Citi report weighs in on bitcoin's "disruptive" potential for credit cards

Like most major financial institutions, banking giant Citi publishes an in-house magazine to keep its customers and employees well versed in the major trends in finance and investment. The articles focus on the big topics likely to come up for investors over the next few quarters, and are written for a wide audience focused less on what a technology or trend is, and more what it means as an investment. When something like bitcoin makes an appearance in this kind of publication, it’s a strong indicator that investors are starting to take it seriously.

The May 20th issue of Citi GPS was dedicated to the impact of so-called “disruptive innovations,” with bitcoin and digital currencies sharing the spotlight with other tech-driven trends such as digital banking, electric vehicles and precision agriculture. While Citi’s analysis was skeptical of bitcoin’s use as a store of value, the authors argued that the technology could have significant impact on how debit and credit card transactions might work in the near future.

The essential innovation in Bitcoin is that it can eliminate the need for a ‘trusted intermediary’ when the principals in a transaction do not trust each other. There are many such transactions but money transfer/ credit/ debit card transactions stand out.”

The report strongly suggested that bitcoin’s core structure might greatly benefit the traditional banking system, noting that “the transactions technology is generic and efficient and less complicated than introducing an intermediate currency (Bitcoin) to facilitate USD to USD or USD to EUR transactions.” In other words, if banks want to compete against the rapidly growing bitcoin network, their best bet is to build their own bitcoin-like network.

What does Citi think the benefits would be? As anyone familiar with bitcoin could argue, a massive savings due to greatly reduced fees and other friction. Or, as Citi GPS put it, “If fraud/chargebacks can be reduced or eliminated by digital currencies there is plenty of room for margins to be eroded. Retail transactions across borders could also become very inexpensive, if the charges involved in going from one currency to another were substantively reduced.”

Those companies whose business models depend on those margins and fees? The Citi report doesn’t pull any punches here, calling noting they’ll be “displaced” and the “losers” in the game. “Most broadly, intermediaries who charge high margins to stand between two transactors who do not ‘trust’ each other may find their franchise eroded if generic Bitcoin technology lowers the cost if these transactions.”