The Payments Elephant

THE WEEK IN FINTECH 12/08/17

The Payments Elephant

I moderated a meeting of the Chicago Payments Forum this week to discuss payments developments in 2017 and how they will affect business in 2018 and beyond. In putting together the overview, it occurred to me that right up front we had to address the elephant in the room: bitcoin.

At Money2020 at the end of October, I heard a number of people talk about it as a new "asset class," a statement I saw quoted almost daily as bitcoin's price rose steadily.

Then the CME Group and CBOE announced that they would start trading bitcoin futures. Both are set to start trading in the next two weeks. Since then the price has skyrocketed.

I received this item in my email on Wednesday morning from Quartz summarizing a Bloomberg article:

Bitcoin surpassed $12,000 for the first time. The cryptocurrency reached new heights amid speculation that the widespread use of futures will lead to digital currencies being considered as a legitimate asset class for mainstream investors. Observers warned the trading frenzy is a dangerous bubble waiting to burst.

By the time we started our meeting that evening, the price had broken $14,000. It's a trader's dream and investment success so far.

But bitcoin hasn’t succeeded to any great extent at its intended purpose: a means of exchange, a payment vehicle. The title of Satoshi's initial paper is "Bitcoin: A Peer-to-Peer Electronic Cash System," and it talks about payments being exchanged from one party to another "without going through a financial institution."

Yes, it works. Major retailers accept bitcoin, and BitPay reports that it will process more than $1 billion in payments this year (compared to more than $250 billion worldwide last year by the card networks). In Japan, bitcoin is gaining acceptance as a currency and the country's regulators have recognized bitcoin exchanges. Even McDonald's is reportedly considering that it will accept bitcoin payments.

Bitcoin has interesting international use cases, with two Chicago firms, DigitalMint and Athena Bitcoin, using it to make international remittance payments more affordable to people sending money back home.

But we're talking miniscule transaction volumes in relation to other payments instruments. And who would want to make a payment with an instrument whose price can rise so quickly?

This quote from a Reddit discussion, "Bitcoin is actually quite adopted by merchants in Japan," sums up the present state of bitcoin as a payments vehicle pretty nicely:

To recap: an extremely small percentage of bitcoiners, let alone persons, wants to spend bitcoin on legal goods and services when there are a ton of better payment options available that don't require them to spend their deflationary store of value.

I’m not saying bitcoin will not become a major payments vehicle in the future—I don't really want to be that guy right now—but the merchants that accept it most likely do it for the PR value and not because it reduces costs or gains much in the way of new customers.

Cryptocurrencies are the future of payments. We don't know when and in what form, but given the current volumes, it’s a long way to that future.

So here we are in the United States with a cards, cash, checks, EFT, ACH, mobile, and the new faster payments. We also have a lot of creative ideas—and opportunities for more—to make existing payments more convenient and safer.

More to come on our discussion next week. . .