Saturday, November 23, 2013

Banks Squander Opportunity in Bitcoin

By Jon Matonis
American Banker
Monday, November 18, 2013

It wasn't that long ago banks made the pitch, "Think of it as Money."

It was captured for eternity on the walls of the Atlanta-Fulton County Stadium where Henry "Hank" Aaron surpassed Babe Ruth's all-time record of 714 home runs. This was just 39 years ago.

Banks led the evolutionary shift from cash to card payment networks. Visa (V) originated from the BankAmericard project launched in 1956 for a general-purpose credit card. By 1975, Bank of America (BAC) had given up control of the BankAmericard program and Visa founder and former CEO Dee Hock assumed the reins. In true startup fashion, the bank-owned card brands of Visa and MasterCard (MA) eventually had successful IPOs. The inspiration is clearly there.

Where are the visionaries in banking now?

Today, banks are often thought of as the dinosaurs of financial services and the U.S. the backwater because they typically wait for clear market penetration and several upgrade releases before adopting any new technology. As a result of their low tolerance for risk, they voluntarily "niched" themselves out of the market share in the global remittance market and more recently, online commerce and mobile payments. Alternative payment companies like PayPal (EBAY), Stripe 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.

With the breakthrough development of digital money, banks have the opportunity to lead the industry once again. Yet instead, banks appear paralyzed about understanding and harnessing this emerging technology. 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 and consumers, hiding behind the rationale that they are being watchful of and adhering to regulatory guidelines.

Interestingly enough, because of their regulatory status, refined customer identity procedures and global infrastructure, banks could actually brand and offer bitcoin exchange services themselves, quickly becoming the de facto leaders of modernizing financial services.

For example, exchange services, the primary way to purchase and sell bitcoin for national fiat currencies, 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. Efficient exchange services are also the domain of banks. Trading and market making for bitcoin (which even has a ticker symbol, XBT) pose no more challenges than dealing in foreign currencies, derivatives, or interest rate swaps. Coupled with their existing global infrastructure, banks are a natural fit for bitcoin currency trading.

For better or worse, despite the mounting inconveniences, a majority of people still prefer banks over trusting Apple (AAPL), Google (GOOG), or PayPal with sensitive data. Security at banks and financial institutions usually represents the strongest in the world. For those individuals desiring a safe storage option for their bitcoin balances, banks could provide several obvious advantages.

We know that banking in the future will be something you do – not some place you go– and aggressive fintech startups already provide the innovation that's occurring in financial services. In a 2010 report by McKinsey & Co., a reported 2.5 billion people are unbanked - the majority in the global south. Just as much as a middle-class kid in suburbia doesn't want to step foot in a bank branch, a poor woman living  in a dirt hut in Africa is not going to spend the money or time to find a bank in the city where she wouldn't even be approved. She has SMS texting. If the option is available, she'll bank with her phone.

Online bitcoin wallet companies like Blockchain's My Walletand Coinbase, which provide direct safekeeping services for the holding of customers' bitcoin balances online and via mobile apps, look and feel like banks of the future because they offer sophisticated access control and integrate seamlessly with mobile phones. So what is the holdup? One could argue that it's the question "how do banks make money with bitcoin?" On a primary level, bitcoin represents a new currency opportunity for banks. The term "banknotes" is actually left over from the period when banks issued their own currency notes in an environment of free banking and currency competition.

I've said this before: Banks have to return to thinking like Silicon Valley and Silicon Alley startups. Without this mentality, banks face an ever-increasingly niched market share and at worst, obsolescence. Innovation in banking is dependent on embracing Bitcoin – will they play or be left in the dust? Therefore, it is by no means out of historical context for banks to re-establish themselves in the competitive money business.

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