The cost of traditional banking transactions has come into focus once again as Amazon announced it would no longer accept Visa credit cards for payment in the UK. It was part of a battle that began earlier this year in Singapore and Australia where the e-commerce giant took steps to deter Visa credit card payments. An Amazon spokesperson explained, “We believe the cost of accepting credit card payments should be going down over time to allow merchants to reinvest savings into low prices and shopping enhancements. Yet despite technical advancements, some cards’ cost of payments continue to stay high or even rise.”
Citing Britain’s exit from the European Union, Visa increased its fees on purchases with UK credit cards from 0.3% to 1.5%. Mastercard also imposed a similar increase. Despite Amazon’s pushback, the truth remains that merchants have always been at the mercy of card issuers.
Credit cards have been a global standard for decades but the financial services landscape has changed. The cryptocurrency sector, underpinned by the security and transparency of blockchain technology, offers functional alternatives which could feasibly take the place of credit cards in the not-so-distant future.
Credit Cards vs. Blockchain-Based PaymentsBloomberg noted that in the US alone, merchants spent $110 billion in card processing fees in 2020. Most consumers are barely aware these costs exist or that they are responsible for higher prices on everyday goods and services.
To accept credit card payments, merchants pay interchange fees, assessment fees, and processing fees. These fees go to the card’s issuing bank, the card’s payment network, and the payment processor. The typical credit card processing fee ranges from about 1.3% to 3.5%, plus the payment processor’s cut, which varies depending on the processor and the merchant’s plan. These are fees that, in many people’s eyes, do not follow principles but rather reflect the choices of issuers who monopolise the market.
Payments are essentially loans from the acquiring bank and the risks involved for the lender add to the costs. Because banks often don’t have direct relationships with each other they have to use the SWIFT network for a correspondent bank that has a relationship with both banks and settles the transaction – another third party for another fee. Furthermore, banks maintain their own ledgers which have to be reconciled with other banks, adding more time and cost.
By contrast, most cryptocurrencies run on public blockchains which share their ledgers globally, providing a way for untrusted parties to verify and agree upon data. By providing this open ledger that nobody needs to administer, blockchains can provide financial services without the need for many of the traditional banking processes. The technology allows for access to information about account holders and every transaction, meaning there is less risk and less need to place trust in third parties. The payment network bypasses the need for interchange fees by being more direct and transparent. The increased efficiency, as well as inherent security of blockchain, significantly reduces fees and settlement times.
Cryptocurrency Payment Solutions Are Already HereSo if the costly intermediaries associated with credit cards are eliminated then merchants will surely have noticed what blockchain can do for their businesses. Not quite. With new technology, awareness and trust tend to build slowly until a tipping point is reached. Regardless of the rate of adoption though, the reality is that there are already crypto payment solutions leveraging this technology and offering to revolutionise payments for merchants.
A report published this month by the analytics firm, TokenInsight, provided research into a number of cryptocurrency payment solutions. While the report pointed to well-known projects such as Stellar and Ripple which cater to large institutions for cross-border transactions, it also observed what Alchemy Pay is offering to online and in-store retailers. It allows merchants to accept cryptocurrency while receiving payment in their local fiat currency via its unique backend process. The network takes crypto and converts it to stablecoins and then on to fiat, via partnerships with OTCs and other exchanges. This overcomes a major barrier to entry by requiring very little from merchants and integrating crypto and fiat currency for them.
This is the kind of solution that was not possible even just three years ago and demonstrates the progression of financial applications built on blockchain technology.
All in Good TimeSo, while Amazon is battling the credit card giants on behalf of the merchants, it is worth knowing that real alternatives are already out there. Nevertheless, retail habits that have built up over decades will not disappear overnight and there still remains a need to educate both retailers and consumers about the issues of traditional finance and the advantages cryptocurrency provides. As exciting as blockchain finance is at this time, those in the know will need to be patient until the word gets out.
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