Cryptocurrency Payment Processors Sole Viable Option For Retailers
With current volatility spikes and scalability issues, merchants are avoiding Bitcoin payments directly and using an intermediary to process the transaction to avoid the currency exchange risk. Most of them never even hold Bitcoin or other cryptocurrencies but rather receive the fiat amount in their bank accounts. And while Bitcoin is currently unfeasible for smaller transactions, merchants have nothing to lose by implementing it.
Bitcoin is experiencing the highest volatility in the last three years (Diar, 8 January) while simultaneously dealing with scalability issues where median transaction fee hasn’t been under $10 for more than a month (see chart above). The Lightning Network, a proposed off-chain scaling solution, has recently been deployed to Bitcoin’s mainnet for testing and some real transactions have already been completed, which indicates that the protocol is getting closer to full implementation. Before the Lightning Network is thoroughly tested, used by enough people and actually proven to be effective, accepting Bitcoin directly does not make sense for merchants. Therefore, the overwhelming majority of merchants that are still accepting Bitcoin as payment are using Bitcoin payment processors.
These services are useful for merchants because they essentially eliminate the volatility risk by guaranteeing the bitcoin exchange rate for a certain amount of time. The customer has to complete the transaction in that time and the processor then immediately converts the bitcoins to a fiat currency and sends the money directly to the merchant’s bank account. For this service, the payment processors are charging a fee, which is usually 1% of the amount. Thus, the merchants never directly hold the cryptocurrency and the fee is often smaller than what the credit card issuers are charging. Refunds are always processed in fiat currencies. The problem is that customers currently have a very small motivation to pay in bitcoins because they have to cover the transaction fees themselves making the smaller purchases completely infeasible. Steam, which was also accepting Bitcoin through a payment processor, stopped accepting it in December citing problems with high transaction fees and volatile price (Diar, 11 December).
The most widely known payment processors in the United States are BitPay and Coinbase but there are many other companies on the market (see table). BitPay, which has handled more than $1 billion in bitcoin payments in 2017, processes payments for Microsoft, Newegg, Shopify and Zynga amongst others. Coinbase says that they are processing Bitcoin payments for 48,000 businesses including Expedia and Overstock.com. It’s worth noting that most of the large companies restrict the products that can be purchased with Bitcoin. For example, Microsoft only allows purchasing digital content on their store and Expedia only enables Bitcoin purchases for hotels.
Overstock.com board member Mr Jonathan Johnson says that the company is bringing in "as much as $5 million per year" from bitcoin.
Bitcoin Standard Deviation of Daily Returns
Source: Bitcoin Volatility Index
Overstock’s revenues were $1.8Bn in 2016 resulting in maximum of 0.3% of revenue coming from payments in Bitcoin. CEO Patrick Byrne, an avid bitcoin enthusiast, stated that the company holds half of the bitcoin and the rest is immediately converted to US Dollars. A strategy that could prove costly in the bear market.
Recently, there has been an increased demand for alternatives to BitPay and Coinbase as both services have yet to implement SegWit support, which would in turn decrease the transaction size and ease off the pressure on the network. Moreover, BitPay only furthered the community’s concerns when it announced in December that it will be implementing Bitcoin Cash as an option for payments.
The lesser known alternatives that provide a comparable service to BitPay and Coinbase are Stripe, GoCoin and CoinPayments for the businesses in the US.
CoinPayments is particularly interesting as they support 110 cryptocurrencies on top of Bitcoin support. The payment processors that mostly focus on the European market include BitcoinPay, Coinify, CoinGate, CoinsBank, SpectroCoin, SpicePay and Cryptopay.me. Coinify, which is a danish startup, is the only payment processor that doesn’t charge any fees to entrepreneurs and smaller businesses.
Moreover, Coinify supports Bitcoin, Bitcoin Cash, Litecoin, Ether and 11 other cryptocurrencies. All the companies that are listed support withdrawals in fiat where merchants don’t have to come in contact with cryptocurrencies if they don’t want to. Of course, there are also services that only provide a solution to accept cryptocurrencies without the conversion to fiat but those are quite impractical because of the volatility risks especially for smaller merchants.
Bitcoin Payment Processors
Source: Diar, Company Websites. Notes: *Planned
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