Bitcoin Seen as Little Threat to Payment FirmsElizabeth Dexheimer and Carter Dougherty
Visa Inc. and MasterCard Inc., which processed $7.4 trillion in purchases last year, are among leading payments networks that devote thousands of words in filings to every perceived threat to their business. “Bitcoin” isn’t one of them.
“I’m a bit skeptical,” said Discover Financial Services Chief Executive Officer David Nelms, who runs the fourth-biggest U.S. network after Visa, MasterCard and American Express Co. Other things pose “a lot more potential threats or opportunities than Bitcoin,” he said.
Investors in the digital currency are looking to capture some of the four firms’ combined $61.3 billion in annual revenue and loosen their decades-long grip on handling electronic payments. While Bitcoin can buy a widening array of goods and services, regulatory scrutiny and technical glitches have raised questions about whether it will continue to catch on. That’s why executives at the biggest payment firms -- watching Bitcoin developments closely -- show little worry, saying their technology is safer, more reliable and easier for consumers.
“Protection and trust are crucial to us and our card members and merchants,” Dan Schulman, president for enterprise growth at American Express and former CEO of Priceline.com Inc., said in an interview at the lender’s New York headquarters. “We don’t believe that is offered by crypto-currencies today.”
Bitcoin, introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, has no central issuing authority and uses a public ledger to verify transactions that are authenticated by cryptographic signatures.
Daily Bitcoin transaction volume climbed to more than $58 million on Feb. 20 from about $6.9 million a year earlier, according to data from Blockchain.info, which provides online wallets for digital currencies. That’s about as much as Visa and MasterCard process every four minutes, not including the $3.7 trillion in cash disbursements they handled last year.
Authorities in Russia, China and Israel have sought to restrict Bitcoin, while the U.S. seeks ways to prevent money-laundering and illicit sales without killing the digital currency. The threat of regulation and disruptions, including hacker attacks on online exchanges, have caused Bitcoin’s value to plummet.
The virtual currency has dropped about 30 percent in the past month to about $605 on Feb. 22, according to the CoinDesk Bitcoin Price Index, which averages exchange prices. Closing values from Feb. 1 through Feb. 22 have ranged between $552.21 and $853.02, data available yesterday show.
Supporters of Bitcoin such as Peter Vessenes, chairman of the Bitcoin Foundation, say it’s cheaper than traditional payment systems because users can move funds without middlemen such as networks, merchant acquirers and banks taking a cut. The proponents predict entrepreneurs will solve security issues while keeping costs low. For example, a cluster of startups are devoted to securing Bitcoins or insuring them.
“They are ways to construct a risk-free money flow,” Vessenes, whose organization promotes the currency’s use, said in an interview.
Retailers such as Salt Lake City-based Overstock.com have said they’re drawn to Bitcoin because it costs less to accept than bank-issued debit cards, which can carry fees and fraud costs amounting to about 3 percent of purchases. Bitcoin payment processor BitPay handled transactions for 23,000 merchants last month, up from 2,400 a year earlier, and is adding about 1,000 a week, said Jan Jahosky, a spokeswoman for the Atlanta-based company.
While card-network executives are watching how businesses and governments react to Bitcoin, it’s the same level of attention they give to any development in the payments industry, a person with direct knowledge of one network’s view said. There’s no Bitcoin-specific lobbying effort, even though the topic does come up in talks with lawmakers and regulators, said another person with knowledge of a major network’s strategy, asking not to be named because the talks are private.
It’s too early to understand all the implications, Visa CEO Charlie Scharf told analysts on a Jan. 30 conference call, in which he called Bitcoin “far more complex” than it’s often portrayed.
“People talk about things like frictionless and things like that, and when you actually dig through it, it’s really not the case,” said Scharf, 48. “We feel very comfortable with the business that we have here.”
While firms such as Visa and MasterCard haven’t labeled Bitcoin a risk in disclosures, PayPal owner EBay Inc. called Coinbase and BitPay, which both act as Bitcoin merchant acquirers, competitors in a Jan. 31 filing. Acquirers help businesses set up systems to receive their customers’ money electronically.
There’s nothing “holding PayPal back from pursuing digital payments,” EBay CEO John Donahoe, 53, said in a Feb. 18 interview with Bloomberg Television.
More retailers will begin accepting Bitcoin this year, said Barry Silbert, an investor in BitPay and San Francisco-based Coinbase. The companies “are in various stages of discussion with the who’s-who of retailers,” said Silbert, the CEO of SecondMarket Inc., a New York-based brokerage.
A spokesman for the Retail Industry Leaders Association declined to comment, and Kathy Grannis, a spokeswoman for the National Retail Federation, said she was “not familiar with this being on the horizon for any major retailers.”
A growing number of regulators are resisting virtual currencies. The instruments suffer from volatility, can be exploited for money-laundering, fraud and terror financing, and are vulnerable to robbery via hacking, Israel’s central bank and financial regulators said last week.
In the U.S., Benjamin Lawsky, superintendent of New York Department of Financial Services, said the state will propose rules for licensing digital-currency companies this year, and may adopt tougher money-laundering rules than those applying to banks.
“You can already see there are some issues about it -- just on some very basic things,” said Martina Hund-Mejean, chief financial officer of Purchase, New York-based MasterCard, in a phone interview Jan. 31. “When you talk about virtual currencies you especially compare it to what we do in our network, and the safety and the security around it is paramount.”
New rules also may undermine Bitcoin’s ability to compete, according to payments-industry executives.
“I just don’t see how it escapes regulation by governments around the world,” said Discover’s Nelms, 53, in a Jan. 23 interview. His company, based in Riverwoods, Illinois, had $310 billion in network volume last year. AmEx handled $952 billion in worldwide spending.
Bitcoin “will eventually be made as a payment system, I think, to follow the same standards as the other payment systems, and that will probably be the end,” Jamie Dimon, 57 and CEO of JPMorgan Chase & Co., the biggest U.S. bank, said in a Jan. 23 interview with CNBC.
Retailers are accepting Bitcoin to lure new customers and are plowing money saved on Bitcoin transactions into incentives. Gyft, a seller of gift cards, uses most of the 3 percent it saves from accepting the digital currency on customer rebates.
International merchants such as Fiverr, an online market for freelance services like writing and graphic design based in Tel Aviv, say accepting Bitcoin provides access to U.S. consumers. Bitcoin has “steady penetration in the U.S., which is a key territory for Fiverr,” CEO Micha Kaufman said Feb. 12 in an e-mail.
The adult website Porn.com accepts Bitcoin so users don’t have to reveal their identities. Marijuana dispensaries in U.S. states that have legalized the drug may accept it to avoid dealing in cash, which can be stolen, or credit cards, which require cooperation from financial firms, according to Silbert.
Still, Bitcoin price swings may deter shoppers. In a paper for the National Bureau of Economic Research, economist David Yermack said that Bitcoin shifts too much to be a unit of account or a store of value.
“It’s a volatile currency, and that makes it very difficult for consumers and merchants to know the value of what they have when using Bitcoin to purchase or receive goods or services,” said AmEx’s Schulman, 56.
Alex Hoffmann, executive vice president of global product management and emerging channels at MoneyGram International Inc., said he doesn’t see widespread demand to send digital currencies. He isn’t convinced that Bitcoin has developed into a disruptive technology for the payments industry.
“Today, people speculate on the potential,” Hoffmann said in an interview. “But today you do not have it.”
Ken Murphy, a payments analyst at Standard Life Investments Ltd. in Boston, said Bitcoin probably won’t work out in the long run.
“It’s a little bit of hype,” Murphy, who oversees about $300 billion in assets including shares of Foster City, California-based Visa, said in an interview. “Humans are slow to adapt.”
As Bitcoin evolves, its opportunities and potential risks to the U.S. payments industry will become clearer, according to Zachary Aron, a principal at Deloitte Consulting LLP who specializes in payments.
“Anyone in the payments space has seen and viewed disruption for a very long time,” he said in an interview. “Bitcoin does have potential and promise, but we are still in its infant stages.”