By Jon Matonis
Thursday, July 25, 2013
failing to respond to customer demand and missing the tectonic shifts
in money services businesses and online/mobile payments, banks are about
to get a third mulligan with the emerging futuristic area of cryptographic money.
example, money services businesses like Xoom and TransferWise provide a
wide variety of services, essentially filing the gaps of what
traditional banks ignore or for one reason or another cannot provide.
payment companies like PayPal and Square have essentially built their
businesses around what banks were not responding to and now they are
national powerhouses – international, in the case of PayPal. Also,
Stripe has become the online version of Square making it easy for
software developers to integrate and accept payments on the web.
was once a time when bankers led rather than followed. One example is
the evolutionary shift to card payment networks; banks were the genesis
of today's leading card brands. Visa originated from the BankAmericard
project launched in 1956, when an in-house product development team
pursued a mass mailing in Fresno, Calif., for a general purpose credit
By 1975 Bank of America had given up control of the
BankAmericard program and Visa founder and former CEO Dee Hock took it
from there. The term Visa was conceived by Hock because he believed that
the word was instantly recognizable in many languages and he felt that
the term denoted universal acceptance in most countries. (Interestingly,
the term Visa has become a recursive backronym for Visa International Service Association.)
true startup fashion, the bank-owned card brands of Visa and MasterCard
eventually had successful IPOs. The inspiration is clearly there. But
where are the visionaries in banking now?
With the breakthrough
development of cryptographic money, banks appear paralyzed about
understanding and harnessing its transformative power. This does not
bode well for the future of banks. Just as they block and freeze the
accounts of competitive money transmitters in the U.S., banks routinely
freeze the bank accounts of innocent bitcoin exchanges, hiding behind
the rationale that they are being watchful of and adhering to regulator
Bitcoin exchange services like Mt. Gox, TradeHill, and
CampBX are the primary way to purchase and sell bitcoin for national
fiat currencies. They are mostly launched by technology experts who may
or may not have any experience in the intricacies of federal and state
anti-money laundering laws or know-your-customer guidelines. Exchanges
depend on their banking partners to keep the funds flowing in both
directions. But rather than provide expert counsel and cultivate a
business customer relationship, banks have routinely pulled the rug out
from under these new companies usually without warning.
Taking it a step further, banks could brand and offer bitcoin exchange services themselves, quickly becoming the de facto leaders because of their regulatory status and supreme customer identity procedures.
are missing out on a huge and glaring opportunity in the area of
exchange services, but it gets worse. Startup companies are springing up
around the bitcoin ecosystem that replicate some of banking's other
core competencies such as asset safekeeping and escrow services.
Online bitcoin wallet companies like Blockchain My Wallet
and Coinbase are providing direct safekeeping services for the holding
of customers' bitcoin balances. Amazingly, these companies look and feel
like banks of the future because they offer sophisticated access
control and integrate seamlessly with mobile phones. Coinbase, even has a
direct username and password connection to a U.S. bank account, access
that is granted voluntarily by the depositor. If it walks like a duck
and quacks like a duck, it's probably a duck.
Transaction escrow companies protect online buyers and sellers via an impartial dispute resolution service. The services from BTCrow, Blockchain’s multi-signature escrow, and the now-closed ClearCoin,
have filled the gap for trust in online transactions. Performing the
role of ensuring customer satisfaction and keeping merchants honest,
these services emulate what chargeback rights have done for consumer
protection in the payment card world.
Finally, in the area of
merchant processing, banks again have an opportunity that leverages
their skill set staring them in the face. Similar to credit and debit
card merchant processors, bitcoin merchant processors like BitPay, BIPS,
and Coinbase help get merchants online and accepting bitcoin in a quick
and easy way. In addition to robust merchant wallet solutions with
detailed reporting capabilities and shopping cart plug-ins for
electronic commerce, the essential service of a bitcoin processor is to
“lock in” or guarantee the exchange rate for merchants that elect not to
maintain bitcoin balances. This is accomplished by the bitcoin
processor managing the risk associated with conversion through internal
treasury trading or external hedging.
The message is clear.
Architect the future. Develop a fintech startup company organically or
acquire an existing best-of-breed team for a massively competitive head
start. Either way, banks have to start thinking like Silicon Valley and
Silicon Alley startups.
Banking institutions are ideally suited to
all of these mentioned cryptocurrency functions. More importantly, they
play directly to the core competencies of banks. When the market is
nascent and still maturing, like now, is the perfect time to exert a
leadership role and show the financial service newbies how it's done. It
looks mighty doubtful that banks will be getting another mulligan