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The payments industry is ripe for disruption

February 10, 2014

Through a special arrangement, what follows is a summary of an article from Retail Paradox, RSR Research's weekly analysis on emerging issues facing retailers, presented here for discussion.

In late January, I attended two conferences in Miami Beach related to payments and currency: the Miami Beach Bitcoin Conference and the Mobile Payments conference.

I came away with a strong and profound feeling that the payment industry is ripe for disruption. The combination of a sense of inevitability in the existing providers contrasted with the enthusiasm and excitement felt in the newer group led me to think we could easily see a disruptive change agent. Is Bitcoin going to be that disruptive agent? It's hard to tell at this point.

I can say that even the new mobile payment exchanges — ISIS, MCX and others — have a similar sense of entitlement to them. Sort of like, "We're new, but we're the same." I don't see any disruption happening there.

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I can also say that Bitcoin, a digital crypto-currency, is certainly different. Digital currencies are trustless rather than trusted, digital rather than physical, and irrevocable rather than chargeback-friendly. At the moment, transacting with them is about as close to "free" for retailers as it gets.

It's hard to explain exactly what Bitcoin is in one paragraph, but basically it's a cross between a stock and a form of payment. A few retailers (including Overstock.com and Tigerdirect.com), casinos and small businesses have started using it as a form of payment. But it's like a stock because there is a fixed number of "Bitcoins" in the universe and the value of each Bitcoin tends to fluctuate based on the law of supply and demand.

With regard to value fluctuation, much has been made of the rapid escalation of Bitcoin's value against traditional currencies, as well as its association with illicit transactions. Venture capitalists at the Bitcoin Conference were very clear that some regulations must be established before they place big bets on the currency.

Saving those hurdles for another day, the important thing to note here is the very, very low fees associated with Bitcoin transactions. The other is that Bitcoin is exempt from PCI standards, as it doesn't pass through traditional payment gateways. It's completely encrypted and "trustless", and the transactions are irrevocable.

Now I'm not prophesying the end of traditional payment gateways. But there are several things worthy of note here: 1) the Target data breach seems to have been the straw that broke the consumer camel's back on privacy and data security. The notion of "trustless" is likely to become more interesting to consumers; and 2) retailers know prices are high for payment processing. That's what spawned the notion of MCX — let's keep a slice for ourselves. Finally, 3) mobile payments are not gaining the traction retailers and tech providers expected. Consumers just don't see the benefits.

So here we are. Payment processors are convinced of their inevitability. Consumers aren't happy. Retailers believe they are paying too much for too little. What do you think? Is there an opportunity to disrupt the ecosystem entirely?

Discussion Questions:

Does Bitcoin in any way represent the future of payments? How may traditional payment gateways be affected or have to adjust to such digital currencies as options?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

What's the likelihood that Bitcoin or other digital currencies will significantly alter traditional payment systems?

Comments:

Under the "what's old is new" category, with all the retail and other security breaches lately, I hear a lot of consumers saying that the best way to pay is cash. Obviously, it doesn't work online, but consumers are leery of their credit and debit card charges being monitored, hacked, or tracked.

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Al McClain, CEO, Founder, RetailWire.com

I recently got an iPhone case with NFC capability to support the ISIS wallet. Everything worked smoothly for setup and use but in the end, it didn't feel like it was very different than using a traditional credit card. Perhaps I'll think differently when more offers are available, but for now I'll endorse Paula's "we're new, but we're the same" assessment.

Almost twenty years ago when I was introduced to smartcards, I felt we were on the verge of a major shift, but it's only now that EMV is starting to take hold. I chuckle when I see credit card commercials are now finally depicting smartcards.

While all this innovation around mobile payments and Bitcoin is fun to watch, the banks are still firmly in control, so my expectations aren't high.

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David Dorf, Sr. Director of Technology Strategy, Oracle Retail

Thanks Paula for bringing this topic forward. It will be one of the key drivers to future profit structure in industries like retail and banks, as well as the broadening payment industry.

Disruption happens when several trends come together: converging technologies, rising demands (consumer or business), introduction of new regulatory rules, crises of confidence or trust (e.g., oil spills, security breaches, sovereign debt, etc.). For the "payment industry" we certainly do have several of these trends coming together and new technologies are coming together to offer alternatives. It's extremely difficult for large players with stake in the status quo to disrupt their own world, so I do look to new players or those parties that can benefit greatly from such a disruption to accelerate movement in a new direction.

I can't speak to future of Bitcoin per se, it's very early for that currency/technology construct. Based on the polarized reaction to Bitcoin (Marc Andreessen and Paul Krugman) a popular adoption is perhaps further out than not. However, it's 'trustless' nature is very attractive to anyone concerned with privacy (covers both licit and illicit use). And oh, who doesn't like "free"?!

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Mohamed Amer, Vice President, Global Consumer Industries, SAP

There are a number of new technologies that are designed to do an end-run around the major payment processors. Only a few have caught on. Cumberland Farm's SmartPay is one that seems to have caught on with the consumers, as it passes the savings from the transaction fee on to the shopper via savings on gasoline.

Others have not been so successful. The key, it would seem, is finding the right mix of savings and rewards that induces the consumer to walk away from the points and benefits of their current Visa, Discover, MC, or AMEX cards, coupled with the convenience and reliability of the current payment options.

I do think more programs will take hold, just as Paula states, when the consumer is unhappy, the retailer is paying too much, and technology is enabling new options!

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Mark Heckman, Principal, Mark Heckman Consulting

Bitcoin has a long way to go before it can be considered a replacement for today's payment standards. However, while it may not be Bitcoin, some form of international internet payment standard is going to be made over the next 5 to 10 years which is much more secure than what we are using today. I think it is to early to see just what it is going to be.

Bitcoin, in its current stage, isn't going to cut it.

'GRMichaud'

This is a very worthwhile discussion, but I think it is way too early to dismiss mobile payments via smartphones. The problem there is the apps are not obviously tied to eliminating checkout, which is the motivation needed to prompt adoption.

Money IS a symbol for value, and since forever has required someONE to be responsible and vouch for its value. It is this vouching for value that seems missing from Bitcoin. It is not just gold that has been a standard for money - scrip, for example, is functionally money, for which a company or other legal entity has usually been the party vouching for it. For that matter, checks are a form of money, vouched for by the signatory, but supervised by a third party "voucher" too, the bank or other institution.

I don't see any legitimate future whatsoever for Bitcoin, a "trustless" currency. It is virtually a contradiction in terms, since TRUST is the foundation of currency - Bitcoin CAN'T play. Highly recommended for fools, knaves and the "un-trust-worthy." ;-)

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Shopper Scientist LLC

Bitcoin (or some competing "trustless" crypto-currency) does indeed hold potential to disrupt the hegemony of the world banking establishment. I would anticipate rather vigorous efforts by governments to try to regulate this emerging phenomenon, with not-so-subtle pressure from the banks.

There's a lot I don't understand about this yet, but I interpret the rise of crypto-currency to be a separate topic compared with alternative payment processing gateways for retail transactions like MCX and ISIS. New gateways are merely attempts to wrestle control over an existing, entrenched paradigm. In comparison, Bitcoin is a bold attempt to establish an entirely new paradigm.

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James Tenser, Principal, VSN Strategies

Thanks Paula for giving my brain a wake up. I have been tossing the whole payment thing around and the only thing I keep on saying is that we need to move into the 21st century. I do not think chip and pin is the answer, nor are any of the payment options out there right now.

My mind has been focused on something along the lines of Paypal for a starting point, but BitCoin has me very intrigued. While I don't think we have to create a whole new currency as Bitcoin has done, I do think this trust-less payment system is onto something. "I don't trust you to have any of my payment info, but you have something I want."

It's sort of like those meetings you go to where you have to buy tickets in order to get a drink at the bar. If I can buy my ticket directly from a source so my data is not transferred or stored anywhere, then I can use my ticket freely in stores or across the net. Hmmm...I think I'll ponder this for a while.

Lee Kent, Let's meet share and succeed in Retail, YourRetailAuthority

In Bitcoin's current form, I do not see widespread adoption anytime soon. It's stock price has been unsteady in recent weeks, also. Just because a couple of retailers and a car dealer accepted them for currency doesn't mean it is ubiquitous.

I have long thoughts about international currency opportunities. I think the proliferation of new payment options does present new opportunities for digital currencies to cross boarders. Maybe Bitcoin will be the winner.

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Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM

The market is more than ripe for disruption. One need only look at the Google Wallet/ISIS war between Google and mobile carriers to see the classic battle of the old school guys wanting to maintain the status quo. Why do some of the big banks and mobile carriers routinely make it onto the list of most disliked brands? Because people dislike the sense of entitlement and don't believe these companies act in the interest of the consumer.

We are definitely ready for a consumer-friendly payment revolution: transparent, honest and simple.

For these reasons, I agree with many of the foregoing posts: Bitcoin is probably NOT going to be the disruptor. It's a bit too bleeding edge and esoteric for the average consumer. Understanding a new currency only adds to the complexity. What consumers crave is simplicity.

I believe the disruption will come from those who can innovate from our present payment systems. Look to PayPal and Square for examples of the revolutionary thinking that finds an obvious need in our present systems and innovates to improve. Square has revolutionized POS for small retail in just a few short years, and it wasn't by inventing a new currency: they simply made it easy for small retailers to accept credit cards anywhere, and with fees that were transparent and fair.

The players that can find similar opportunities and create elegant solutions will move us to a new future of payments.

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Lance Thornswood, VP/Managing Director, inRetail

The only thing free is nothing. If Bitcoin was a viable currency, it would have moved forward already. The greater probability lies in corporations going into the lending business themselves and on their own. Banks are simply taking to much money for the transaction services they provide. Very large world wide corporations and co-operative marketing ventures will be forced to commit to something on their own if the transaction prices continue to escalate as service and security degrade.

'gjarnoldjr'

This is a timely discussion as there are several digital wallet solutions in process of being made ready for market and the Bitcoin discussion is heating up.

It is interesting (just an observation) that Bitcoin earned its most recent notoriety from the Silk Road controversy and somehow that negative press has evolved into discussion of whether Bitcoin could be a legitimate alternate currency in the future.

From my view, the payment solution that will become the leading "disruptor" will not only meet the needs of customers and merchants as others have mentioned, but will also be able to establish a broad footprint upon launch. Seems that MCX is one that could do that given their merchant support.

As for PayPal, it is a convenient alternative but it does flunk the lower cost test. I reviewed a series of payment made and received over the past year in my account and found the average discount rate to be between 3-4%. How is that better than using a credit card?

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Bill Hanifin, Managing Director, Hanifin Loyalty LLC

Some retailers see Bitcoins as an alternative currency that saves merchant fees. Thus, they reason they can sell for less. But as long as retailers like Overstock only sell, not purchase, using Bitcoins, they are reliant on middlemen like Bitpay to exchange back to real currency. Since Bitcoins are rising in value, the spread is now in their favor.

But it won't always be that way. And therein lies the problem: volatility will slow adoption for mainstream businesses.

This is a manageable risk for drug dealers and the black market, where high transaction costs are built into their business models. But retailers and other legitimate firms in competitive markets can't absorb the same level of uncertainty.

What will reduce volatility in the future? A controlled supply of 21 million Bitcoins is a start (have no fear of QE). And the New York Division of Financial Services is looking into legalizing derivatives and hedging to reduce volatility (how has that worked out for other currencies?).

There is quite a bit for the academics to work out, and regulations will certainly follow. Until then, caveat emptor.

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Dan Frechtling, Vice President, Global Product Management, hibu, PLC

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