Comparing SWIFT, Paypal and Bitcoin – and why this matters!

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Attending SWIFT’s Sibos conference and watching sessions on digital currencies is rather like letting the wolf in the hen house. You see, SWIFT is the utility (some would say monopoly) which moves money for banks around the world using a closed standard. Watching the potential ultimate disintermediation was rather cool of them.

That Bitcoin has captured the imagination of speculators is an understatement. But according to Informilo, a tech journal, as of June 2014, there are now 48 venture capital backed Bitcoin start-ups.

I had the pleasure of attending a great bash in Boston put on by Circle, a new company that provides payment acceptance tools for merchants, and onramp services for consumers like you and me to buy and sell Bitcoin. I met plenty of cool geeks and engineers at the party, and learned about block chain, mining, and why this is all important for them.

You see, the interesting angle in all of this is that Bitcoin, via Block Chains, takes the payment infrastructure of banks and turns it on its head. Why? Becasue the cost of sending money is almost zero (there is cost of mining, and that gets increasingly expensive, but is still very very small relative to the cost of sending money).

When you look at what others would consider an innovator in the money movement space, Paypal, they have three distinct advantages that provide them value:

  1.   They offer security of not using credit card for online transactions
  2.   Anyone can accept credit cards – you do not have to be a bank merchant to accept
  3.   Person to person transactions are free

But Paypal still uses the Banks legacy payment system to send money (the ACH clearing network).

Bitcoin effectively lowers the cost of money transfer to zero + it does so without having to go through bank infrastructure – what it lacks though is remittance information – it’s just anonymous bits and bytes saying move money from this computer to that computer. The ultimate owner of any single unit of Bitcoin can be tracked through a central system, and any transaction is automatically recorded.

I don’t know where this Bitcoin thing will go, but I do like it in the sense its open sourced, not controlled by any “utility” and takes the traditional trust brokers of banks, and others and turns them upside down.

Will Bitcoin work? I dont know. Right now Informilo estimates 63,000 businesses take Bitcoin. The problem merchants have that take Bitcoins is they usually liquidate right for cash, creating downward pressure.  Last week Bitcoin's price fell almost 20% in one day, not good for something that is trying to be an established currency for merchants.

There is still much to understand, but knowing Bitcoin made the main stage at Sibos and there was quite a buzz of all things digital currency, the bankers are starting to come to the party.

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First Voice

  1. Maksim Rokhline:

    Hi David.
    Bitcoin as a distributed processing protocol is a very potential thing. And i am sure it can carry a load of b2b remittance data if it is tasked and enhanced for it. As a currency, – i am not sure. It should be left alone (not prohibited or punished by state) to prove itself in competition with other monies privately issued.

    To push/pull money (state, fiat currency) in/out of Bitcoin wallet you need same good old Clearing mechanist, like ACH in the US. At least for now. Obviously if you are paid with Bitcoin, trade w/ Bitcoin and save for retirement in Bitcoin you don’t need to leave your favorite currency universe. But right now there are many galactics (and most likely will be even more in the future) and that will require exchanges and multiple processing protocols to coexist. Complexity will only grow.

    It also doesn’t cost PayPal to move funds within its own system. If I ACHed funds into my PayPal wallet account from my bank, i can move then these funds to your PayPal wallet account and this transaction will cost nothing to PayPal (as it is a simple electronic ledger entry: debit one PayPal account and credit another PayPal account). In both cases – Bitcoin wallet and PayPal wallet – you need to move funds via ACH or other networks into a wallet first b/f transactions can be carried across these wallet networks. And most likely you will need to pull (ach) money out from a wallet at a later day. Of course, i understand the differences b/w Paypal and Bitcoin. These are many and many.

    No difference is with wholesale payments. A Central Bank (anyone) instantly moves money between its member banks (member banks accounts with CB) as long as enough funds are available on a payor account. Again this is no cost electronic ledger transaction – debit one bank’s CB bank account and credit another bank’s CB bank account.

    Of course, PayPal or a CB are the examples of closed loop system. Bitcoin is a distributed protocol. But obviously with respect to non Bitcoin currencies it is a closed [and dynamic] universe.

    Last point is that expensiveness comes with additional services, outside of payment processing (debit/credit) proper. Like AML programs, fraud management, reporting, authentication and authorization, chargeback, cyberfraud, …, hardware, … Within Bitcoin SOME of the add services are either not required or solved in a very elegant, ‘no additional cost’ way .

    Thank you,
    Maksim

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