Bitcoin Vs. Payment Companies

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Bitcoin vs. Payment Companies

The first use case for bitcoin is as a payment network. It is interesting to compare bitcoin to Western Union and Visa since bitcoin is just beginning to compete with these companies.

Western Union WU

How does Western Union with an $8 billion market cap stack up against bitcoin? Western Union has 200 million users and 500,000 locations in 200 countries. Bitcoin has around five million users and perhaps around 100,000 to 200,000 merchants accepting bitcoin.

Related Link: PayPal Should Use Bitcoin, Not Compete

Some claim bitcoin passed Western Union in transaction volume last November. Looking at the massive difference in users, that may or may not be true.

One of bitcoin’s strengths is the ease and extremely low cost of moving money. This makes it hard to differentiate between transactional volume and people reshuffling accounts. Adding to the confusion are exchanges that let people trade millions of dollars of bitcoin for dollars every day.

Since bitcoin doesn’t have nearly the same usage level or locations around the world accepting it, bitcoin has a very different risk profile to Western Union and a very different reward profile.

Western Union’s risk is that technologies like bitcoin or companies like Facebook, Chase and Apple are innovating in the payments space and may destroy Western Union’s business model.

The reward profile for Western Union is that it has been around a long time and predictably pumped out dividends for shareholders.

Anyone investing in bitcoin is betting Western Union will not exist in the next five years or will be a radically different company. Bitcoin’s primary use case is moving money anywhere in the world as fast as email for a fraction of a cent.

Can Western Union compete with bitcoin if bitcoin gets the traction it needs to lower its volatility?

Visa V

Visa is a giant in the payments industry. With 500 million users worldwide and growing, Visa is a formidable competitor. Especially in the U.S., Visa is ubiquitous, convenient and has a huge infrastructure supporting it.

From a merchant's perspective, bitcoin is great, enabling transactions for no fees, eliminating fraud and gaining control over dispute mediation. However, from a customer perspective, Visa still has an attractive value proposition letting customers pay for things later, protecting them in disputes and providing insurance for some purchases.

There are two areas where bitcoin provides significant advantages over Visa: online payments and micropayments.

Credit cards weren’t built for the internet and they can’t handle $0.10 payments. Bitcoin is built for the internet. Payments are secure, fast and almost free. If bitcoin is successful, personal payment information data breaches and fraud will be eliminated. Bitcoin’s almost free transaction cost will also enable new business models.

The risk/reward profile for a Visa investor is much lower risk and much lower reward. Bitcoin is almost a polar opposite with a high risk and high reward. Visa is much better-positioned to compete with bitcoin than Western Union. However, if bitcoin continues to gain traction, Visa may start to lose market share, especially online.

Bottom Line

Bitcoin may even save journalism.

With micropayments, customers can pay a fraction of a dollar to read an article. In the future, journalists may even be able to crowdsource payments for in-depth reporting. Sound farfetched? The Chicago Sun Times trialed a bitcoin paywall before deciding to accept bitcoin for subscriptions this year.

Bitcoin is a high-risk, high-reward investment. Those seeking a high return by investing in emerging companies should look at bitcoin. Investors in the financial space should be watching bitcoin developments.

Could bitcoin turn stable companies like Western Union and Visa into troubled companies like Netflix did to Blockbuster?

Disclosure: At the time of this writing David Smith had a long bitcoin position.