Bitcoin possesses the potential to transform the way we make payments, lowering transaction costs and vastly expanding the scope of commerce globally by creating access for markets and individuals excluded from the current system.
Its easier said than done, of course, but the potentials for this payment transformation are ripe, the incentives are in place. The opportunity to live in a world that enables widespread access to global financial services is simply too great for these changes not to happen, and rapidly.
Here are three reasons why bitcoin is poised to play an essential role in expanding the global marketplace.
Bitcoin Can be Trusted. The digital age has connected people from all corners of the world, while also making it easier to shop globally. However, payments systems have not kept pace, and the online use of credit and debit cards continues to present a significant hurdle to the continued growth of global e-commerce.
Transaction fees charged by the banks that issue cards to consumers can exceed 3% on each purchase, creating margin-eroding costs which are naturally passed along by the merchant to the consumer. The card issuing banks defend the collection of these usurious fees (known as interchange in the card networks parlance) by describing the significant costs that banks incur in extending credit to consumers who sometimes default on repayment, as well as the tremendous cost of providing reward programs that increase spending by consumers.
However, merchants pay the freight for delivering this consumer loyalty to card issuing banks. Even worse, merchants bear the risk of loss when the purchases are contested through chargebacks initiated by cardholders who claim that their cards were used without their authorization. And the ultimate insult: these interchange fees are increasingly being used to subsidize the cost of security breaches where sensitive card credentials are stolen from processing systems and then used by thieves to steal goods and services from merchants. So, trick question: who pays for these mounting costs? We all do! By continuing to use our credit cards, we perpetuate this broken system.
And the situation is not improving: criminal rings are becoming increasingly sophisticated in circumventing fraud control systems. The banks understand this ugly trend, and in response, they have established a hair-trigger on declining card transactions that might otherwise be legitimate (ever get off a plane and have your card rejected while buying gas or groceries?) In fact, a study by TrustInsight (a division of Experian) found that $40 billion worth of card transactions are falsely declined annually due to fear of fraud.
Think about the magnitude of that "deadweight loss" to merchants and the enormous frustration to consumers. Enter stage left: Bitcoin, providing a secure system that eliminates the need for these fees and empowers merchants to reduce costs to consumers and accept more transactions without fear of fraud risk.
Bitcoin is a Global Currency. Over 6 billion inhabitants of Planet Earth own a mobile phone but do not maintain a bank account. In the past 12 months, 600 million people obtained a smartphone, and hundreds of millions of subscribers use messaging apps to communicate with each other. Since Bitcoin is an IP-based technology, these same apps are also being enabled to hold and transfer bitcoin.
Furthermore, over 80% of all millennials reside in emerging markets, and less than 1/3 of these millennials expect to open a bank account during their lifetime, greatly reducing the likelihood that future generations will ever hold a credit card. The rapid spread of mobile phones represents an unparalleled opportunity for bitcoin to leapfrog legacy financial services.
Billions of our fellow human beings have traditionally relied entirely on cash in the absence of other financial tools, which frequently results in costly fees for transfers beyond a limited geographic reach. Emigrants who send money home to family members lose enormous sums of value through international remittances fees. The dominant providers Western Union and MoneyGram charge an average of over 12%, even on modest amounts. These same funds can instead be loaded into bitcoin wallets and transferred anywhere in the world for a negligible fee.
The World is Waiting. The world is ready for bitcoin. The bitcoin protocol has transformed the public Internet into a secure payments system that grants access to financial services for billions of people while eliminating the punitive costs extracted by banks and money transfer companies for sending hard-earned funds over proprietary bank networks.
And bitcoin knows no borders. Just as the Internet has extended the global reach of information and ideas, bitcoin enables anyone to store and transfer value, without regard to arbitrary lines drawn on a map by colonial powers. Bitcoin is Money over IP, and it is coming to places financial and ecommerce tools haven't yet been via mobile technology.
John McDonnell is CEO of Bitnet.