By Tom Waters
Bank Associates Merchant Services
Speculation has been running since technological disruptor bitcoin surpassed the $1,000 valuation benchmark. New buzzwords and phrases like peer-to-peer computing and cryptographic currency have many readers scratching their heads. You would likely need a computer science degree to fully grasp how the system works. Perhaps, after finishing this article, you will have a better understanding of why it could work.
People often need to send money from point A to point B. Whether the currency is intended for a student away at college, a family member in another country or any other reason to initiate a transfer, billions of dollars are transmitted daily. Consider all of the options available to send $100 to someone 100 miles away. You probably thought of the following: initiate a bank transfer or send cash in the mail. Both of these methods require time and money – and the faster the transfer, the higher the fees.
How can you get money from point A to point B but not use the post office or a bank or a payment company? It's a tough puzzle to consider. Currently, all available mainstream options of sending money are different sides of the same coin. We are accustomed to the payment process, so it's difficult to remember that we rely on a fundamental requirement: the need for a trusted third party to deliver money on our behalf. We give money to this intermediary and trust that the entity will transmit it to its intended destination quickly and securely. Bitcoin is a technology that eliminates this requirement.
Before the debut of America Online (now AOL Inc.), the Internet was widely considered a complex technology, limiting its accessibility to the dedicated few who found it intriguing. Internet access and email have since become so common that access to it is considered a fundamental human right in many countries. By bypassing the trusted third party, email has done to disrupt traditional mail what Bitcoin may do to disrupt traditional payments.
Consider the technology that brought currency transmittal to the masses: PayPal Inc. PayPal has netted billions of dollars for bridging the payment gap by allowing the average person to send money easily. The business model innovated upon existing technology by connecting payment cards to user accounts and acting as a third-party alternative to the banks. The explosive growth of PayPal was facilitated in part by millions of investment dollars to improve accessibility and usability. The product made the existing system more accessible.
Bitcoin, on the other hand, creates a unique system built from the ground up. It is a protocol, not a company. As such, bitcoin's success or failure will not come from standing on the shoulders of giants. The concept is not far from what mainstream consumers are accustomed to: purchase credits on an account with dollars and monitor your balance on a website or through software. Then spend those credits to make purchases. Without a concentrated effort from known brands, however, adoption is still limited to those dedicated few, find it intriguing.
It is also difficult for the masses to acquire bitcoin at this stage. The difficulty lies with the act of exchanging dollars into an account that is run by a credible and secure company. It often takes several days, or high fees, to convert your native currency into bitcoin. This limitation, however, further exacerbates the inconvenience of requiring a third party to transfer currency. Once converted to bitcoin, however, credits are available for you to move where you wish, to whomever you wish, in just a few seconds.
Acceptance of innovation in payment technology is typically driven by two types of influencers: merchants and cardholders. Merchants purchase equipment to initiate transactions from cardholder accounts. They are leery of expenses and can be reluctant to invest in anything new unless it drives business, creates efficiency or increases revenue.
For example, merchant adoption of accepting credit cards saw relatively limited growth until rewards cards were introduced to attract more cardholders. More cardholders meant higher demand for card acceptance. The expenses of accepting bitcoin as a form of payment are minimal, so if consumers start offering to pay with it, merchants will begin to accept it.
Since transactions are direct from the customer to the merchant, much like cash, there are no chargebacks or retrievals. Merchants selling custom items or high-ticket items see the immediate benefit. The lowered cost of accepting a bitcoin transaction is attractive to all merchants and especially helpful for those soliciting internationally.
Currently, there are liquidity limitations that might be troublesome for merchants who wish to redeem bitcoin in their native currency. Not enough vendors accept bitcoin, so there is not a strong incentive to keep balances in high amounts. Payment companies that convert bitcoin to dollars quickly and securely are scarce. Merchants who have adopted bitcoin recently, however expansive growth in the value of their bitcoin reserves. Merchants that kept their credits without immediately converting to their native currency have created a lot more wealth.
Just like your email address, you can create a bitcoin address that represents your wallet. That address comes in the form of a scannable quick response (QR) code or a series of letters, like a longer version of a credit card number. Someone can send money to that wallet by either scanning your QR code or by typing in your address.
Moving money out of a wallet requires a strong password that is automatically created for you. It is often referred to as a private key. Just like with your email, no one can send anything from your account without your password. This is where the "crypto" meets the currency. Your private key is encrypted with such strength that it would take the world's fastest computers a minimum of 1 quintillion years to crack.
There are ways to print your password and wallet address to physical paper or on a small portable file. This feature allows users to protect their accounts from hackers or back up their access in case of computer damage or fire. The most common ways to store wallets are on mobile apps, Internet websites or desktop software.
The merchant services industry will not perish as a result of increasing demand for alternative transaction methods. There will still be value and incentive for using credit or debit as a form of payment. Alternatives will compete with existing markets, not replace them. There will still be revenue opportunities in transaction fees as well as currency conversion costs.
New technologies will always emerge. You will find detractors and endorsers, successes and failures with every new invention. When innovation gains attention, it is important to investigate why, because it is likely fulfilling a need. By learning why there is a demand for it, we can better learn to adapt to it.
Tom Waters has been dedicated to the merchant service sales profession since 2001. Currently, he is responsible for cultivating relationships with entrepreneurs in information technology, accounting, sales and marketing in his role as Sales Director of Bank Associates Merchant Services (www.bams.com). Using fresh and matter-of-fact training methods, Tom has contributed to the success of thousands of agents, affiliates and clients. He can be reached via email through t.waters@bams.com or via phone at 347-651-1065
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