A research conducted jointly by consultancy firm Capgemini and BNP Paribas Bank states that the total volume of digital payments is estimated to reach 726 billion transactions by 2020. With crypto acceptance still at a humble 2%, the share of cryptocurrencies in the global digital payments pie is relatively small, albeit growing. Payments technologies are going through multiple disruptive innovations, and uptake of crypto as a medium of transaction will take time. To put it in perspective, credit cards took nearly ten years to become an acceptable mode of transaction. And crypto as a payment option is just getting started. The conventional solutions in use today, such as Visa, MasterCard etc. are centralized in their structure and hence have singular points of failure. Being trustless and decentralized, use of blockchain and crypto platforms offers some distinct advantages over permissioned means of payment.
Whenever someone swipes a credit card at checkout, the merchant is charged a portion of the transacted amount as fees. This is known as interchange fees, and it is used for maintaining the payment network: the bank which issued the card, the payment processor (which may or may not be the issuing bank), the payment network provider, the payment gateway and the merchant’s own bank. All of these intermediaries get a share of the fee. The average interchange fee is 2% of the total transacted amount. For online payments, this is even higher at 2.5%. MasterCard and Visa are actually planning to increase their charges further.
An average Bitcoin transaction costs less than interchange fees even when the network is choc-a-bloc. This is because BTC mining fees do not depend on the transaction amount. Case in point, a recent transfer of a USD $1B worth of BTC cost just USD $600 in mining fees. A similar sized transaction over traditional gateways would have incurred millions in interchange fees. Moreover, with the Lightning Network implementation, BTC transaction fees will be even lower than it is now. There are also a host of digital currencies available whose transaction fee are lesser than Bitcoin’s.
Settlement and Chargebacks
A median Bitcoin transaction takes 10–20 minutes to confirm. There are other cryptocurrencies that take much lesser confirmation times. Ethereum and Litecoin transactions are usually settled within a matter of minutes. Visa and MasterCard does this in seconds. However, this is just part of the story. The money doesn’t reach the merchant’s bank account immediately. It takes 3 to 5 bank working days for the amount to finally reflect in his bank account. Several minutes’ worth of confirmation time (with cryptocurrencies) is still better than waiting for half a week while money is routed through different bank channels and finally into one’s own account.
In traditional setups, the buyer is entitled to challenge this payment after a transaction goes through. In case the challenge is successful, this chargeback amount is returned to the buyer’s account. Typically, the customer has a window of 90 to 120 days within which he can challenge a transaction. There is a prevalence of cases of abusing the system to get a refund without a legitimate complaint. On top of it, merchants themselves bear the transaction cost associated with this chargeback amount. A study by LexisNexis has shown that in case of chargeback fraud, for every USD $1 that merchants pay as chargeback, they actually end up losing USD $2.4. Crypto transactions, on the other hand, are irreversible. However, it’s not totally skewed against the buyer in cases of genuine refund requests. Platforms can use arbitration and escrow mechanisms to handle legitimate complaints. In addition to this, as the merchant’s wallet details are stored on a distributed ledger, all transactions records associated with it are publicly viewable and open to scrutiny.
Security is where the biggest contention lies. Whenever a payment is made through Visa or MasterCard, a number of centralized players are involved. For the payment to finally reach the merchant’s account, all the participants have to perform properly and non-fraudulently. Moreover, credit/debit card data is extremely susceptible to theft. Cases of credit card fraud have been on the rise in recent years. As per a report by the Identity Theft Resource Center (ITRC), a total of 14.2 million credit card numbers were exposed in 2017, which was an increase of 88% over 2016.
Crypto payments, on the other hand, are technically peer to peer. The network is maintained not by centralized actors but by distributed and public nodes. Taking over a blockchain network requires enormously high resources. For example, successfully launching a 51% attack over the Bitcoin network would cost something to the tune of USD $1.4 billion. Crypto transactions don’t require the sharing of sensitive data either. All you need to know is the public address of the receiver; your private key (which is essentially your secret password) is used to sign the transaction and is never broadcasted over the network.
Institutional players, industry participants and government bodies are now waking up to the benefits of crypto payments. For merchants, this also provides an additional option to offer to consumers to pay for their goods and services. Coinbase Commerce, BitPay, Crypto.com, CoinPayments etc. are a few companies that offer crypto payment services. Several platforms do not require merchants to integrate or accept cryptocurrencies either. A fiat settlement layer in the background allows these merchants to receive fiat currency while a customer can still pay in crypto. For example, aXpire’s PayBX solution is partnering with a Japanese Fintech company to make this happen. Users simply sign up to the platform, create a FIAT card with their crypto holdings, and can start paying with crypto in any online store. Plug and play solutions like these will make onboarding new entrants to crypto seamless.
As crypto purchases gain steam, competition is already heating up with Square adding BTC deposits, Flexa launching in Canada, retail chain Traki using crypto point-of-sale devices, and so on. With PayBX, aXpire aims to build a simple point and click application for all crypto purchases. Companies building payment solutions like these will eventually push more established players to get into the space as well. Signs of that are showing. Expect these signs to show up more often in the near future.
About the Authors:
Rohit Chatterjee is an Analog Design Engineer working at Texas Instruments. Abhijoy Sarkar is a banker-turned-entrepreneur. They are high school friends who lost contact years ago. They reunited over crypto in early 2018 and have been investing through mutual research and shared knowledge. Rohit and Abhijoy wrote this article for aXpire as freelancers at MatchBX.io