A group of the largest banks in the world is working on a global standard for Bitcoin’s blockchain ledger technology, a secure funds-transfer system that advocates and industry watchers have likened to “email for money.”
At first glance it seems that bank-backed blockchain payment systems like the ones being developed by R3 of New York are redundant to the Bitcoin network. But such commercial systems—built with government and industry regulatory requirements in mind—may hasten changes in the payments industry that benefit cross-border merchants and global consumers.
Bitcoin and its blockchain distributed-ledger system were once heralded as the beginning of the end for banks, the presumption being that peer-to-peer secure transactions would render big institutions irrelevant. But, as the Financial Times has reported, major banks now view a permissioned, closed-system variant of Bitcoin’s open distributed-ledger technology as a possible tool to reduce their operating costs by as much as $20 billion, by streamlining payment and settlement processes and involving fewer parties along the way.
Whether or not that reduction in expenses would be passed along to clients and consumers, blockchain tech holds the potential of savings in other ways. Remittances come up frequently in discussions about blockchain efficiencies, and for good reason: Any reduction in fees would result in more money flowing to developing countries whose economies depend disproportionately on cash from workers elsewhere.
The International Monetary Fund estimated that in 2011, approximately $966 billion in remittances was transferred worldwide, with only half of that amount officially recorded. For the types of low-value remittances that migrant workers commonly send home, the IMF found that transaction fees average 10% and can run as high as 20%. A reduction of even 1% in fees would result in another $9.6 billion going to workers’ families for necessities and consumer goods.
One startup, U.S.-based Abra, now uses blockchain technology and an app to let U.S. and Filipino users transfer money without any transfer fees, and it plans to expand its fee-free digital cash service worldwide. If companies such as Abra succeed at reducing or eliminating remittance fees, the result will be more spending power in developing markets. American Express is among Abra’s Series A investors.
Another banking giant, Bank of America, has patented its own plan for bitcoin-based cross-border currency transfer. Quartz reports that BofA’s process would choose either cryptocurrency or the customer’s currency depending upon the cost and speed of the transfer as well as several risk factors including fluctuations in price, which would be mitigated with near real-time settlement.
If these bank and tech industry programs demonstrate that money can move securely across borders faster and for less than current rates, it is logical to expect that cross-border merchants and shoppers will make use of the same service, regardless of whether they accept bitcoin itself. Payment systems built on blockchain technology can reduce merchant fees, currency conversion fees, and the number of unwarranted declines based on flawed verification and fraud screening tools.
Cross-border e-commerce has always faced the challenge of card-not-present fraud, as well as the loss of revenue that results from false declines. With blockchain verification of funds and near real-time transfer and settlement, merchants can avoid missing sales due to false declines. The same ledger system can alert merchants when customer funds are not available, reducing the rate of fraudulent transactions.
Blockchain technology can also reduce the number of fraudulent chargebacks merchants must deal with, which result in lost revenue, chargeback fees, and (if a merchant incurs a high number of chargebacks) higher transaction processing fees. Bitcoin transactions do not allow for chargebacks; it remains to be seen whether blockchain products developed by major banks will retain the no-chargeback feature.
Time will tell which blockchain applications developed by banks, start-ups and industry groups gain the most traction with merchants, consumers, and regulators. Of course, services that enable merchants to accept bitcoin are already in play in markets around the world. But for those who are leery of using an open distributed-ledger network or Bitcoin itself, these bank-backed blockchain programs may eventually provide parallel access to the cost-cutting and security benefits of the original bitcoin system.
Lori Ciavarella is BillPro’s Director of Operations.