Are companies like Circle part of a fad, or part of a wider revolution that is the changing face of payments and banking in the UK?
Circle, which is partnered with Barclays and says that it is the first digital currency company to be given an e-money issuer licence by the FCA, has launched its payments app in the UK. The app allows UK and US consumers to transfer US dollars and UK Sterling across borders and it also enables the transfer of funds to and from other jurisdictions and currencies by linking to blockchain services. Around 150 countries are served.
“We want money to work the way the internet works,” says Jeremy Allaire, co-founder and CEO of Circle. “We want the transfer of money to be instant, global and without fees…In five to ten years, there won’t be a business in sending money around the world.”
But the system is not seamless - an example given by Allaire shows a woman working in the US, who wants to send money back to her family in the Philippines. She is paid through Circle (in US dollars), sends that money to another app which creates a blockchain address and converts the money to Philippines peso, which can then be forwarded to a bank account or picked up for a small fee.
This lack of a global currency is why, Citi argued in a recent report, blockchain will not really threaten the current cross-border payments system in the short-term. “Large international banks are needed to transfer value across borders since currencies can only travel physically within their respective central bank system,” the WSJ quotes the report saying. This means that, without a new currency behind it, blockchain is just part of a patchwork.
Still, there is already a huge push to reduce the cost of payments and not only in huge remittance markets such as the Philippines. (According to the World Bank, global remittances in 2014 totalled $583bn, of which India received the most with $70bn, China was next at $64bn and the Philippines third with $28bn). Allaire says that the UK e-money licence gives Circle access to the Eurozone and that it plans to roll out its service there incrementally.
Circle is partly based on the social payment applications that have grown up in China – including WeChat Pay and Alipay which, together, have more than 600 million users. They combine messaging, media sharing and payments in a free service that consumers find compelling. (It has been argued that one of the reasons for their traction is that the Chinese authorities kept Facebook out.) However, Allaire does not believe that social payment applications as they now stand will be the last word.
Certainly, at present, not everyone is convinced that the Circle app is transformational. “The user interface is more interesting than what it going on in the background. I am not sure what problem the app is solving, as there are already lots of payment solutions, though sharing money is quite a reasonable use case,” says David Bannister principal analyst in the financial services technology team at Ovum.
Bye bye banks
New payment apps are displacing ‘old’ payment methods for a number of reasons. One is instant access to the funds, However, this brings settlement and liability risk. “When you send money from a linked debit card, Circle doesn’t get the funds for a while,” says Allaire. “We have a treasury and trading operation that builds reserves in all the currencies we support, including digital currencies, which supports liquidity, and we have a learning engine that makes the risk decisions in real-time for each transaction.”
Among the parameters the risk engine examines are whether the funds are available and whether the user is who they say they are. Tools include facial recognition, and the engine learns about the users over time. In line with that knowledge, it gradually increases the amount that can be transferred. For fully-fledged, and suitably solvent, users Circle has no limits on the amount that can be sent over the app, which sounds risky. Allaire, however, says that its banking partners have done significant due diligence on its risk and compliance systems and found them superior to their own.
There is a lively debate on how fractional reserve banking might be affected by full-blown digital currencies, in particular if a central bank were to use a digital ledger to displace retail bank deposits, which Ben Broadbent recently outlined in a Bank of England speech.
Interestingly, Circle appears to have a fan in the UK Treasury. Harriet Baldwin, the economic secretary to the Treasury, called Circle’s decision to launch in the UK and its partnership with Barclays “major milestones” helping to underpin the UK’s position as the global FinTech capital.'
Whether Circle, and companies like it, are part of a wider payment revolution or just the latest financial trend remains to be seen. The ease and lack of cost will may well encourage users to get onboard. With reports of hundreds of Barclays, HSBC and RBS branches to close this year, Circle may have simply recognised an unstoppable trend in banking, which UK customers have to embrace, and which will change the face of banking in the future.
Ouida Taaffe is the editor of Financial World magazine.