EMERGE Recap: Digital Currencies Pack Potential to Serve the Underbanked (June 9, 2014)
The rise of Bitcoin and other digital currencies could present new opportunities for serving the underbanked once acceptance becomes more widespread, and payment providers and investors are building an infrastructure to support such uses. Last week at EMERGE: The Forum on Consumer Financial Services Innovation held in Los Angeles, a panel explored how digital currencies can provide an avenue for cash-preferred consumers to load and transfer funds electronically with minimal friction and lower costs compared with traditional methods.
When cash-preferred and underbanked consumers want to make online transactions, send remittances or transfer money, they seek ways to enter cash into electronic payment systems as quickly and cheaply as possible, noted Fama Longjohn, consultant, advisory services for the Center for Financial Services Innovation (CFSI). Transferring cash into digital currency can be an efficient method of doing so, and several providers have emerged offering cash-to-Bitcoin services, including ZipZap Inc., a global cash payment network, whose founder and CEO, Alan Safahi, also was on the panel.
Once cash is converted to digital currency, the fewer intermediaries involved in a single transaction leads to lower transaction costs, Longjohn said. Over the course of a single transaction with a traditional currency, fees charged to the merchant by parties, including payment networks, insurers, banks and the government, reduce revenue and lead to higher prices for consumers, she suggested. On the other hand, digital currency-based transactions require only the two parties involved the transaction—reducing costs for consumers. And because digital currencies are not tied to any national currency, conversion costs are eliminated for international transactions. “The lower friction, potential for price reduction and simplification of money transfer provided by [digital currency] payment systems gives consumers a viable alternative to a traditional electronic transaction,” she said.
Products and services are being developed to make digital currencies even more accessible. ATMs, prepaid cards, debit cards, exchanges and P2P payments providers have all emerged to serve digital currency customers, Longjohn continued. “Digital currencies have the potential to connect people with higher quality and less expensive payments transfer, democratize the remittance system and improve international money settlement. It is because of this potential that [payment providers and investors] are interested in digital currency systems.”
But before the full potential of digital currency can be realized, there remain important issues that must be resolved, Longjohn cautioned. “The decentralization of [digital currency] can pose serious challenges,” including value swings based on external events and government regulations that vary between countries and even at the state level. Keeping transaction records also may be challenging, and the anonymized nature of digital currency opens the potential for hacking and fraud, she said.
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