Coining it - Bitcoin offers prospect of payments innovation

George Osborne’s announcement that the Government is to explore the regulation of Bitcoins will have had an ominous ring to it for those attracted to the virtual currency precisely because it is not currently covered by any regulation. For the rest of us, however, the announcement should be welcomed. Osborne’s focus on the UK financial services sector’s ability to harness technological innovations is a particularly pleasing development.

However, it is not always the most obvious innovations that are worth harnessing. For example, I have said before that the payments mechanism attached to Bitcoin is far superior, at least in terms of efficiency, to those used by most retail banks. Cost of payment has a major impact on the pricing of payments services provided by retail banks. It’s a cost that is passed on to customers, and which may eventually contribute to those customers seeking financial services elsewhere. 

Regulation of payments in the UK is changing, with the new Payments Systems Regulator to take over much of the function of the Payments Council, but the antiquated state of most electronic payment infrastructure (and the associated costs) is very much a global issue. Commentators have speculated that the UK's new body will force banks to relinquish control of the payments protocols they use, which could promote greater competition in the industry, and open the door for new, more efficient, payments systems. If they are effective, then these changes in the UK could be reflected elsewhere. 

The mobile payments service Paym recently passed 1 million users in the UK, showing a real appetite amongst consumers for alternative means of transferring money between bank accounts. There is no reason to suppose that such appetite is limited by national boundaries, and more widespread regulatory changes would be an important first step in the adoption of a low-cost protocol for international money transfers. This would be of huge benefit to small businesses, to consumers, and also to banks.

If the growth of Bitcoin tells us anything, it is that consumers are willing to use alternative, cheaper means of transferring money, even if it is less secure than bank services. Banks could find their share of wallet being cannibalised by other services in the very near future, but a more efficient payments infrastructure could do a lot to prevent this. Of course, a lot of work needs to be done on security and anti-money laundering before experimental technology can be adopted or adapted for mainstream use, but hopefully the UK Government’s investigations can provide a useful first step.