Make no mistake: Goldman Sachs doesn’t particularly like Bitcoin. But that doesn’t mean the investment banking giant doesn’t see some potential in the virtual currency.In a report published yesterday, Goldman’s chief markets economist Dominic Wilson noted that Bitcoin is not a traditional currency, and is unlikely to ever work as one. Without state control and endorsement, Wilson argues, Bitcoin is also too volatile to be a reliable store of value. Both criticisms are hardly new, nor is Wilson’s caveat that wide-spread adoption may offset some of those concerns.
Buried in the same report, however, is an analysis of Bitcoin as a payment system by Goldman’s Roman Leal. The conclusions of that study couldn’t be more explosive: Adoption of Bitcoin could result in a $210 billion reduction in retail and e-commerce fees.
Currently, retailers pay a percentage of purchase volume called the merchant discount rate (MDR) in order to accept electronic forms of payments. In the United States, the average MDR is about 2.5% for offline retail payments and 3.0% for online retail payments (though these fees vary widely by merchant size and type). Today, the use of virtual currencies could theoretically eliminate these fees as they do not rely on traditional banking/payment networks. That said, Bitcoin gateway service providers such as BitPay and Coinbase, which enable merchants to accept Bitcoin payments, typically charge a fee of about 1%. At face value, the annual net savings if all electronic payments were conducted in Bitcoin could potentially add up to over $150 bn in retail point of sale and $12 bn in e-commerce fees per annum based on global 2013 purchase volume. Using this math, merchants generating $1 million in annual purchase volume would save at least half in payment processing fees by accepting bitcoin, with small merchants even better off.
The potential savings for remittance sees is even more dramatic:
Currently, consumers pay a money transfer fee as a percentage of the total amount transferred; roughly 10% on average. Money transfer networks, such as Western Union, charge these fees for accessing their network, as well as to cover agent commissions and FX conversion fees. Today, Bitcoin could theoretically reduce these fees to 1% by bypassing traditional money transfer systems and instead enabling transfers directly between two Bitcoin wallets. As a result, annual net savings for consumers could theoretically amount to over $43 bn based on the World Bank’s estimate of global money transfers.
The conclusion is relevant for Goldman’s clients, as many of them would benefit tremendously from a reduction in those same fees, while others depend on those fees for their business models to be profitable. In other words, although it might not be “currency,” Bitcoin will almost certainly be a game-changing technology for every company involved in finance.