Will the banks adapt to bitcoin?

Tuesday 25 March 2014

The banking sector has not embraced bitcoin, for obvious reasons. There are huge, vested interests at work here. To date, the banks have been the gatekeepers of our financial transactions, even those that occur in cash. People still need somewhere to store their notes, and under the mattress is too much of a risk for most. Then the central banks administer monetary policy, setting how much of the green stuff is even available. Clearly, decentralised, borderless P2P money represents a threat to their profit margins, if not their very existences.

NYC financial centre by BitScan

In the US, the big banks have almost unanimously come out as critical of bitcoin. Goldman Sachs came closest to enthusiasm with a series of backhanded compliments and pointing to possible revenue opportunities, summarising that ‘despite media coverage and current trading levels, bitcoin remains orders of magnitude away from widespread adoption.’ Otherwise, FUD (Fear, Uncertainty, Doubt) has generally been the order of the day. JP Morgan was harsh, stating – not unfairly – that bitcoin was dangerously volatile as well as ‘vastly inferior’ to fiat, and highlighting the perceived threats inherent in its model: ‘In
exchange for its low-cost peer-to-peer system, Bitcoin’s network contains no recourse if bitcoins are lost or hacked. At least traditional fee-charging banks provide deposit insurance and other fall-backs. With fixed supply, Bitcoin’s deflationary bias should also be clear. That quality serves owners well when exchanging into foreign currency, but it would be onerous for any
economy operating with it as legal tender. Indeed Weimar Germany was unpleasant, but so was the Great Depression.’

In the UK, the situation has been even worse. Rather than come out directly against it the banks have closed ranks, stonewalling customers who try to run bitcoin companies and even cutting off services and hamstringing their businesses (as British exchange bit121 recently found out). This has occurred despite the governments of both countries showing some cautious optimism around the new technology, albeit with demands for greater regulation.

An outdated system
For all their size and profitability, the banks are barely fit for purpose in many areas of business. They are slow to react, bureaucratic and expensive. Transfers can take days, even within the same country, let alone abroad – and the cost of international transfers can be prohibitively expensive. In many cases their systems are ancient and creaking under loads they were never designed to bear. We use them because that’s what we have had, until now. Replacing them with something fit for the internet age would be costly and disruptive.

So it’s not surprising that bitcoin threatens the banks, with its promise of low-cost, fast and cheap transfer of funds anywhere in the world, outside of the control of a central authority. And there’s some suggestion that they have started to react. It might be too little, and too slow, but it has started. There’s no clear evidence it has happened in direct response to bitcoin – only suspicious timing, since the technology to achieve the changes has existed for some time.

P2P payments
One of the biggest changes has been in the area of P2P payments via mobile phone. In the UK, services like Pingit (Barclays) and Pay Your Contact (Natwest) have existed for some time. Now, though, a new system called Paym (‘Pay-em’) is set to be rolled out across almost every major bank, allowing customers to make payments using their smartphone to anyone else with a phone, regardless of whether they use the same bank, or even have a smartphone themselves to receive payments. It’s more or less instant, and it’s direct, from one customer to another – much like bitcoin. But, of course, it still goes through the central authority of the bank: a critical difference.

Speed
A while back the Faster Payments System (FPS) began to gain traction over the older BACS, offering almost-instant bank BitScan: will the banks adapt to bitcoin?transfers rather than the three-working-days model that had persisted for decades. International transfers, of course, can still take days or longer.

Cheque clearance currently takes up to five days. Now, a change in the law means they can be digitally signed, so they will only take two days to clear. Two days is still two days longer than a bitcoin transfer, but it’s still an indication of changing times. The fact that cheques are still used at all is a different matter.

A new challenge?
These are small changes, but they are signs that the banking sector can adapt further, and must. The technology exists, just not the will to implement it – yet. They herald new developments, perhaps in terms of cross-border transfers and the speed with which transactions take effect and show up in our accounts; three days is currently not uncommon before a debit appears, for example.

In the long run, it seems likely that banking will integrate with cryptocurrency networks to carry out their own business using similar models – perhaps proprietary protocols, but similar nevertheless. The costs of them not doing so are too high to contemplate. A bank that offers even some of the benefits of bitcoin whilst retaining its own systems too has an immediate competitive advantage.

In the short term, the big banks are not generally keen on bitcoin – though in Europe the situation has been somewhat different, with banks showing more flexibility. Ultimately that will have to change. Until then, expect more FUD as banks struggle to adapt to the new way of doing business – and offer new services to remain competitive.

Brandon Hurst


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