6 ms·

An estimate of the real savings for merchants from Bitcoin

24 points by davidrangel 13y ago

pbreit 13y ago
There are no savings given the volatility. Since it can take days to convert to usable currency, you'd have to bake in 3-20% padding to cover volatility.
- unlimited_power 13y ago
  Use a service like BitPay and it converts instantly.
  - pbreit 13y ago
    That's just transferring the expense/risk which is not sustainable.
    - lhl 13y ago
      All payment processors take currency risk. Coinbase has an interesting approach by also being an exchange and doing some algorithmic arbitrage. The current volatility isn't inherent to the protocol, it's just a function of market depth and liquidity which will presumably improve/stabilize as the network grows.
      - pbreit 13y ago
        But not all currencies have the same risk.
    - kolinko 13y ago
      Exchanging into dollars is momentary, it's dollar withdrawal that takes days. So, actually the only risk that's being taken by bitpay is the fifteen minutes between the moment the price is displayed and someone pays (after 15 minutes the proce they lost in btc becomes invalid) And even against that risk they can hedge. So it can really be sustaining.
sergiosgc 13y ago
20% savings is not ground shaking. Remember that BTC is tackling an entrenched opponent, quasi monopolist. It'd take an order of magnitude in savings to guarantee success. Think 50% to 90% less.
- ronaldx 13y ago
  It depends. A high-volume, low-margin retailer would save a huge amount from 20% on transactions. If Amazon were motivated to take on the risk of building the infrastructure, this could happen quickly. But, they have other things to focus on, and I doubt they would make the calculations in the same aggressively optimistic manner.
- lhl 13y ago
  There aren't guarantees in life, but I think you're wholly misunderstanding the scale we're talking about. Visa processes about 200M transactions/day. Almost $17B/day. These are not small numbers. I think you're also misunderstanding of how the financial system looks at payment rails - there's a pent up (ongoing?) demand for better ones. Also, while merchant transactions are one market, they certainly aren't the only one. There's lots of talk about international remittances. This is a $500B+ market[1] that is growing at an insane rate[2]. Average fees are 9.3%[3] and way worse for some countries - it's not unheard of to say, pay $40 for sending $100 from the US to Kenya. Now that is a market that's ripe for disruption (you'd have to balance bitcoin inflows w/ capital flight for the economy to work, but it's worth pointing out there's already a service linking bitcoin w/ M-Pesa: http://motherboard.vice.com/blog/one-third-of-kenyans-now-have-a-bitcoin-wallet http://motherboard.vice.com/blog/one-third-of-kenyans-now-ha... ) IMO, this is a particularly useful page which gives some context on where bitcoin currently sits with other payment networks: http://www.coinometrics.com/bitcoin/btix http://www.coinometrics.com/bitcoin/btix [1] http://www.bloomberg.com/news/2013-12-17/global-immigrants-send-500-billion-back-home.html http://www.bloomberg.com/news/2013-12-17/global-immigrants-s... [2] http://gulfnews.com/business/economy/global-remittance-flow-grows-10-77-to-514-billion-in-2012-world-bank-1.1172693 http://gulfnews.com/business/economy/global-remittance-flow-... [3] http://www.cognizant.com/InsightsWhitepapers/Remittance-Market-Ready-and-Waiting-for-its-Skype-Moment.pdf http://www.cognizant.com/InsightsWhitepapers/Remittance-Mark...
- 13y ago
JeffJenkins 13y ago
If merchants were doing sales and returns using Bitcoin it seems like you could make money on the volatility by returning items when the value of Bitcoins went up within the return window. You'd have to be willing to keep items you bought if the value of Bitcoin went down, but if you systematically made all your regular purchases that way you ought to come out ahead. Is this a real risk for merchants, or am I missing something?
- gavinjoyce 13y ago
  Merchants could simply return the $ value of the product
  - pmorici 13y ago
    That sounds shady. Unless that was explicitly agreed to before the purchase I don't think that would fly.
    - waterlesscloud 13y ago
      It's pretty much how the merchants that accept bitcoin are handling it right now. It's flying fine.
      - davidrangel 13y ago
        I believe the larger merchants (e.g., Overstock) may not even be giving refunds right now. When buying with Bitcoin you can only get store credit.
      - pmorici 13y ago
        No, it's one of the things you have to consider before accepting Bitcoin. Overstock for example gives store credit and is explicitly says up front that is what they are doing. Anyone that tries to refund in USD at the current exchange rate instead of returning the original payment w/o stating upfront that is what they are going to do is being hugely dishonest. Think about it what if you tried to return your laptop to Sony and they said find but we are going to refund your money in JPY instead of USD and o by the way the exchange rate has changed 10% since you bought this so here is a refund for 10% less. No way that would fly so I'm surprised people would think doing the same with Bitcoin would be ok.
dror 13y ago
Most of these savings could be accomplished by having the merchant withdraw the payment from your bank account rather than a credit card. Frankly, I'm surprised that Amazon doesn't offer this service. Just take the money out from my bank, offer me the same protections as a credit card, and we split the credit card fee: 1% for you and 1% for me :-). Used to be that violated their credit card agreement to charge more for credit card purchases, but looks like that's not the case since Jan 2013. http://www.washingtonpost.com/business/capitalbusiness/as-rules-change-more-retailers-offer-discounts-for-cash-payments/2013/06/29/d4c84d7a-dcfc-11e2-bd83-e99e43c336ed_story.html http://www.washingtonpost.com/business/capitalbusiness/as-ru...
- TwoFactor 13y ago
  There is a lot more risk on the consumer allowing a merchant (and vicariously the consumer's bank) full "pull" access to a bank account. You'll need a dispute resolution system, which is what debit cards are basically providing in addition to point of sale systems. Imagine a security compromise like with Target, but if there was full bank account access as well... it would be a nightmare. Bitcoin is "push" based which eliminates the ability to fraudulently pull charges from the sender's account. Banks also charge a fee, and add transfer times to transactions that are basically non-existant with bitcoin
  - davidrangel 13y ago
    Agreed. Giving someone full access to your bank account is very risky. At least with credit cards you can always dispute charges and it is the merchant who is usually on the hook, not the consumer.
al2o3cr 13y ago
"Assuming consumers will be ok with only 0.5% in rewards" And assuming they'll be OK with having ZERO chargeback rights in case the purchase turns out to be not-as-advertised and/or defective. That second article (explaining why consumers would want to do this) best be a doozy, because so far consumers have had to swallow a requirement for them to provide a "mobile wallet", lower rewards, AND increased vulnerability to fraud all to save the merchant 0.375%.
- waterlesscloud 13y ago
  Assuming Bitpay, Coinbase, and company don't get into providing some sort of chargeback protection for consumers, which of course they could do. It's also possible that merchant reputation will become key, which isn't exactly a bad thing.
  - davidrangel 13y ago
    Agreed on both counts. They (e.g., Coinbase) will likely have to do this, and charge for it.
- davidrangel 13y ago
  I agree that foregoing the rewards is a fairly big assumption and it might not be realistic. But I do think there are other advantages and will write about those. The I don't think people will (or should) absorb the merchant risk and that's why someone does have to take up an acquiring bank-type role (and charge for it).
- wyager 13y ago
  I'm ok with not having chargeback rights on these transactions, because it's not like I'm going to do a chargeback on my local burrito place or grocery store or whatever. Also, the article factored in a "Bitcoin discount" for customers, and .375% of revenue is a hell of a lot more that .375% in profit. That's easily 20% of profit for small margin businesses. The article was also very conservative on credit card fees. If a Bitcoin user wants chargeback ability, they can use a third party mediator for a fraction of what credit card companies charge.
philrapo 13y ago
Shouldn't we be asking what the savings to the consumer are? I use my credit card all the time for 2 reasons: 1) fraud protection and 2) reward points. Interchange fees paid by the merchant are essentially being passed to the consumer via reward points. Why would people switch from credit cards to bitcoin en masse?
- davidrangel 13y ago
  It's a good question and also needs to be answered. I'm the author of the post and have one coming on the consumer side.
  - philrapo 13y ago
    Nice, looking forward to reading your thoughts. I've been thinking about this myself recently. I'd suggest using a higher estimate for the value of rewards points. (You used a 1%.) You can explicitly get >1% cash back on many cards, so I'd argue that's really the lower bound.[1] Most reward points can be redeemed for ~2%, with conscious consumers getting even more than that. [2] Consumers are very aware of the value they're getting, too. If you read AMEX company filings, the redemption rate on MR points is >90%. I found that shockingly high. It's tough to get consumers to switch to bitcoin when it's worse value and more risk. [1] https://creditcards.chase.com/freedom?jp_cmp=cc/freedom/off/na/multiple https://creditcards.chase.com/freedom?jp_cmp=cc/freedom/off/... [2] http://boardingarea.com/onemileatatime/2012/05/25/my-updated-analysis-on-what-a-milepoint-is-worth-credit-card-points/ http://boardingarea.com/onemileatatime/2012/05/25/my-updated...
    - davidrangel 13y ago
      Thanks. You make a good point about the rewards. I thought 1% could be a decent estimate given that not everyone pays attention, some points are never redeemed and rewards over 1% are usually only for specific purchase types (e.g., gas). But I may very well have underestimated this. And if people do redeem at a 90%+ rate, then they will definitely notice if there are no rewards on the Bitcoin side. Very interesting.

24 points by davidrangel 13y ago

There are no savings given the volatility. Since it can take days to convert to usable currency, you'd have to bake in 3-20% padding to cover volatility.

unlimited_power 13y ago
Use a service like BitPay and it converts instantly.
- pbreit 13y ago
  That's just transferring the expense/risk which is not sustainable.
  - lhl 13y ago
    All payment processors take currency risk. Coinbase has an interesting approach by also being an exchange and doing some algorithmic arbitrage. The current volatility isn't inherent to the protocol, it's just a function of market depth and liquidity which will presumably improve/stabilize as the network grows.
    - pbreit 13y ago
      But not all currencies have the same risk.
  - kolinko 13y ago
    Exchanging into dollars is momentary, it's dollar withdrawal that takes days. So, actually the only risk that's being taken by bitpay is the fifteen minutes between the moment the price is displayed and someone pays (after 15 minutes the proce they lost in btc becomes invalid) And even against that risk they can hedge. So it can really be sustaining.

sergiosgc 13y ago

20% savings is not ground shaking. Remember that BTC is tackling an entrenched opponent, quasi monopolist. It'd take an order of magnitude in savings to guarantee success. Think 50% to 90% less.

ronaldx 13y ago
It depends. A high-volume, low-margin retailer would save a huge amount from 20% on transactions. If Amazon were motivated to take on the risk of building the infrastructure, this could happen quickly. But, they have other things to focus on, and I doubt they would make the calculations in the same aggressively optimistic manner.
lhl 13y ago
There aren't guarantees in life, but I think you're wholly misunderstanding the scale we're talking about. Visa processes about 200M transactions/day. Almost $17B/day. These are not small numbers. I think you're also misunderstanding of how the financial system looks at payment rails - there's a pent up (ongoing?) demand for better ones. Also, while merchant transactions are one market, they certainly aren't the only one. There's lots of talk about international remittances. This is a $500B+ market[1] that is growing at an insane rate[2]. Average fees are 9.3%[3] and way worse for some countries - it's not unheard of to say, pay $40 for sending $100 from the US to Kenya. Now that is a market that's ripe for disruption (you'd have to balance bitcoin inflows w/ capital flight for the economy to work, but it's worth pointing out there's already a service linking bitcoin w/ M-Pesa: http://motherboard.vice.com/blog/one-third-of-kenyans-now-have-a-bitcoin-wallet http://motherboard.vice.com/blog/one-third-of-kenyans-now-ha... ) IMO, this is a particularly useful page which gives some context on where bitcoin currently sits with other payment networks: http://www.coinometrics.com/bitcoin/btix http://www.coinometrics.com/bitcoin/btix [1] http://www.bloomberg.com/news/2013-12-17/global-immigrants-send-500-billion-back-home.html http://www.bloomberg.com/news/2013-12-17/global-immigrants-s... [2] http://gulfnews.com/business/economy/global-remittance-flow-grows-10-77-to-514-billion-in-2012-world-bank-1.1172693 http://gulfnews.com/business/economy/global-remittance-flow-... [3] http://www.cognizant.com/InsightsWhitepapers/Remittance-Market-Ready-and-Waiting-for-its-Skype-Moment.pdf http://www.cognizant.com/InsightsWhitepapers/Remittance-Mark...
13y ago

JeffJenkins 13y ago

If merchants were doing sales and returns using Bitcoin it seems like you could make money on the volatility by returning items when the value of Bitcoins went up within the return window. You'd have to be willing to keep items you bought if the value of Bitcoin went down, but if you systematically made all your regular purchases that way you ought to come out ahead. Is this a real risk for merchants, or am I missing something?

gavinjoyce 13y ago
Merchants could simply return the $ value of the product
- pmorici 13y ago
  That sounds shady. Unless that was explicitly agreed to before the purchase I don't think that would fly.
  - waterlesscloud 13y ago
    It's pretty much how the merchants that accept bitcoin are handling it right now. It's flying fine.
    - davidrangel 13y ago
      I believe the larger merchants (e.g., Overstock) may not even be giving refunds right now. When buying with Bitcoin you can only get store credit.
    - pmorici 13y ago
      No, it's one of the things you have to consider before accepting Bitcoin. Overstock for example gives store credit and is explicitly says up front that is what they are doing. Anyone that tries to refund in USD at the current exchange rate instead of returning the original payment w/o stating upfront that is what they are going to do is being hugely dishonest. Think about it what if you tried to return your laptop to Sony and they said find but we are going to refund your money in JPY instead of USD and o by the way the exchange rate has changed 10% since you bought this so here is a refund for 10% less. No way that would fly so I'm surprised people would think doing the same with Bitcoin would be ok.

dror 13y ago

Most of these savings could be accomplished by having the merchant withdraw the payment from your bank account rather than a credit card. Frankly, I'm surprised that Amazon doesn't offer this service. Just take the money out from my bank, offer me the same protections as a credit card, and we split the credit card fee: 1% for you and 1% for me :-). Used to be that violated their credit card agreement to charge more for credit card purchases, but looks like that's not the case since Jan 2013. http://www.washingtonpost.com/business/capitalbusiness/as-rules-change-more-retailers-offer-discounts-for-cash-payments/2013/06/29/d4c84d7a-dcfc-11e2-bd83-e99e43c336ed_story.html http://www.washingtonpost.com/business/capitalbusiness/as-ru...

TwoFactor 13y ago
There is a lot more risk on the consumer allowing a merchant (and vicariously the consumer's bank) full "pull" access to a bank account. You'll need a dispute resolution system, which is what debit cards are basically providing in addition to point of sale systems. Imagine a security compromise like with Target, but if there was full bank account access as well... it would be a nightmare. Bitcoin is "push" based which eliminates the ability to fraudulently pull charges from the sender's account. Banks also charge a fee, and add transfer times to transactions that are basically non-existant with bitcoin
- davidrangel 13y ago
  Agreed. Giving someone full access to your bank account is very risky. At least with credit cards you can always dispute charges and it is the merchant who is usually on the hook, not the consumer.

al2o3cr 13y ago

"Assuming consumers will be ok with only 0.5% in rewards" And assuming they'll be OK with having ZERO chargeback rights in case the purchase turns out to be not-as-advertised and/or defective. That second article (explaining why consumers would want to do this) best be a doozy, because so far consumers have had to swallow a requirement for them to provide a "mobile wallet", lower rewards, AND increased vulnerability to fraud all to save the merchant 0.375%.

waterlesscloud 13y ago
Assuming Bitpay, Coinbase, and company don't get into providing some sort of chargeback protection for consumers, which of course they could do. It's also possible that merchant reputation will become key, which isn't exactly a bad thing.
- davidrangel 13y ago
  Agreed on both counts. They (e.g., Coinbase) will likely have to do this, and charge for it.
davidrangel 13y ago
I agree that foregoing the rewards is a fairly big assumption and it might not be realistic. But I do think there are other advantages and will write about those. The I don't think people will (or should) absorb the merchant risk and that's why someone does have to take up an acquiring bank-type role (and charge for it).
wyager 13y ago
I'm ok with not having chargeback rights on these transactions, because it's not like I'm going to do a chargeback on my local burrito place or grocery store or whatever. Also, the article factored in a "Bitcoin discount" for customers, and .375% of revenue is a hell of a lot more that .375% in profit. That's easily 20% of profit for small margin businesses. The article was also very conservative on credit card fees. If a Bitcoin user wants chargeback ability, they can use a third party mediator for a fraction of what credit card companies charge.

philrapo 13y ago

Shouldn't we be asking what the savings to the consumer are? I use my credit card all the time for 2 reasons: 1) fraud protection and 2) reward points. Interchange fees paid by the merchant are essentially being passed to the consumer via reward points. Why would people switch from credit cards to bitcoin en masse?

davidrangel 13y ago
It's a good question and also needs to be answered. I'm the author of the post and have one coming on the consumer side.
- philrapo 13y ago
  Nice, looking forward to reading your thoughts. I've been thinking about this myself recently. I'd suggest using a higher estimate for the value of rewards points. (You used a 1%.) You can explicitly get >1% cash back on many cards, so I'd argue that's really the lower bound.[1] Most reward points can be redeemed for ~2%, with conscious consumers getting even more than that. [2] Consumers are very aware of the value they're getting, too. If you read AMEX company filings, the redemption rate on MR points is >90%. I found that shockingly high. It's tough to get consumers to switch to bitcoin when it's worse value and more risk. [1] https://creditcards.chase.com/freedom?jp_cmp=cc/freedom/off/na/multiple https://creditcards.chase.com/freedom?jp_cmp=cc/freedom/off/... [2] http://boardingarea.com/onemileatatime/2012/05/25/my-updated-analysis-on-what-a-milepoint-is-worth-credit-card-points/ http://boardingarea.com/onemileatatime/2012/05/25/my-updated...
  - davidrangel 13y ago
    Thanks. You make a good point about the rewards. I thought 1% could be a decent estimate given that not everyone pays attention, some points are never redeemed and rewards over 1% are usually only for specific purchase types (e.g., gas). But I may very well have underestimated this. And if people do redeem at a 90%+ rate, then they will definitely notice if there are no rewards on the Bitcoin side. Very interesting.