A recent report published by Citi suggests that bitcoin could challenge or even supplant some traditional payment services if adoption widens in future years.
According to Citi GPS, a corporate publication owned by the financial institution, the technology underlying digital currencies has the potential to disrupt current-day payments structures. It cites debit/credit card systems and remittance services in particular, saying:
“The essential innovation in bitcoin is that it can eliminate the need for a ‘trusted intermediary’ when the principals in a transaction do not trust each other. There are many such transactions but money transfer/ credit/ debit card transactions stand out.”
However, the report goes on to state that security risks and price volatility may prevent bitcoin from ever becoming more than a “wannabe means of transactions”.
Bitcoin could shift payments paradigm
The report compares the roughly $6.2bn bitcoin market capitalization with that of the combined global payment companies, which amounts to approximately $300bn.
As many as $15.5tn debit and credit card transactions took place in 2013, and it is this large market that digital currencies are poised to disrupt in the years to come, the report continued.
Citi directly cited the potential cost savings of using digital currencies like bitcoin as a payment vehicle. Notably, the report said greater use of bitcoin for this purpose is possible even when accounting for transaction costs collected to boost security in the bitcoin network.
“Bitcoin transactions have potential cost advantages over conventional payments and reduce the need for intermediation. The gap between conventional transactions cost and any bitcoin fees for convenience and increased security will allow bitcoin to make incursions into this market.”
The financial institution also suggested that other digital currencies, such as litecoin, dogecoin and blackcoin, in particular, could also gain more market share, calling transactions in those altcoins ”significant”.
Digital currencies threaten credit, debit cards
Notably, the report suggested that companies that offer credit and debit card services may face increased competition from digital currencies that could disrupt their existing business models.
The report stated:
“If fraud/charge backs can be reduced or eliminated by digital currencies there is plenty of room for margins to be eroded. Retail transactions across borders could also become very inexpensive, if the charges involved in going from one currency to another were substantively reduced.”
The impact on foreign exchange (FX) markets is less certain, said Citi, given the low margin that already exists.
However, the report said that companies which charge higher fees to transact between currencies, including global remittance firms, “may find their franchise eroded if generic bitcoin technology lowers the cost if these transactions”