Companies establishing virtual currencies may not capture the imagination of consumers right away, but their technologies should catch the attention of traditional debit card issuers.
Alternative and virtual currencies establish technology and payments structures that will eventually change how consumers opt for "pay now" debit payments, according to Boston-based Mercator's new report, "Next Generation Debit: The Final Frontier."
"I didn't find any virtual currency schemes that have an explicit impact on the industry, but the key factor is how they operate and the different business models and open-source atmosphere they are creating," says report author Patricia Hewitt, Mercator's director of debit advisory service.
The worldwide payments industry is rapidly evolving to efficiently and safely support a full-range of "pay now" transaction types, with a general goal of finally eliminating paper-based payments from the market, the report states.
As such, the report adds, traditional debit payments are likely to move into models more aligned with virtual currency schemes or online payment forms such as PayPal that have evolved into proxy transaction accounts.
"The report doesn't take the position that any of these other specific forms are going to take over [payments], it's just that digital accounts and digital currency are creating a new paradigm of operations," Hewitt says.
Virtual currencies, such as Bitcoin, operate through exchanges that establish the currency value based on the marketplace, much in the same manner as physical currency, Hewitt notes. In fact, Tradehill, a Bitcoin exchange, engaged in a
Most importantly, consumers can use virtual currency to "pay now" for goods (mostly in online games) and services in a manner similar to that of using a debit card, the report notes.
Because virtual currencies sidestep the traditional payment network model, the technology could have growing appeal for merchants accepting "pay now" options, Hewitt says.
When regulation reduced the price of debit-card interchange, it kicked off a search for new business models, Hewitt says. "There have been changes in the historical construct of interchange, and it will evolve like everything else has."
Banks and merchants play their part in the future of debit payments by keeping a wide range of payment options alive. These companies are hesitant to restrict consumer choice, and they like new options that don't call for drastic changes at the point of sale, the report says.
The card networks are also here to stay, Hewitt says.
"The networks have reached into this market with digital wallets, so they are moving into it and will find their place," she adds.
The report surmises that a complex technology movement is most definitely taking place — and taking debit payments along with it.
"Without a unifying force, such as government regulations that mandate one payment form over another, the final frontier for debit may be in sight," the report states. "But the train heading to that horizon is dragging a lot of cars with it."
