Could core payments infrastructure in the US and other countries shift to Bitcoin or some other blockchain or cyber-currency model? It seems impossible. Government, regulators and banks are conservative, and today skeptical, if not hostile. Payment volumes of Bitcoin and other cyber-currencies lag dollar payment volumes by several orders of magnitude. Nor are those volumes yet even growing at a speed that might point to such a possibility.
And yet: Internet Protocol (IP) based networks conquered the world despite, and not because of incumbent telcos. In attempting to foresee the future, it can be helpful to outline scenarios that might result in such dramatic changes, even if they still seem unlikely. It is certainly now well understood how exponentially growing networks, like the Internet itself, emerge seemingly out of nowhere with transformative results. This post explores one such scenario for payments.
Payments today are fundamentally about networks. We can observe various networks that have reached mass, global scale: Paypal, Facebook, the Internet itself. A few patterns emerge as to how that happens. One pattern: early users of the new network technology emerge from relatively narrow or niche groups for whom it provides particularly compelling value. Another, complementary, pattern: the new technology enables connections between networks that were previously disconnected (or poorly connected). A third pattern: as the network scales, it becomes a platform for increasingly general and mainstream applications.
So, before mass scale or core infrastructure scenarios, we should consider what market segments and use cases might drive early, niche adoption. Let’s consider a scenario with global payments in the lead, followed by B2B payments as a possible vector for broad and deep Bitcoin adoption.
Global payments are the segment of payments that is, arguably, the most broken: high and hidden fees for payers; inconsistent, slow, and opaque speed of payment delivery; unpredictable payee experiences and fees. One way to look at these problems is that they arise from friction in the connections between networks. Here, that means the web of ad hoc correspondent bank relationships that link the (relatively faster) domestic payments systems in the two countries concerned. Historically, any new global payments offering has had to build its own network of correspondent relationships, and/or rely on a global bank.
Bitcoin, however, already has a distributed equivalent in the form of the various bitcoin exchanges around the world. These potentially play the same role that Internet Protocol played in the 1970s-80s in connecting various different proprietary networking protocols. (While other cyber-currencies have the same potential conceptually, they don’t yet have this emerging global infrastructure and market liquidity). So here we see two of the three network patterns applying: compelling customer value, based on a superior model for connecting existing networks.
The third pattern relates to how new, broader use cases arise, extending beyond the initial segments where the new network’s value proposition was most compelling. Bitcoin as a unified, global-ready platform for B2B payments could represent such a scenario. Global 5000 enterprises, with some $58 trillion of total revenue (equal to 70% of global GDP), are an important segment of the payments market globally. With operations around the world in most cases, they pay significant amounts to their suppliers, both in-country and cross-border. Their general desire to standardize and unify processes around the world potentially applies to payments as well. As such, they represent an important potential market for standardized global payment processes.
As Bitcoin-based payment networks begin to deliver superior value for cross-border payments, it’s not hard to see the desire for standardization leading to adoption for some in-country payments as well. Exact use cases are hard to predict, but might start with countries where the domestic payment system had deficiencies. Settling local currency funds into existing bank accounts through those domestic systems would likely be the starting point (with their speed as a limiting factor). But there might be cases where Bitcoin’s near-real time settlement capability started driving some payment volume to alternate networks, even for domestic payments – with settlement still in local currencies. These various use cases, along with an emerging ecosystem of service providers, could result in an exponentially growing volume of payments settled through new, Bitcoin-native networks.
Of course, government and banking industry initiatives in many countries are also driving towards improvements in core payments market infrastructure, not least around faster payments. However, there’s an important difference in the dynamics of change between such “core-first” initiatives, and “edge-first” transformations, such as we are hypothesizing here.
Core-first efforts need to determine which of the myriad use cases of the existing payment system will be supported first. This is a balancing act. The more requirements for use cases and market participants to be supported, the slower, more complex and expensive the development project. The fewer such requirements, the faster – but likely also, the smaller the payment volume across which new costs can be amortized. Get the balance wrong, and the economics may not make for a business case compelling enough to drive rapid adoption of the new system.
Edge-first transitions, however, don’t require this kind of challenging planning exercise, or complex, centralized development project. A new platform achieves very low cost based on superior, standard technology and a few use cases. It then scales organically as it gets extended incrementally to support new use cases. Each use case or implementation has its own, separate business case to justify migration costs based on ongoing cost or revenue benefits from the new platform. Migration decisions are distributed rather than centralized.
Eventually, the cost savings and other benefits from consolidating onto the new technology platform drive even the last, legacy scenarios to migrate. It happened in telecom with IP networking. Unlikely as it may now seem, it could happen in payments with Bitcoin.