Ever since they were developed, certain people—we know who you are—have been advocating the revolutionary changes that digital currencies and blockchain-based payments will bring to the global economy. I think I wrote my first blog post on this about six years ago while an employee at Mastercard. I do not claim to be an expert in this area but I do have a pretty good understanding of the payments space and consumer behavior.
My basic premise then, and now, is that it is a solution in search of a problem.
A recent article on Seeking Alpha, Disruption And Growth In Digital Payments, highlights this very issue. The article makes some very important observations on why the payments networks, like Visa and Mastercard, are not threatened by the likes of Bitcoin or Libra. One of the most important points raised is:
First and foremost, the technology simply isn’t capable of handling the bandwidth needed to support any sort of systematic shift. Estimates of the number of transactions that Bitcoin and its competitors can handle ranges from as low as five to a few hundred per second – a fraction of what existing networks such as Visa and Mastercard can handle.
Considering that Visa is processing about 1,700 transactions per second, there’s a lot of work to be done to catch up. Not to mention that the networks are also continuously improving their own processing capabilities through investment, invention, and acquisitions.
The other issue that the article touches on but, I think, needs further discussion is consumer behavior.
Old habits die hard, and this has already been proven to be true in the area of payments. Contactless, (a.k.a., tap and go) technology has been around for years but, at least in the U.S., it is still fighting to gain meaningful traction. Why is this? First of all, contactless payments at the POS (where the majority of transactions happen) are not significantly different from swiping a mag stripe, or inserting a chip card.
Further, there is the issue of trust. The networks and issuers are known, trusted entities. These players have been in the marketplace for years; they have earned the trust of the cardholders. One cannot underestimate the power that trust has in the consumers’ minds—particularly when it comes to something as near and dear to them as their money. Sorry, but the digital currencies just do not have anywhere near the trust that the networks or issuers have.
Trust is even a bigger issue when it comes to shopping online. Back in the day, one of the biggest hurdles the e-commerce industry had to overcome was the payment. People did not trust these online retailers with their payment information; many still don’t and choose to use intermediaries like PayPal. Will cryptocurrencies and the like ever make a meaningful dent in the payment ecosystem? Maybe, but they have a host of high hurdles to clear before they make it mainstream. Further, I’m pretty certain it ain’t going to happen anytime soon.
Overview by Peter Reville, Director, Primary Research Services at Mercator Advisory Group