Before there were cell phones, there was the dream. You know the dream, the dream of techno-optimists everywhere: Get rid of the wallet. Make money electronic. Get rid of those inconvenient technologies like cash and credit cards, and put it all on your phone. Pay by punching a key on your phone. Like in Japan! And cut out a few middlemen while we're at it. Admit it, we've all fantasized about it.
With the smartphone era, the dream of the the mobile payment network really took off. And now, it looks like another recent technology might help to bring us closer to that dream: Bitcoin.
The potential of Bitcoin as a mobile payments network isn't fanciful. There are many potential advantages, or so the argument goes:
- No middlemen. One big obstacle to making mobile payments work has been the number of middlemen involved. OEMs. Carriers. Mobile platform companies. POS manufacturers and service providers. Credit card companies. Banks. Payments companies. Everybody realizes the scale of the opportunity, and so everyone wants a piece of the action. The predictable end result is that nothing gets done, as companies and coalitions push differing standards and technologies. Bitcoin simplifies by cutting everybody out. Want to buy a cup at your local coffee shop? Just make a direct deposit of Bitcoin, and boom.
- Low fees. Another undesirable consequence of the proliferation of middlemen in mobile payments is high fees. High fees increase transaction costs. The transaction costs of cash (at least for the end user) are basically zero. This is a big problem, not just because fees are expensive, but because if you want your mobile solution to replace cash, you have to be able to use it for all transactions, not just relatively large transactions that justify charging a fee. Bitcoin is an open source technology with zero marginal cost to make a transaction on the peer-to-peer Bitcoin network, so the fees should be much lower.
- Convenience. Bitcoin is essentially electronic cash. Give it, receive it, boom. What could be more convenient?
- Developing markets and remittances. The benefits of Bitcoin might be theoretical and fuzzy for most readers of this article who have bank accounts. But a lot of people in the developing world don't have bank accounts. However, increasingly these people have cell phones, and they will want to move money electronically (and, therefore, securely). Particularly to receive remittances, which totaled $440 billion in 2012 according to the World Bank, an amount that dwarfs government aid to the developing world. Remittance fees are famously expensive, and the market famously opaque and overregulated. If Bitcoin could allow remittances without fees, that would be an economic boom to the millions (if not hundreds of millions) of families in the developing world who rely on remittances. It just might kick-start a mobile payments revolution. If hundreds of millions of people in the developing world -- the markets that will probably determine the future of large global software platforms -- start to use Bitcoin on their mobile phones to receive remittances, they just might leapfrog our rickety payments infrastructure and usher in the next era of mobile payments.
So, is Bitcoin the future of mobile payments? Not so fast.
There's a problem with that beautiful narrative: In the real world, stuff is messy. The wonderful world of unregulated, open source, middleman-free, free-also-as-in-beer is never going to happen. Why would VCs line up to fund Bitcoin start-ups if they didn't think these companies would be the Visa and JPMorgan Chase of the Bitcoin era -- i.e., fee-taking necessary middlemen? Already Coinbase, one of the most popular Bitcoin wallet services, charges a 1% withdrawal fee -- not much less than the 2 to 3% fee on most point-of-sale credit card transactions.
Running a modern payments system is a massively complex undertaking that requires many companies to work together at each point of the chain, and these companies are going to need to capture some value to pay their employees and stockholders. In the Bitcoin ecosystem, you already have wallet services, exchanges, payments networks, and there will only be more. It's not a conspiracy. It's natural.
Moreover, Bitcoin will either be unregulated or successful. If Bitcoin becomes successful, it will be because entrepreneurs -- i.e., suits -- spread the Gospel of Bitcoin, and suits don't want to be thrown into jail. Bitcoin businesspeople and regulators are already cozying up with each other, as Buzzfeed's Matt Zeitlin reported, just like regular bankers and regulators cozy up with each other. Welcome to the real world.
What about convenience? So far, it's far less convenient than a credit card. Before I get accused of being the guy who said the Internet would never amount to anything because you couldn't take your laptop to the beach -- yes, the ecosystem will mature. As the exchanges get bigger, massive thefts like the ones recently experienced probably won't happen as often. User-friendly services will build on top of the technology so that grandmothers can use it.
But despite all of these things, at the heart of it, Bitcoin is an anonymous peer-to-peer network which requires you to use a cryptographic key to make transactions. If your key is lost or stolen -- boom. That's it. Gone. No do-overs -- all of the transactions, including the fraudulent ones, are forever inscribed on the blockchain. The fact that increased security, and insurance solutions (more transaction fees!) can be implemented doesn't change the fact that it's hard to sell consumers on a solution where they could -- highly unlikely, but conceivably -- lose everything with no safety net. Credit cards started taking off when the credit card companies decided to insure everyone against fraud and just eat the resulting losses (which also explains the transaction fees). People are paranoid about money.
There is real opportunity for Bitcoin and remittances in the developing world. But Bitcoin will probably not take over the whole world by storm. More likely, as Goldman Sachs analyst Roman Leal suggests, there will be a "convergence" between Bitcoin and the traditional financial ecosystem. Meaning that as Bitcoin grows up, it will have more middlemen and more regulation, driving up costs, even as competition from Bitcoin causes the existing financial system to lower its fees and improve its end user experience.
Once you have the smartphone, you don't really need Bitcoin to move money around.