The evolution of how we pay and get paid for products and services has repeatedly been punctuated with the arrival of new technologies that have brought about disruptive change. From adopting national fiat currencies to becoming reliant on a vast network that supports debit and credit card transactions all over the world, we continue to embrace methods that offer more convenience and more security when buying and selling.
Now, many are touting digital currencies as the next revolution in payments. With our buying and selling habits rapidly changing towards more purchases online and overseas, many customers are becoming more than willing to consider alternatives that can better serve modern payment needs.
With recent announcements like PayPal’s integration with bitcoin, the increasing use of digital currencies is apparent. Companies like Overstock.com, Dell, Expedia, eBay and WordPress have already begun accepting digital currencies. However, while this medium of exchange is becoming more widespread, uncertainty surrounding regulatory rules and ongoing security problems remain. This begs the question of what makes digital currencies an attractive alternative when making and accepting payments to the point where it could bring about disruptive change.
When purchasing with a credit card, banks and credit card companies both usually charge merchants fees between 1-4% which is then compounded for consumers when they purchase from overseas. Yearly, card companies such as Visa and MasterCard make over $30 billion from interchange fees alone with banks earning billions more.
Digital currencies offer much lower or no transaction fees because they effectively take out banks and credit card companies as intermediaries. Instead of having to rely on bank networks to securely transfer funds, digital currencies use the Internet. Most of these digital currency networks, like bitcoin, are designed to be secure and neutral with no one having total control. This also makes them effectively neutral with no person, bank or government being able to deny access to or take your funds.
The removal of banks also makes cross-border purchases and exchanges much simpler, especially for those wanting to buy from or send money to many of the more impoverished parts of the world. Many banks and credit card companies will not process transactions or issue credit cards in countries outside of North America, Europe and some Asian and South American countries because of the high risk of fraud and chargebacks for which they are on the hook. Digital currencies make it possible for people to securely send money back to their family in their home country without the high fees charged by companies like TransUnion. Money is then available almost instantly for those on the receiving end and there is no risk of it being held for a prolonged period by a third party.
While they do charge high fees, users do get a certain level of protection and stability with more traditional payment systems. First, national currencies don’t usually experience the huge swings in value seen in some digital currencies. For example, the price of bitcoin fell from $1200 USD to $600 USD in the course of 48 hours in December 2013 and at the time of writing sits at around $220 USD.
Secondly, while credit card numbers can be stolen, banks and credit card companies do usually offer protection by reimbursing customers who have been victims of fraud or by undertaking chargebacks. In contrast, if you accidentally send bitcoins to the wrong person, don’t get what you paid for or have your bitcoins stolen from your digital wallet or bitcoin exchange, there is no mechanism to get it back because it is a decentralized medium of exchange – it is gone. It is estimated that 1 in 16 bitcoins, or about $500 million worth, belong to someone who stole it.
While the concept of programmable digital currencies promises greater efficiency and less cost, there are still hurdles to overcome before these mediums of exchange become mainstream. Most importantly, there needs to be more widespread adoption by both merchants and customers. But before that can happen, security issues, both real and perceived, have to be resolved. As well, the user experience needs to be simple and transparent for people to want to park their assets in digital currencies.
But every medium of exchange has its growing pains and digital currencies are no exception. Advances in technology will no doubt produce change in the financial system like that seen with the rise of digital payment alternatives like Xoom, Skrill, Payza and Paym. But it’s still too early to tell exactly how digital currencies will evolve in the financial ecosystem. Banks and credit card companies will undoubtedly fight to keep their market share and have already been pre-emptively adopting innovations to keep customers happy while still paying higher fees.
Once the shortcomings of digital currencies are overcome, the potential of digital currencies is monumental in an increasingly globalized economy, especially for those in the developing world that lack easy access to credit cards or any banking services at all. For online merchants and customers buying and selling internationally, seamless cross-boarder transactions and minimal charges are already proving to be very attractive. So, while it is still early to determine how disruptive digital currencies will be, there is little doubt that digital currencies are here to stay.
- Jason
Jason Kiwaluk
Director of Ideation
