The cost of traditional banking transactions has come into focus again as Amazon announced that it will no longer accept Visa credit cards for payments in the UK. It was part of a battle that began earlier this year in Singapore and Australia as the e-commerce giant took steps to deter Visa credit card payments. An Amazon spokesperson explained, “We believe that the cost of accepting credit card payments should decrease over time to allow merchants to reinvest savings in lower rates and shopping improvements. However, despite technical advances, the cost of some card payments is still high or even on the rise.”
Citing Brexit, Visa has raised its fee on UK credit card purchases from 0.3% to 1.5%. MasterCard also imposed a similar increase. Despite Amazon’s refusal, the fact 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. Backed by the security and transparency of blockchain technology, the cryptocurrency sector offers functional alternatives that could practically replace credit cards in the not too distant future.
Credit Cards vs. Blockchain-Based Payments
Bloomberg notes that in the US alone, merchants spent $110 billion in card processing fees in 2020. Most consumers barely realize these costs exist or are responsible for the rising prices of everyday goods and services.
To accept credit card payments, merchants pay an exchange fee, an appraisal fee, and a processing fee. This fee goes to the card issuing bank, the card payment network, and the payment processor. Typical credit card processing fees range from about 1.3% to 3.5%, plus payment processor cutoff, which varies depending on the processor and merchant plan. These are fees that, in the eyes of many people, do not follow principles but rather reflect the choices of issuers who have a market monopoly.
The payments are basically loans from the earning bank and the risks involved with the lender add to the costs. Since banks often do not have direct relationships with each other, they have to use the SWIFT network of the correspondent bank that has a relationship with both banks and settle the transaction – another third party for another fee. Further, banks maintain their own ledgers which have to be reconciled with other banks, which adds more time and cost.
By contrast, most cryptocurrencies run on public blockchains that share their ledgers globally, providing a way for untrusted parties to verify and agree on data. By providing such an open ledger that no one needs to manage, blockchain can provide financial services without the need for many traditional banking operations. This technology allows access to information about account holders and each transaction, which means there is less risk and less need to trust third parties. The payment network bypasses the need for exchange fees by being more direct and transparent. The increased efficiency, as well as the inherent security of the blockchain, significantly reduces fees and settlement times.
Cryptocurrency payment solutions already exist
So if the costly intermediaries associated with credit cards are eliminated, merchants are sure to take note of what blockchain can do for their business. not exactly. With new technology, awareness and confidence tend to build slowly until a point of no return is reached. Regardless of the rate of adoption, the fact is that there are already crypto payment solutions that take advantage of this technology and revolutionize payments for merchants.
A report published this month by analytics firm TokenInsight provides research into a number of cryptocurrency payment solutions. While the report mentioned well-known projects like Stellar and Ripple that cater to large organizations for cross-border transactions, it also notes what Alchemy Pay offers to online and in-store retailers. It allows merchants to accept cryptocurrency while receiving payment in their local official currency via a unique backend process. The network takes cryptocurrencies and converts them into stablecoins and then into fiat currencies, through partnerships with OTCs and other exchanges. This overcomes a major hurdle to entry by requiring too few merchants and integrating crypto and fiat currencies for them.
This is the kind of solution that was not possible even just three years ago and demonstrates the progress of financial applications built on blockchain technology.
All have a good time
So, while Amazon battles the credit card giants on behalf of merchants, it’s worth knowing that real alternatives do exist. However, the retail habits that have built up over decades will not disappear overnight and there is still a need to educate both retailers and consumers about the issues of traditional finance and the benefits that cryptocurrency offers. As exciting as blockchain finance is at this time, those in the know will need to be patient until the word is spread.