BITCOIN – A BIT OF A FUSS ABOUT NOTHING, OR THE FUTURE OF PAYMENTS?

Henrik Meierhoff, Head of Business Development, Computop

Digital currencies.  We’ve all heard of them but they are not widely used.  Yet.

Litecoin, Dash, Peercoin, Dogecoin, Primecoin – this is just a small list of the many different digital currency exchanges available, but the most well-known, largest and notorious player in this space is Bitcoin.  Bitcoin is a decentralised, global, peer-to-peer digital currency.  With Bitcoin, encryption techniques are used to regulate the generation of units of currency – bitcoins – and verify the transfer of funds, without bank involvement.  As a result, no transaction fees are incurred by a retailer when bitcoins are used for payment, and payment is guaranteed.  From the consumer perspective, they are able to pay with bitcoins quickly and have their information kept private.

Whether bitcoins have a positive or negative connotation depends largely on where you are based in the world. For example, bitcoins already have good market penetration in the UK and are viewed fairly positively, while the currency is more provocative but gaining some footing here in the U.S.  In the Netherlands, bitcoins are widely accepted but conversely are extremely controversial in Germany.  It’s been reported that 80 percent of bitcoin volume is exchanged into and out of the Chinese yuan, demonstrating that Chinese consumers are rapidly adapting to this form of payment.

Regardless of current perception and adoption, Bitcoin is gaining traction, as demonstrated by recent news coverage of investments in the space.  To understand if bitcoins might be right to offer as a payment option, following are four key points to consider:

  1. There is no country controlling Bitcoin, meaning, it can be set up, accessed and used anywhere globally.  For emerging markets, this presents a great opportunity for both merchants and consumers, particularly if banks, ATMs and credit card machines are hard to access or are rare.  Also, accounts cannot be frozen for any reason, and value is not connected to a country’s political security or trustworthiness – making it easier to conduct business globally, regardless of a country’s economic or political situation.

Worth noting, is that without centralised control or regulation, there’s nobody overseeing security or providing insurance against lost money on the consumer’s end, either due to hacker – think of Bitstamp and Mt. Gox – or other illegal activity.  Payment cannot be stopped without the recipient’s consent.  While this does not necessarily affect the merchant, it can impact a consumer’s perception of a retailer should something fraudulent happen during a transaction.  And, it may impact consumers’ perceptions of bitcoins as a whole, despite the benefits they present.

To help address the lack of regulation, government and a number of state financial regulators have begun to issue guidelines to help protect consumers.

  1. There are no companies or banks that control Bitcoin either, which translates favorably into less fees for retailers.  Unlike credit card companies, financial service providers and banks that charge fees on transactions, most Bitcoin transactions are processed without a fee, making them highly cost-effective and appealing for merchants to offer.
  1. Bitcoin is extremely easy to use for both retailers and consumers. It takes just minutes to set up and for computers to verify.  Also, from a consumer perspective, they don’t need to carry paper money or credit or debit cards on them, making it easy for them to purchase.  However, at present time bitcoins are not accepted in many places, particularly in-store.  And with many U.S. and other developed countries’ consumers having easy access to their credit cards, it would require a change in behavior to get consumers to pay with bitcoins.
  1. Bitcoin accounts are anonymous, making paying by bitcoins appealing to consumers who may not want to broadcast what they are purchasing.  The flip side of this is that the digital currency has attracted criminals who have tried to capitalize on the anonymity that Bitcoin affords to conduct illegal activity.

Yes, digital currencies are unchartered territory for most.  The European Banking Authority (EBA) recently released a report into virtual currencies which acknowledges their relevance in the future of banking practice; however, it also urges caution in relation to risk assessment.  It is the same old adage, with risk there comes reward.  It is still up to each retailer and financial institution to assess the potential in each new technology that comes along.  For instance, with Bitcoin, those banks and payment service providers that are tackling and overcoming potential risks are already reaping first mover advantage.  Can the retail sector really afford to turn its head in this world of social and digital change?  Inertia can be as dangerous as risk avoidance.

Overall, payment via bitcoins, while still evolving, delivers distinct advantages for merchants and consumers alike.  As the market demand for digital currencies continues to grow, merchants offering payment options like Bitcoin will be well positioned to meet customer needs for an easy, seamless, digital transaction experience.

Henrik Meierhoff is Head of Business Development at Computop, a leading international payment service provider (PSP). Henrik has over 10 years of experience in the payment industry. Prior to joining Computop, Henrik was Head of Sales at Otto Group PSP.