British Banking Association: Bitcoin is a Real Threat to Banks

As cryptocurrencies grow in popularity, they will continue to threaten revenue streams of the traditional banking system, according to a new report from the British Banking Association (BBA). A section of The Digital Disruption: UK Banking Report looks specifically at cryptocurrencies and the impact they have already had, and will continue to have, on people's perceptions of monetary transfer.
"Cryptocurrencies increasingly look like becoming ubiquitous challengers to more familiar, established currencies. And, as they grow in popularity, so too will the risks for banks," the report reads.
It goes on to emphasise issues presented and faced by bitcoin, including its volatility, its perception as a haven for illegal payments activity and its relatively low market cap ($3.4bn at press time).
However, the report concedes that the risks presented to the banking system by bitcoin should not be ignored:

"Bitcoin users can handle many of their daily payments needs themselves, without the need for interaction with banks, and avoiding the need to incur bank fees. In the same way, value stored in PayPal accounts moves outside of the bank’s payment systems, depriving banks of valuable payments revenue."

The BBA believes it is important for banks to take action now, investing time and energy in understanding how best to use the technology behind bitcoin.
"Banks must accept that they are increasingly part of the broader ecosystems that customers are constructing around themselves. However, their place in these ecosystems is far from secure," the report concludes.



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Here are some of the key takeaways:

• The ecosystem for credit- and debit-card processing involves a complicated set of players interacting to process every transaction. Five types of players are involved: acquirers/processors, issuers, card networks, gateway providers, and independent sales organizations (ISOs). 
• to process a typical transaction, three steps must occur: authorizing, batching, and funding. Each participant in this process takes a fee off of the total volume of a transaction. The remainder is deposited in a merchant's account.
• three trends will shape the payment-card-processing ecosystem from 2015 onward: the EMV security migration, rapid development of new payment technologies, and the massive card-fraud problem in the US. While none of these developments will completely upend the incumbent system for processing payments, each will disrupt key players. 
  
• The mobile point-of-sale (mPOS) is going to have a massive impact on the payments-hardware and payments-software industry. By 2019, we forecast that nearly 80% of US retailers will have implemented a mPOS device. The move to mPOS will continue to put pressure on hardware providers that compete directly against mPOS devices, as well as ISOs that sell legacy devices to merchants.
• While the payment-card-processing system as a whole isn't in danger, the proliferation of mobile devices will have a significant effect on the way we pay. 

In full, the report:

• Provides 9 infographics and diagrams explaining how card transactions are processed and which players are involved in each step. 
• Analyzes the key trends and forces that will shape the payments industry going forward. 
• Details how mobile is shaping 5 types of consumer payment technologies and which companies to watch for within each category. 

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Disclosure: Jeff Bezos is an investor in Business Insider through his personal investment company Bezos Expeditions.

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