Our article last year on the future of virtual currencies provoked a great deal of interest (“Bitcoins: when will they crash and what is coming next?“). One area we didn’t touch on was the threat to banks and other payment systems. Transaction costs for payment systems are very high and Bitcoin may offer sellers a much cheaper way to transact.
We are using Bitcoins as an example but it could be applicable to any virtual currency out there.
Obviously the internet has revolutionised the way we buy and sell products and services. New payment firms such as Paypal have emerged through clever technology, become massively successful and then bought for huge amounts of money.
The issue is with Paypal and other transaction systems such as Visa/Mastercard is the charge to the retailer can be excessive. If a company is working in a high margin space then this is less of an issue but a the majority of internet companies rely on a large number of low margin transactions. With Paypal & Visa generally charging between 1 & 3% of total cost this can reduce and almost eliminate any profits. If multi-currency exchange rates are then applied then profit can disappear altogether.
It is generally accepted that Bitcoins transactions costs are insignificant compared to Paypal, Visa etc – there is some debate around the actual costs (Bloomberg’s Matt Levine thinks transaction costs are on a par or higher than Visa) but transaction cost of using Bitcoins is around 0.1-0.2%.
Another potential advantage of Bitcoins or alternative currencies generally (Altcoins?) is that the exchange rate transaction can be controlled and may not be needed at all. Money can be held in Bitcoins and so if an individual or company buys and sells in Bitcoins it can be used as a common currency (like having a consolidated FX bank account) so eliminating expensive foreign exchange transfers. Unless Bitcoins replace all existing currencies then at some point some money would have to be transferred but it would the net difference after buying and selling rather than a ‘tax’ on each transaction.
The success of Bitcoins, as with any currency or payment method, depend on a wide enough acceptance (with associated trust etc) to make transactions viable and easy. Bitcoins have a long way to go for general acceptance but more and more places both virtual and real are starting to accept them.
Obviously there are other important factors including general acceptance, volatility & reputation that may impact the acceptance of the alternative payment methods but it should make sense for etailing firms and will be keeping Paypal Executives awake at night. An obvious way for them to fight the risk could be to reduce their transaction costs. Paypal is immensely profitable and their model would probably still work with a lower margin, we are not so sure in regard to Visa & Mastercard with heavyweight organisational structures and legacy processes & systems.
If nothing else the rise of the virtual currency will provide some competition and lower costs for retailers and so hopefully buyers too!
