Will Banks Miss the Bitcoin Boat?

I read Hemingway’s In Our Time my Junior year in high school with the fantastic Mr. S Farmans, who inspired in me a love of literature in particular and liberal arts in general that would condemn me to years of unemployment after graduating from college five years later. I vividly remember reading one particular short story in which the protagonist, Nick Adams, asserted “[he] was happy”, a statement Mr. Farmans brought us to understand meant exactly the opposite. If someone is happy they needn’t remind you and themselves of the fact. In any event, it was a minor detail but it stuck with me.

I recalled this particular lecture recently upon hearing Jamie Dimon, CEO of America’s largest bank JP Morgan Chase, assert that bitcoin was “just not going to happen”, and MoneyGram VP Peter Ohser state that bitcoin would not disrupt the remittance markets. The exaggerated confidence with which both gentlemen dismissed the notion (you need to see the video and read the article to understand of what I speak), much like Nick Adam’s assertions of happiness, suggests the opposite.

As it pertains specifically to remittances, Mr. Ohser’s confidence is puzzling. As we’ve written elsewhere, money transfer companies are charging as much as 30% to transfer funds along particular payment corridors, with an average 9% across the board. As they continue charging the world’s most disenfranchised population extortion-level fees, tens of millions of dollars are being invested in bitcoin applications servicing the same population, but for fees bordering on zero. About a week before Mr. Ohser’s interview, the bitcoin remittance company Abra, thanks to $14 million Series B funding round led by American Express, expanded its operations to the US and the Philippines. Considering this, Mr. Ohser appears to suffer from either massive hubris, ignorance or a bad case of Nick Adamitis; regardless of his certainty, we are pretty confident that MoneyGram will go the way of Blockbuster if they are unable to leverage bitcoin/blockchain technology to drastically reduce their fees – and the world will be better for it.

Jamie Dimon’s reaction is less bewildering. In his 2015 letter to investors, he took aim at freeloaders who are able to offer fee-free and instant transfers, whilst claiming that banks pay the “true cost” for such services, services that also happen to be extremely slow due to dependence on legacy payment systems. His bank’s partnership with R3, which offers a distributed ledger solution with a more centralized settlement mechanism, is meant to address the issue, and serves as admission that blockchain technology could very well be disruptive to the banking system. However, his almost disgusted dismissal of bitcoin, a product which has already solved the above issues, and for eight years now, reeks a bit of Nick Adamsitis.

To be fair, even if Mr. Dimon was an enthusiastic bitcoin early adopter it would be quite difficult for his bank to exploit the blockchain. The amount of transactions required to service banks are beyond the current capacity of the network. This leads to an interesting paradox in which banks are simply too large to take advantage of a new technology that has disruptive potential. Rather, small, agile firms like Coinbase are growing along with the network, poised to offer services traditionally the exclusive role of banks – like international foreign exchange, for instance – for a fraction of the cost. The banks are basically left with three options – they can do nothing and hope bitcoin fails; they can hook up with a permissioned ledger like R3 and hope it does not turn into a fancy, rebranded, SWIFT network; or they can work together with developers to determine the best method with which they might utilize the bitcoin settlement mechanism.

The whole situation mirrors neatly the rise of the internet and the banking sector’s response. In his three-part series on the issue, William Mougayar summarizes how banks dealt with, or more accurately didn’t really deal with, the internet in its early days. Essentially, banks first ignored, then warned of the dangers of the internet and online payments, then lagged the market by offering lukewarm integrations utilizing legacy platforms not suitable, and thus produced half-baked products. The result of this slow and tentative embrace of new technology has led to e-payment providers like paypal capturing large chunks of the online payment market. And this trend is continuing, with Fintech startups like TransferWise disrupting additional banking services sectors, and with a fraction of the budget.

The parallels are obvious. Mr. Dimon first ignored, then castigated, and now is tentatively embracing parts of bitcoin / blockchain technology. But much like the internet, you really can’t just embrace the parts you like; your customers are under no such constraints, and it very well could be that future applications of bitcoin and its fully decentralized blockchain will prove extremely attractive to end users. It might simply mean that banks end up excluding themselves from a financial technology revolution.

Of course, being a part of such a revolution requires massive commitment and the willingness to move away from legacy systems and processes. Lumbering behemoths that many banks are, this is no small task, and the easy path is simply to dismiss bitcoin as a pipe dream and hope for the best. The risks of such a course should be obvious.