A big part of customer engagement is making the commerce experience as frictionless as possible and empowering customers in the process. At the same, catering to customers should not come at the expense of sound, long-term business decisions. In these respects, bitcoin presents both a number of unique opportunities and challenges.
As the peer-to-peer economy flourishes, Bitcoin has emerged as an intriguing alternative payment option; a virtual, digital currency directly connecting buyers and sellers, without the backing or intervention of any central government or financial institution. This decentralized approach, along with other concerns, is enough to make companies think long and hard about whether to add bitcoin to their payment mix.
Despite some early stumbles, bitcoin has proved surprisingly resilient. It has survived the Silk Road marketplace scandal and the implosion of bitcoin exchange Mt. Gox. Yet other challenges to this fledgling currency still exist. So, is it a smart business decision for merchants to accept bitcoin? Let’s look at both sides of the virtual coin and see where we net out.
The case for Bitcoin
With each passing day Bitcoin continues to move further into the mainstream. Among recent developments, payment processor Braintree struck a partnership with bitcoin wallet provider Coinbase. This should soon bring bitcoin payment options to Braintree clients, and pillars of the peer-to-peer economy, Uber and Airbnb. More importantly, this should also enable Braintree’s parent company PayPal to rollout bitcoin as a payment option to its 152 million global users by 2015. This fact alone makes accepting bitcoin hard to ignore.
As international commerce becomes an imperative for many B2B and direct-to-consumer merchants, bitcoin offers some advantages. As bitcoin is a global currency, its value is universal. The conversion from hard currency to bitcoin takes place prior to the e-commerce transaction. So, a bitcoin in Chicago is worth exactly the same as a bitcoin held in Amsterdam or Kuala Lumpur. This can simplify pricing across borders and remove many of the headaches associated with localization and payment processing.
As a peer-to-peer payment, transaction fees are minimal. This makes them highly competitive with other forms of payment. They can range from zero to an amount that currently translates to less than $1.00. (Calculating these fees is a fairly complex process that I won’t go into here.) Compare that to the 2%-3% processing fee most credit cards and payment processors charge, or the cost of transferring and exchanging one currency for another.
While not as instantaneous as cash, bitcoin transactions are credited to a merchant’s account (i.e. virtual wallet) much faster than credit card payments. Once payment is verified, generally within ten minutes to one hour, the transaction is final, similar to a cash transaction. At that point, any reversal of the transaction would follow the merchant’s return policy and procedures. This greatly reduces the likelihood of the types of fraud that lead to credit card chargebacks and lost merchandise. And as bitcoins are not tied to a single user there is no underlying customer payment data at risk of being stolen and misused, in the case of a site security breach.
Lastly, bitcoins are easy to redeem or spend. As thousands of merchants currently accept bitcoin, it is possible to receive bitcoin as payment and spend the proceeds on other goods and services without ever converting them to a hard currency. Alternately, it is an easy process to redeem bitcoin for U.S. dollars or other currencies, and these transaction fees are also generally lower than comparable banking charges.
The case against Bitcoin
It’s debatable whether bitcoin is scalable on a global level. The intrinsic value of bitcoin is based on its relative scarcity as it relates to supply and demand. Bitcoin has been purposefully constructed to limit its availability. A maximum of 21 million will ever be produced. Unlike traditional currencies, however, bitcoin is divisible to eight decimal points (.00000001) and is, in theory, infinitely divisible. That said, there are hundreds of millions of consumers and companies conducting business online, with more coming online every day. As digital commerce continues to grow as a share of the overall economy, it will be interesting to see how fractional bitcoin ownership will affect the currency’s adoption and usage. This cap on bitcoin production also introduces the possibility of deflation, a major potential drawback that I’ll leave for an economist to explain.
Currently, much of the Bitcoin market is ruled by speculators, who are holding onto their bitcoins in the hopes of a big payday. Only a small percentage of bitcoins produced to date are being circulated or being offered for sale. This has led to volatility in the market. Over the last year, the price of 1 bitcoin in U.S. dollars has ranged between $125 and $1147, and is currently hovering around $350. While fluctuations in world currencies are commonplace, these wild changes in value can be a detriment to merchants trying to price their products and services, as well as lead to uncertainty for long-term business planning and forecasting.
Due to the time required to verify bitcoin transactions, certain types of purchases can be problematic. This includes instant digital downloads, as well as buy online pickup in store and some same-day shipping scenarios.
For omni-channel merchants, in-person bitcoin payments are also impractical, which leads to another weakness of bitcoin. For all the comparisons likening bitcoin to cash, bitcoin does not come close to providing the function and anonymity of cash transactions. To become truly indispensable, bitcoin will need to provide nearly instantaneous transactions and offer a level of privacy (accountability without traceability) that would benefit the many consumers and businesses seeking a more discreet payment option. This need will only become more acute as paper and coin-based currencies are gradually phased out in future decades.
And like any first mover, there is a very real threat that at some point bitcoin will be challenged by a new form of digital-currency. There are at least a dozen others actively vying for their shot. So, while bitcoin is the incumbent, it is yet not the foregone winner.
The conclusion? I believe that over the long-term, the advantages of peer-to-peer payments will make the viability of digital currency inevitable. Will it be bitcoin? At this point it seems promising, but like many of the crypto-currency’s holders, I can only speculate.
