How Can Cryptocurrency Change Retail Payments?
How Can Cryptocurrency Change Retail Payments?
Cryptocurrency made a poor first impression with the public when it launched, thanks to an association with criminal activity and security loopholes that were not the fault of the blockchain technology on which it runs. Widespread application possibilities got lost among the sensationalism in the news, which included constant stories harping on the radical fluctuations in the value of bitcoin and other popular cryptocurrencies.
Even by removing the bad news early on, a seismic shift from traditional fiat currency backed by banks and governments wasn’t going to happen quickly. Cryptocurrencies aren’t yet intuitive for the average consumer to use, and there aren’t many places to spend them even if consumers had been persuaded to try.
For obvious reasons, banks and credit card companies are resistant to the kind of sea change that crypto signals. Widespread adoption of cryptocurrencies in everyday usage would shift the majority of transactions away from credit cards and could put banks out of the loop entirely.
Continued resistance by banks and credit card companies, as well as an indifference and befuddlement among consumers, have created a cloud of suspicion. Nevertheless, cryptocurrency has enormous potential to change financial transactions. Blockchain technology is particularly well placed to impact retail markets, which endure weaknesses that cost merchants billions each year.
Fraught With Fraud
Identity theft of consumer payment information is at an all-time high. In 2017 alone, identity fraud resulted in $16.8 billion in loss and 16.7 million victims, as reported by Javelin Strategy & Research. Banks lose billions of dollars every year to these fraudulent transactions, and merchants carry almost the entire chargeback liability.
While Javelin’s report suggests several proactive ways customers can protect themselves, an industry pilgrimage to cryptocurrency and decentralized, blockchain-based security systems would go much farther — and would also protect retail merchants.
The best way to protect both merchant and consumer is to conduct transactions using blockchains with digital ledgers that make collecting data more reliable and secure from tampering. Blockchain transactions can be set up to create an escrow-like system that can’t release funds until both merchant and buyer confirm the agreement. The idea is to replace trust with transparency. You don’t have to hope the other party is telling the truth — the blockchain tells you whether they are or aren’t.
Freedom From Fees
The high cost of transaction settlements is another pain point in retail. Currently, each step along the retail value chain pays steeply to ensure that the exchanges of money and data are valid. These retail players must pay third parties for their services and wait on them to send payments or confirm transactions. Blockchain-based secure transactions can reduce the need for such third parties.
To be sure, the companies that handle these services and charge these fees today won’t like being the “third-party intermediary” that blockchain cuts out of the transaction loop. And to be fair, not everyone thinks a blockchain migration is necessary. Some even argue that our current system of payments works just fine. But really, who is it working for?
Merchants usually bear full liability for chargebacks, which are incredibly costly to process — not to mention ripe for fraud. Merchants, in fact, manage all of the burdens in today’s financial construction. If a consumer calls his bank to dispute a charge, and the bank accommodates the dispute and returns the money, the merchant pays for it. In fact, the merchant pays exorbitant processing fees over and above the original transaction cost. This happens because the syndicate of banks and credit card companies forces the merchants to assume all liability in order to accept payment cards.
It’s a true dilemma for merchants, who can either stick with a cash/check norm — a world in which they pretend cards don’t exist — or accept credit cards and the liability that comes with them. With few exceptions, such as niche businesses with fiercely loyal customers, merchants can’t stay in business without the ability to accept cards. Consumers will simply find somewhere else to spend their money. Accept the cards, and the merchant has a greater chance to stay in business — as long as it also accepts the liability for fraudulent transactions, not to mention the ongoing processing fees, for the privilege.
Crypto paves the way for a better payment system, one in which merchants are responsible for neither excessive processing fees nor the liability for fraudulent transactions. Blockchain makes this possible through immutable payments when transactions are publicly recorded on the blockchain. Private keys, which should only ever be exposed to the person who creates a crypto wallet and can remain forever secret to the rest of the world, are required to initiate a transaction. When a consumer sends a payment and the merchant accepts it, a public record is created and cannot be changed.
Cryptocurrency puts responsibility for preventing fraud back where it belongs. Due to the fact that only a consumer with a private key can initiate a payment, as long as the private key has been kept private, the transactions recorded on the blockchain should all be legitimate. The privacy of the key depends solely on the consumer’s discretion. This removes the need for someone other than the consumer to assume liability for fraudulent spending.
Transaction fees and protection against fraudulent chargebacks are heavy costs that impact a merchant’s bottom line. Blockchain technology could very well perform these preventive functions more efficiently and, almost certainly, at a greatly reduced cost. This should lower transaction fees that help fund security and fraud protection today. The money left on the table would benefit consumers by allowing them to spend more, which in turn benefits merchants.
A Path to Adoption
With all these benefits, why aren’t merchants rushing to adopt cryptocurrencies and blockchain? We know that fear of change itself is not the barrier for adopting blockchain and cryptocurrency, because retail is already a high-technology space. For example, retailers are already capitalizing on the Internet of Things — machine-to-machine connectivity — to streamline and enhance the shopping experience for consumers and maximize profit for merchants.
As blockchain’s potential is not limited to financial transactions, we don’t have to wait for widespread crypto acceptance before putting it to use. For example, tracking retail inventory, particularly in overstocking and understocking, can be enhanced by using blockchain. Its ability to gather accurate information reduces product waste along the supply chain. All of these features increase retail efficiency for merchant and consumer alike, potentially saving money on all sides.
The true barrier to widespread blockchain adoption with crypto is that it’s still too complicated. An overwhelming array of coins, prevailing public confusion, and too many logistical hurdles leaves retailers in no hurry to accept cryptocurrency as a payment type.
Literally thousands of cryptocurrencies exist, but none of them yet has all of the specific capabilities — transaction speed being just one example — needed to thrive in retail. Mobile payment networks exist, but none that functions as a point of exchange for crypto and fiat currencies. Having both a network and a token that work together will pave the way for more widespread acceptance, but only if crypto can offer the same use incentives to merchants and consumers that credit cards currently do.
A complete changeover to crypto as the universally accepted payment, or even a shift that makes it just another form of payment among older ones, will not change the fundamental needs for merchants. Crypto isn’t a revolution; rather, it’s an enhancement that increases efficiency, strengthens security, and adds value — all of which makes retail better. From the particular standpoint of improving security and reducing fraud, blockchain and crypto would add important benefits for merchants as a whole, provided they continued to meet the day-to-day functions of doing business.
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