Infosys Strategic Vision
Kiran Kalmadi, Senior Client Solution Manager, Financial Services, Infosys
& Sukhna Dang, Client Solution Manager, Financial services, Infosys.
Do you know what is common to WordPress.com, Amazon, Subway, Expedia, Zappos, Bloomberg.com, Wikipedia, iTunes, Dell, and Bing? This list is a sample of companies that have started accepting Bitcoins. Yes, you read it right, the Amazons, Apples and Microsofts of the world are accepting Bitcoins. Bitcoins and other virtual currencies are the cynosure of all eyes – of industry experts, bankers, hackers, consumers, merchants and regulators. Experts believe that the world of virtual currency is at a crossroads. Now, what is virtual currency?
Virtual currency is a form of electronic money, not issued by any monetary authority, but which has an equivalent value in real money. When someone buys virtual currency, they don’t get an actual note or coin. Instead, they receive electronic units that people agree to accept and treat like real money. Virtual currencies can be classified as Centralized and Decentralized. Centralized virtual currencies like Facebook Credits, Amazon Coins etc. have an administrator and a central repository, whereas decentralized virtual currencies do not have either, and every transaction is registered in a public ledger known as a block chain. The most popular virtual currency today is Bitcoin. Bitcoins are managed by peer-to-peer (p2p) technology without any central authority governing them. Virtual currency is not only about Bitcoin; there are the likes of Darkcoin, Litecoin, Peercoin, Dogecoin and many more. In the past few years, virtual currencies have mushroomed widely and are making presence felt for the right or wrong reasons.
Why the spurt in interest?
The concept of crypto-currency is not entirely new, being first described way back in 1998, and the first proof-of-concept Bitcoin being published in 2009. Initially, virtual currencies were mostly used in lotteries and online gaming. However, in the past few years, there has been an increase in interest in the usage of virtual currencies and a rising acceptance among merchants. According to CoinDesk, by end-2015, the number of merchants accepting Bitcoin is expected to cross 140,000. Bitcoin has found high-profile supporters in the form of Marc Andreessen, Al Gore, the Winklevoss twins, Richard Branson, and Ashton Kutcher, to name a few. The spurt in interest in virtual currencies is a result of their perceived benefits versus traditional payment methods. The pro-virtual currency group hails it as a disruptor of the financial service industry and a challenger to the current financial system.
The Appeal Of Virtual Currency
Transaction Cost: The cost of processing is far lower for virtual currency than any other payment mechanism. One of the main reasons for this is that virtual currencies eliminate the need for intermediaries. As virtual currencies are a form of P2P payment, they bypass banks and other intermediaries and evade the additional processing charges. For instance, in the traditional banking service model, if someone buys a watch using a credit card, the merchant needs to pay the issuer an interchange fee of 1% - 3% plus a flat fee, which is eventually passed on to the consumer as a cost. However, if the same payment were made using virtual currency, the transaction cost would have been <1% of the transaction amount, as there are no intermediaries.
Transaction Speed: Payments made using virtual currencies are much faster than payments made using other electronic modes. It is believed that the processing time for the Bitcoin is in the range of 10-60 minutes and transfers can happen instantly, which is much faster than traditional payment modes. For instance, in traditional banking, international bank transfers can take up to a week. In addition, virtual currency payments can happen round the clock, unlike traditional payments.
Financial Inclusion: Virtual currencies can promote financial inclusion. They can become an appropriate form of payment, especially in those countries where individuals do not have access to bank accounts. For instance, in several parts of Latin America and Africa, many people do not have access to traditional banking services or even to any safe, cheap and convenient credit functioning system. All this can change with virtual currency, as it provides an alternative option for the unbanked.
International Cross-Border Remittance Cost: Virtual currencies are expected to play a big role in the global remittances market. In Q4 2014, the global average cost of remitting about USD 200 was about 7.99%. Post offices are the least expensive, at 5.06%, while banks are the most expensive at 11.75% (Source: The World Bank: Remittance Prices Worldwide). However, using virtual currency, users can remit money directly to their families at a lower cost and faster too. For instance, BitPesa uses a virtual currency like Bitcoin to cut transaction costs. It charges about 3% on cross-border transfers and the money reaches the same day. Players charging lower fees using virtual currencies will eventually put pressure on the existing money transfer operators and banks to reduce their remittance charges too.
Micropayments Potential: Virtual currencies can facilitate rapid expansion of micropayments online. In the traditional banking service model, there is no proper system available to transfer $1 or less online using a credit card or other traditional form of payment. Virtual currencies like Bitcoin can be used to make micropayments as small as 25 or 50 cents. This is particularly useful for businesses, such as content or news providers, that would like to charge say, 10 cents per article. Virtual currency potentially opens a new revenue model to sell things digitally at a much lower price.
Merchant Risks: Virtual currencies pose fewer risks to merchants due to transaction certainty, protecting them even against non-delivery claims and fraudulent chargebacks. The transactions are irreversible, i.e. once a transfer is completed, it cannot be reversed, which is not the case with a credit card transaction. Concerns of card fraud are also making online merchants skeptical about traditional forms of payment and driving them to consider virtual currencies as an alternative.
Lower Identity Risk: Virtual currency transactions do not contain a customer’s personal information, whereas traditional payment mechanisms, such as credit cards, require card information and other user credentials to be shared, posing a higher risk of identity theft.
For all its advantages, virtual currency can be labelled as a double-edged sword. Being a comparatively new phenomenon, the market for virtual currencies is still developing and many users are unaware of such currencies and their workings. Virtual currencies have their own legion of critics, with the likes of Warren Buffet, Alan Greenspan, Nouriel Roubini and many others having criticized Bitcoin.