewards and lambasted for the role in precipitating the 2008-financial crisis, the worst financial crisis since the Great Depression. It is this negative image of the banking sector that is driving innovations such as Bitcoin to challenge the hegemony of the banking and financial systems. Bitcoin, can easily be viewed as Libertarians opposition to the status quo of the banking and financial system similar to the Tea Party Movement opposition to the political influence that swept across the North America in the aftermath of the 2008-financial crisis.

The battle lines are drawn even when consumers know that banking need Bitcoin and Bitcoin need banking. The banking sector is straddled with legacy systems that do not make it easy to slice product and transactions data per customer. The systems were designed with transaction processing, per product, in mind. Consequently, while banks have made some progress in achieving multi-channel integration to achieve seamless customer navigation across different channels, banks face enormous challenges around their existing legacy applications, systems, and processes which often operate in silos. Our banks have to overcome the challenges of its legacy system to deliver true seamless experience across channels to consumers. Today, there is a greater demand to understand relationships, data has to be mined and collated from a variety of systems and geographies. This is a massive and costly undertaking but one that might be readily addressed with Bitcoin.

Bitcoin and virtually currencies by design represent one of the most significant innovations to hit the financial system in a long time. It is perhaps the most significant development since swaps were first introduced to the public in 1981 when IBM and the World Bank entered into a swap agreement that revolutionise risk management and hedging. If Bitcoin and virtual currencies gain traction, it will represent the most significant competitive threat to the hegemony of the financial system.

The banking sector and the Bitcoin community are at odds and at polarizing ends of the spectrum. Bitcoin has the potential to become an important protocol for the exchange of money online at enormously lower fees than banks and credit card companies charge for online transactions. It also has the potential to drive the transaction costs for cross border transfers lower. As an immigrant and a consumer that is like music to my ears. The World Bank estimates that remittances totalled USD 440 billion in 2010, of which USD 325 billion went to developing countries, involving some 192 million migrants or 3.0% of world population. In many cases, the cost to consumers of these remittance transactions is expensive relative to the often low incomes of migrant workers, the amounts sent and the income of remittance recipients.

Like most immigrants I also have to remit funds back home to help take care of love ones in Jamaica. As a consumer I find the cost of remittances and wire transfers is enormous. It is costly to use money services businesses such as Western Union. Bitcoin in its current form allows free transfers done from one Bitcoin address to another, unless the sender elects to pay an optional transaction fee, which usually amounts to pennies, for faster confirmation. Most consumers will welcome any reduction in remittance transfer price or transaction that would result in more money remaining in the pockets of migrants and their families. The World Bank estimates that if the cost of sending remittances could be reduced by 5 percentage points relative to the value sent, remittance recipients in developing countries would receive over $16 billion dollars more each year than they do now. This added income could then provide remittance recipients more opportunity for consumption, savings, and investment in local economies.

Bitcoin also offers near real time settlement which is also a big plus for online businesses. Bitcoin can settle transactions within seconds for good. Allow me to share a personal experience. Recently, I received a cheque from a client. My client and I conduct our financial affairs with the same bank. Despite this little fact, the bank held onto the funds for seven business days. If my client had used email money, I would merely accept the payment and then deposit the funds directly in my account. No problem.

To add further insult, the teller attempted to clear the cheque in what I consider to be archaic. She first called my client to confirm that he had written out cheque to me. She then proceeded to call my client’s branch to request a fax copy of his signature. The kicker for me was when my client’s branch informed the teller they could not find or retrieve client’s signature. I could not help but think that despite the significant the investment in technology banks are just as inefficient today as when I started my banking career in the late 1980s in Kingston, Jamaica.

As inefficient as banks are, they will not lose their hegemony of consumers’ wallet that easily to the innovators and developers of Bitcoin. They are going to fight to hold on to a greater share of consumers’ wallet. This is the battle ground. This is a gigantic political conflict. In my view, Bitcoin aficionados and enthusiasts are at a slight disadvantage. The Bitcoin community seem fragmented and opaqueness. The community seem to lack of transparency the hallmark for building public confidence and trust. They seem to lack the public relation and marketing savviness as a true competitor. Bitcoin aficionados cannot expect to continue to position Bitcoin and virtual currencies as merely empowering the average consumer. Bitcoin and virtual currencies are far from unsophisticated. It is complex. In the battle for consumers’ wallets, banks have first mover advantage since they already serve a custodians and intermediaries of the financial services. The banking sector also holds significant political clout.

Bitcoin can play an important role in address gaps and deficiencies in the global payment systems as well as reduce transaction costs in the current banking and payment system. To be truly competitive Bitcoin will have to move beyond the dark clouds of the recent collapse of Mt. Gox, the Malleability or denial of services attacks (DOSAs), the Liberty Reserve criminal and money laundering case. These incidents caught the attention of governments around the world and the public igniting discussions about regulations, which I do believe are relevant. However, lost beyond the clouds are the threats Bitcoin poses to the banks for a share of consumers’ wallet as well as the possible benefits of Bitcoin to the banking and financial system.

Bitcoin need the support of banking sector and the banking sector need Bitcoin. Bitcoin also need broader public support. In order to win broader public support Bitcoin innovators and developers have to work on creating a positive image of their products and the Bitcoin community. It cannot be seen as merely a bunch of Libertarians or even anarchist wanting to either disrupt or revolutionize the financial system. They have to dispel the view that the Bitcoin and virtual currencies is overrun by organised crime groups and criminal enterprises. This can only be accomplished by being transparent about their business. Share with the public information on security, compliance and risk management measures taken to safeguard their operations. They have to strengthen corporate governance including disclosure of information on key personals.

What do you think?

Mark McKenzie is a leading Subject Matter Expert in financial services regulation and supervision as well as a professional motivational speaker, corporate trainer and youth mentor.  He can be contacted by email mastbmckenzie@gmail.com or by telephone 647-406-4622. Read my blog  http://mastbmckenzie.blogspot.ca/ and always write me a comment and share. Follow me on Twitter @mackynacky. Connect with me on www.youtube.com, Google+, Facebook and Linkedin.