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."
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."
Established in 1957, BCS, The Chartered Institute for IT, promotes wider social and economic progress through the advancement of information...