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May 13, 2014updated 22 Sep 2016 11:25am

Why banks must copy Bitcoin’s payments system

The rise of cryptocurrencies means banks are struggling to keep up.

By Joe Curtis

Banks need to adopt a Bitcoin-like payments framework to avoid being sidelined by the digital currency’s faster and cheaper transactions, an expert has warned.

Financial institutions currently risk irrelevancy as more and more peer-to-peer payment methods and cryptocurrencies spring up, providing people with the opportunity to bypass banks entirely, SunTec CEO Nanda Kumar told CBR.

The fintech expert, whose company links up banks’ mobile apps with the aged mainframes that store their customer data, pointed to the proliferation of digital wallets and payment mechanisms that let people transfer money directly to firms and friends, without it passing through a bank.

Bitcoin’s swift transactions aligned with cheap fees mean banks may be forced to innovate to stay relevant in a burgeoning age of digital money, Kumar said at a London roundtable last week.

"This protocol can be easily adopted and then the whole cost of transactions comes down to zero," Kumar said. "These are things we’d like global financial unions to take up and adopt.

"It would mean a lot of infrastructure would change but at the same time it creates an ecosystem where money can be easily interchanged without any problem."

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Banks’ payment systems have been notoriously expensive for years, especially when it comes to remittance payments.

But Bitcoin’s basic code ensures that transfer fees are minimal, wherever the location you wish to send money to.

Sent from one digital wallet to another, any Bitcoin transaction is confirmed by ‘miners’, who use PC processing power to solve complex equations that unlock new bitcoins as well as confirming the latest transactions.

They receive a portion of the newly released bitcoins for their work instead of Bitcoin users being charged for the service, though users can pay a fee to speed up the process.

Bitcoin’s reputation has taken a hit since the collapse of exchange house Mt. Gox, which blamed hackers for a loss of 650,000 bitcoins in February.

However, new services like open source payment system Ripple have sprung up, allowing users to transfer one currency into another very conveniently.

Ripple claims to allow users to send cash internationally in no more than five seconds time, with a fee of $0.0001 per transaction.

Kumar believes such payment systems open the door to the creation of many more currencies, while simultaneously solving the problem of fragmentation, where many different currencies exist side by side.

"It’s going to reshape this space," he said. "You can use any currency you like. You can create your own currency as long as you can honour the exchange rate."

However, finance sector and startup veteran Nektarios Liolios, who is currently looking for entrepreneurs to join his European accelerator Startupbootcamp FinTech, believes banks wish to innovate.

Sponsors of the accelerator include MasterCard, Rabobank and Lloyds, and he said they are keen to harness new ideas in fintech.

Probably rightly so, too – it was only in February this year when high street names including RBS, Santander and Barclays suffered glitches on their mobile apps.

RBS blamed the problem on too many people trying to check their accounts at once, with its mainframe unable to cope with the 5,500 customers logging on every minute.

"Some systems are being held together by chewing gum and a piece of string," Liolios admitted. "But [banks] are starting to come to terms with innovation. Our sponsors are all on board because they are interested in new ways of doing things."

In fact, some banks are already moving into the peer-to-peer payments space.

Singapore’s OCBC Bank now lets users transfer money via Facebook, as well as email and text message, with its app Pay Anyone, while JP Morgan filed a patent last December for an online payment system that partly resembles Bitcoin.

But SunTec’s Kumar admitted that security is still the big question hanging over the use of cryptocurrencies, especially in light of Mt. Gox’s spiral into bankruptcy.

"Bitcoin relies on peer to peer trust," he told CBR. "In a perfect world, everyone would be good and nothing bad would happen, but that’s not the case."

Regulators are looking closely at Bitcoin, but no-one has been confident enough to touch it yet.

And Matteo Rizzi, a partner at SBT Venture Capital, said banks must wait for regulators to step in before adopting such a framework as a payments model.

"At the moment it’s way too risky," he said. "Second, it’s way too early. The day regulation hits it will either kill all of them [cryptocurrencies] or shake the market in a way that’s totally unexpected."

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