Published on March 11, 2015 at 15:52 GMT
Bitcoin and cryptocurrencies are part of a technology "megatrend" that could change the fundamental mechanics of transactions, according to a new report from Goldman Sachs' equity research analysts.
Bitcoin, along with improved payment security, 'big data' analytics and faster payment networks are the components of a technology trend that will disrupt the payments ecosystem, the report says.
The disruption of the $1.2tn global payments industry will be also be driven by converging trends in regulation, global demographics and the rise of markets outside the United States.
The report says:
"Innovations in network technology and cryptography could change the speed and mechanics of moving money."
Bitcoin will change consumer payments
The report, published yesterday, is titled The Future of Finance: Redefining The Way We Pay in the Next Decade. It's written by James Schneider and SK Prasad Borra, payments analysts at the bank's research division.
It comes as the second in a series that has already featured the rise of 'shadow banks'.
According to Schneider and Borra, bitcoin's major impact will be enabling the transfer of assets without a central clearing authority.
The large public companies that will benefit will be merchants, who will reap savings on payment costs. Firms who might lose out are traditional money-transfer firms like Western Union, Moneygram and Xoom.
Bitcoin's impact will be felt in the field of consumer-to-consumer payments, the report says. This market includes all payments made between consumers, with examples of leading vendors being mobile wallets like Venmo and Square Cash.
Disruptive entrants to the consumer payments space are limited to earning revenue from international money transfers, according to the report, a market that's worth $580bn. These entrants include bitcoin exchanges and the peer-to-peer platform for foreign currency exchange TransferWise.
Bitcoin could also play a significant role in global remittances for customers who want to use cash to begin the transfer process. The report points to Bitspark as an example of a firm that lets customers remit funds by depositing cash, bypassing the need for a bank account. Bitspark then performs the transfer by exchanging it into bitcoin.
New players could take 20% of the current $30bn consumer-to-consumer market from incumbents over the next 10 years, the analysts estimate. Newcomers will also drive fees down from a current average of 6% of the principal to 2.5%.
"Distributed networks are, in principle, more secure and reliable due to their open source nature, and there is no single point of failure," the report notes.
"Given the low transaction fees associated with ... virtual currencies, there is potential for significant dislocation in the profit pools associated with money transfer."
Significant merchant interest in bitcoin
The Ripple network is highlighted as a bitcoin alternative that could gain acceptance among small banks. The report points to Ripple's partnerships with banks like Fidor, CBW Bank and Cross River Bank as evidence that the network allows these institutions to perform international money transfers without depending on large banking partners.
Merchant adoption of bitcoin could rise in coming years, the report found. The analysts conducted a survey with the Electronic Transactions Association that found 23% of merchants planned to accept bitcoin within the next 24 months.
The report estimates that more than 100,000 merchants currently take bitcoin payments globally.
The analysts stress that merchant adoption of bitcoin is in its "infancy" and that results so far have been inconclusive. It cites Overstock.com falling well short of its bitcoin sales target last year as an example of a merchant who is not enjoying significant benefits from bitcoin payments.
But the authors also stress that it's too early to write bitcoin off, and that they will "closely monitor" merchant bitcoin-use in the coming months.
The report also noted that nearly 80% of trading volume on bitcoin exchanges is driven by trade in the yuan-bitcoin currency pair, although it did not point out that Chinese exchanges often don't charge fees for trading, leading to higher trading volumes.
The opportunity for bitcoin-linked companies is tiny compared to the potential gains available in other sectors identified in the report. While $6bn could accrue to firms like bitcoin exchanges operating in the consumer-to-consumer payments space, some $17bn is up for grabs in the business-to-business payments sector.
In the field of payments between businesses and consumers, $84bn could be taken by newcomers.
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