The payments industry has been ripe for disruption for as long as I can
remember. Historically conservative and non-experimental, banking and
financial services always appear to be the laggard for any new technology.
But none of that has stopped recent innovators from pursuing things like
Square, Stripe, Dwolla, FaceCash,
ZooZ, Affirm, MangoPay,
and Balanced. The Internet and mobile payments gold rush is in full swing and
venture capitalists are lapping it up.
The amount of money raised by a startup in the space can be staggering too,
ranging from $3.4 million to as much as $200 million in the case of Square.
But are venture capitalists truly funding disruptive "home runs" if
licensed banks and legacy credit card networks are required for their
so-called innovations? Also, most would agree that the states' money
transmitter licensing infrastructure acts more like a barrier of entry
protecting incumbents than providing any protection for consumers.
Doesn't anyone notice the elephant in the room? Growth rates of over 10,000%
since inception, measured in transaction volume and amounts. Pervasive
international market penetration with full digital and mobile platforms. A passionate and dedicated customer
base.
Of course, I'm talking about the distributed payments network and cryptocurrency Bitcoin, which
plays a dual role as a transaction confirmation network and independent
floating unit of account.
It's easy to understand why certain venture capitalists might be timid about
pulling the trigger on a Bitcoin-related
investment. Regulatory risk (illustrated by the fallout from Fincen's
recent guidelines in the U.S.), on top of typical
execution risk demands a greater return from initial investment. While that
return may ultimately be there, a skittish board or a wary risk-averse
management team might be unable to navigate the onslaught of negative public relations and price volatility.
Any lesser technology with so many forces aligned against it would be
unlikely to survive. Bitcoin's persistence
demonstrates that we are witnessing something unique in money and payments.
For those that do invest and successfully navigate the potential traps, the
reward is a first-mover advantage for a new international monetary unit.
Here's the important part. Disruption in the unit of
account is the way to disrupt the
payments space.
National currency units come with many strings attached and they reek of
favoritism and crony capitalism primarily benefiting the well-connected. With
a nonpolitical monetary unit, many new possibilities become apparent
structurally that would not have been contemplated before, such as:
peer-to-peer mobile applications that don't require permission from legacy
transaction carriers; global remittances that don't require high-fee currency
conversion; merchant categories that are no longer disallowed due to fraud
and chargeback risk; and merchant reach into countries that are not even on
the map for Visa, MasterCard or PayPal.
It's very telling that, when WordPress announced
its plan to begin accepting bitcoin, the blogging
platform provider noted, "PayPal alone blocks access from over 60 countries, and many
credit card companies have similar restrictions. Some are blocked for
political reasons, some because of higher fraud rates, and some for other
financial reasons."
Compared to conventional payments startups, the largest private equity raise
by a Bitcoin-related company has been Atlanta-based
BitPay Inc. which raised $510,000 in January to expand its lead in the bitcoin
merchant processing space. Startup CoinLab also raised $500,000 in April 2012 and foreign exchange platform Coinsetter closed a $500,000 investment round this month. Coinbase,
a provider of personal wallet storage and merchant processing services,
raised $600,000, although almost half of that was through crowdfunding.
Those are just some of the Bitcoin initiatives with
external funding. Many Bitcoin-related companies
grow organically with a one- or two-person team, because the technology
offers the most open platform for payments innovation in the world today.
The powerful Bitcoin open-source development funnel
will begin to suck in greater and greater talent driving applications that
will have the broadest overall impact in the payments sphere. Creative talent
naturally gravitates toward the point where maximum societal impact
intersects with maximum reward. This alignment of incentives for early
adopters and a global "workforce army" cannot be matched with
traditional employee stock option plans. Legacy and closed systems cannot
compete.
Just ask Kevin McInturff, who recently left Global
Payments – a processor of Visa and MasterCard transactions with thousands of
employees – to join BitPay, where he is one of
three full-timers. Bitcoin "offers the
opportunity to change the way business is done," McInturff told PaymentsSource.
Email wasn't spawned by the post office as a way to drive efficiency for the
U.S. Postal Service. File sharing technology didn't come out of a media
headquarters' lab to test improvements for distribution. Disruptive
innovation simply doesn't work that way.
Disruptive technology disrupts. That is its mission. It annihilates
any substandard process or product in its path and it originates outside of
the established paradigm. You don't see it coming. I get a chuckle out of all
these investors trying desperately to attach themselves to something,
anything, in the Internet and mobile payments space.
However, a payments startup that ignores Bitcoin in
its strategic plan is like a publisher ignoring the Web in 1999. Certainly,
innovators can design routes around Bitcoin and
established players can dismiss it as insignificant, but that won't make the
elephant go away. The savvy and true disruptors already know this.
By Jon Matonis
American Banker
Monday, April 29, 2013
http://www.americanbanker.com/bankthink/the-elephant-in-the-payments-room-bitcoin-1058703-1.html
