January 4, 2019
By: Jared McClure
Cryptocurrency, with blockchain as its foundation, offers an intriguing vision as a future payment method. Unlike current methods that rely on trusting third-party entities such as Visa or Mastercard to ensure payment delivery, cryptocurrency could provide a fully transparent payment system for merchants and customers alike without the outside dependency.
This transparency-based fraud protection — combined with the potential to establish a common global currency — makes a compelling argument in favor of cryptocurrency payments. However, in order to shift from its use as speculative commodity to become a truly viable payment option, cryptocurrency requires a rethinking of the entire payment system.
The Case for Cryptocurrency Payments
In the most basic terms, crypto-based payments would give power back to the merchant and the consumer by eliminating the middleman, including banks, card associations, and ISOs.
While cryptocurrency would significantly disrupt today’s payment structure, it offers an appealing alternative to the current network of intermediaries. With blockchain-based systems, merchants and customers gain added security while cutting down fees paid to third parties to facilitate payments.
If a merchant were to take advantage of customers with fraudulent transactions, the evidence would be right there on the public blockchain. Likewise, the blockchain would make it nearly impossible for a consumer to fabricate a story about not initiating a purchase. In addition, for merchants, who bear much of the fraud liability today, the transactional visibility of cryptocurrency would put more of the money they charge for their services directly into their pockets.
The vision is appealing, but there’s a long way to go before cryptocurrency becomes a viable payment method.
What Crypto and Mobile Pay Have in Common
Just like mobile payments overall, cryptocurrency faces the somewhat daunting challenge of changing the behavior of consumers and merchants. In recent years, Apple, Samsung, and Google’s mobile pay efforts have met with market resistance. To date, there hasn’t been a worthy incentive for consumers to pay with their phones, especially when their cards work fine in the current payment infrastructure. As a mobile-focused currency, crypto will need to address the same “what’s in it for the customer” question that mobile payment is still working through.
Merchant adoption of mobile pay has a similar incentive challenge. To accept Apple or Android pay, merchants need to use near-field communication-enabled terminals. With few customers clamoring for mobile pay options, most merchants haven’t been inclined to take on the added costs of NFC terminals. Interestingly, cryptocurrency wouldn’t need the NFC terminals. The incentive for merchants would be the ability to receive the full amount they charge, without having to pay transaction fees to intermediaries and without upfront cost for new equipment. Still, merchants wouldn’t reap these benefits until we see widespread consumer adoption of cryptocurrency.
4 Key Milestones to Crypto-Payment Normalization
In the years before cryptocurrency can fulfill its promise of streamlining the payment process, there are four milestones to watch for:
- A legislative shift. Today, the IRS views cryptocurrency like bitcoin as property, rather than currency. In other words, if crypto is used for purchase transactions, the user needs to document the loss or gain, similar to buying or selling stock. Obviously, that could never work on a practical level because it disincentivizes usage for day-to-day purchases.
By viewing crypto as property, the U.S. is behind other nations, including Japan, that recognize crypto as currency. With the introduction of the Cryptocurrency Tax Fairness Act of 2017, legislators are beginning to explore tax code and legislative changes that alleviate the current constraints. This kind of shift in legislative thinking will make crypto payments more practical for mass adoption.
- Expanded purchase options. So far, cryptocurrency as payment is more of a novelty than a realistic option. For that to change, an expanded range of goods and services needs to be available for purchase using cryptocurrency.
In 2017, a reporter for CNBC attempted to make purchases solely with bitcoin for a week. Even in New York City, she found her options limited to a handful of French restaurants. For other day-to-day expenses, she had to get creative by arranging intermediaries willing to trade what she needed for bitcoin. Taking price volatility and transaction fees into account, she estimated that she spent 40 percent more than usual on her weekly living expenses.
In the end, it will come down to basic supply and demand. The limited availability of goods and services reflects the current low levels of merchant adoption. Merchant adoption will be driven by consumer demand, and as consumers are incentivized to use crypto for payments, merchants will push for that change.
- Transactional simplicity. Right now, cryptocurrency is overly complicated at the transactional level. Hundreds of cryptocurrencies exist, and it’s not yet clear which ones will be legitimate currencies for everyday payments. Even as key contenders emerge, there will still be merchant concerns about processing speed and exchange value to address.
With a solid user experience, however, crypto payments could realistically begin to compete with traditional payment sources. By jettisoning the extensive network of payment middlemen, crypto payments can clear in milliseconds instead of hours or days. Speeding up transactions without impacting security will be key to creating a customer experience that’s comparable — preferable, even — to the current system.
A reduction in price volatility is a must for any cryptocurrency seeking to become a viable payment alternative. If there’s too much volatility, merchants risk losing money on exchanges, which invariably will be required if they are going to accept crytpo payments. For any of this to become a reality, we’ll need to see a network that can enable efficient crypto transactions, handle exchanges, and maintain a stable coin value, all without adding to a merchant’s cost of doing business. Only then will merchants be more interested in exploring the acceptance of crypto as payment.
- Coins designed to compete. In the 1970s, Visa and MasterCard normalized credit card spending by mass mailing cards to prospective customers, inviting them to use the cards to make purchases. Cryptocurrencies will need to take a similar tactic, adapted for modern day, by developing new coins that simultaneously compete for a merchant’s business and put crypto in the hands of more consumers. A cryptocurrency explicitly designed to meet retail and consumer demands could address current transactional gaps and significantly accelerate consumer demand.
If cryptocurrency remains constrained as a vehicle for speculative investment, it will fail to live up to its full potential. To realize it, the payment industry must evolve in the years ahead by increasing its understanding of cryptocurrencies, recognizing the opportunities, and figuring out how to effectively adapt processes to bring crypto-payment options into the mainstream.
Jared McClure is the co-founder and COO of CrayPay, a free app that drives mobile payment adoption by offering to instantly pay a portion of every purchase made. Jared embodies years of experience in new business development and successful strategic implementation. During his 18-year career, Jared has provided leadership, vision, and management to ensure proper operational controls. His entrepreneurial background is manifested in his oversight of the company’s technological development, brand partnership strategy, and customer service. Prior to CrayPay, Jared was the co-founder and president of Transfer for Less, an online service for digitizing assets.