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Will consumers pay with Crypto? Probably not

by: Bradley Riss

Bradley Riss is the Chief Commercial Officer at Checkout.com. One of the world's biggest fintechs, Checkout.com's mission is to enable businesses and their communities to thrive in the digital economy. With over 2,000 employees and 19 offices around the world, its flexible payments platform and local expertise power some of the world’s most innovative companies and established global brands. At its most recent fundraising round in January 2022, Checkout.com was valued at $40bn, making it the UK’s most valuable venture-backed business. He plays a key role in scaling the company’s crypto offerings, enabling Checkout.com to power the world’s largest exchanges, on-ramps, token platforms, and wallets. Bradley has 15 years of experience working with some of the world's largest brands to deliver payment solutions across the world. Prior to joining Checkout.com, he held positions with Adyen, DigitalRiver, and Ingenico, based across the US, Europe, and Asia Pacific.

He is currently based in Miami and holds an MA in Business Management from The University of Edinburgh.

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To say these are rocky times in the crypto sector would be somewhat of an understatement. As the US discourse has become increasingly vitriolic, many fear that US innovation across Web3 will be hampered—but what innovation would be missed? There have been too many scams, rug pulls, blind celebrity endorsements, and snake oil salesmen. As Circle’s Jeremy Allaire noted during their Converge conference last year, this is the time to realize a better future for the sector.

In a sentence, moving from speculation to utility.

The more I have engaged and learned, the more it became apparent that there is a conflation of anything leveraging the underlying blockchain technology to be labeled as “crypto” and as such, sullied by those events and bad actors of 2022 (and earlier). Technology is not innately good or bad, and grouping stablecoins with dogecoin, or NFT JPEGs with fractionalization of assets, is not helpful as regulators struggle to come to terms with exactly how to police this sector.

While I will not go down each rabbit hole in this piece, it does feel like an opportune moment to explain the reality of one of the most familiar, original words tied to blockchain technology: cryptocurrency. 

 

Should consumers pay in crypto?

I am a payments guy having fallen into the space in 2010 and having since had the great fortune to work with some of the largest merchants and best service providers globally. As conference season rolls on again in my world, it is common for payment events to have sessions dedicated to crypto, typically asking the same question: “Should I offer cryptocurrencies for my customers to pay with?”

I consider myself a Web3 advocate so my one-word answer of “no” may seem contrary to this statement. However, it is overdue time to evaluate why consumer purchases may not be a good use case for crypto – at least, not yet, and not in their current form.

Asking if consumers could pay with the most known cryptocurrencies – BTC, ETH, DOGE, LTC, SOL, AVAX, etc. -  is not the right question. It is a case of asking why they would. To address this, it is interesting to compare apples-to-apples how merchants and consumers alike are incentivized to use crypto compared to the largest of “incumbents”, Visa and Mastercard.

 

Card Schemes

Cryptocurrency

Winner

1. User experience

ApplePay / GooglePay / NFC

Looking at your phone or holding near an NFC reader in-store. It is hard to get more frictionless.

Crypto wallet / QR Code

Opening mobile apps or connecting your wallet to dapps; scanning a QR code in-store. While comparable to WeChat Pay and not terrible, this is not as fast and has more steps.

Cards

2. Familiarity

Widely adopted, trusted, and used habitually.

New with many holding suspicious views of the sector.

Cards

3. Consumer protections

Chargebacks / Disputes / Refunds

Consumers have recourse in the event a merchant either deliberately or accidentally does not deliver the goods or services as expected. If your bank account is breached there is an established process and recourse.

No recourse in the event goods or services are not delivered. If your wallet is taken over, it is cumbersome and unlikely, in any event, funds could be recovered.

Cards

4. Rewards

Cashback & Points

Using your card often provides incentives for the customer at no cost and has been shown to drive end-user behavior. 

Airdrops

By no means established but a promising avenue to explore.

Cards

5. APY

0% current account interest rates

When using cards, you will typically pay off fees using funds in your current account. Those funds are losing value, increasingly so as inflation rises, so spending from this balance is logical.

The counterpoint is that consumers may incur charges and interest payments. But, the argument has a flipside that the provision of credit is itself an enabling factor in increasing spending power and can be positive in limited doses.

Staking revenue / deflationary assets

BTC and ETH are the largest tokens. In the former’s case, the finite number of BTC that will exist means the asset is deflationary and will increase in value over time with continued adoption. When you convert or make a purchase, it is a taxable event so needs to be reported. ETH returns 4%+ when staked, so the incentive is not to draw down this balance.

Hodl.

Cards

6. Payment features

Rich features

Through cards, merchants can set up recurring payments, easily refund a customer and understand why transactions fail with detailed response codes.

Limited features

Very few features other than one-time push payments exist today.

Cards

7. Custody

Clear regulatory guidelines

Most CFOs will today find comfort that fiat and card payments fit into GAAP. On the technology side, there are well-established ERP systems.

Dated regulations are not clearly or consistently applied

There is implied risk in holding digital assets with no regulatory framework yet in place and a paucity of accounting software to aid in reconciliation.

Cards

8. Reputation

Known customers

To be issued a card, most consumers will have undergone KYC with a regulated entity, typically a bank.

Opaque

While there are increasingly effective ways of conducting due diligence on the source of assets and customer identity, there is less certainty a merchant can have as to who they are doing business with.

Cards

9. Cost

Interchange, scheme fees, processing fees

Card fees are variable based on many conditions but typically come in at between 1-4% all-in.

“$0.0001” – but not exactly

Proof of Stake, sharding, L2s, roll-ups, Lightning and other advancements will lead to increasingly low fees. Some networks today already operate at a fraction of a cent. However, if a merchant needs to validate a wallet or use a third-party processor who has this expertise, there will be other costs to incur.

Crypto

10. Scalability

TPS and uptime

Visanet has never reached its limit and operates with almost perfect uptime.

TPS and uptime

Some newer projects may outstrip Visa or Mastercard, however, as both have linear scalability - in effect, limitless expansion.

Draw

 

The consumer use case for crypto

Tallying the scores (Cards holding an 8-1-1 record) is revealing. Inertia is a powerful force and to change consumer and business behavior requires clear improvements over the status quo. I do not see this in most situations today.

All this said, there are traditional Web2 business models, use cases, and geographies where crypto is superior. To examine this, we can look at one of the fastest-growing sectors: contractor work.

Companies like Freelancer.com, Upwork and Fivrr have been in operation for years. Alongside these, payroll companies specializing in connecting businesses with international talent have also proliferated since remote work became a mainstay during the pandemic. A typical use case would see a developed market company, possibly an SME in the US, farming out technical work to a developer based in an emerging economy – let’s say Argentina in this case - where the talent-to-cost ratio is more favourable. To keep the math simple, we’ll say a small web development project is agreed for $200.

Company A will advertise the scope via a platform, a freelancer will either bid or accept the offered rate and work commences once the company pays, with funds being held in escrow by the intermediary platform. So far, so good.

Upon completion, the platform will take its cut with the remainder now due to the worker. There were typically a few means of transferring this value, the most common being:

  1. Sending a wire transfer
  2. Establishing local entities and bank accounts in each country from which contractors operate
  3. Using a third party who has likely undertaken some level of the work required in option 2
  4. Using Card Scheme rails – Visa Direct or Mastercard Send being the most popular

Establishing entities in every country is a huge sunk cost, requires ongoing maintenance, and regular liquidity rebalancing across currencies. Card Scheme rails work well but require the customer to have a Visa or Mastercard branded card. Even then, their local bank will force an FX conversion upon receipt, likely at a 5%+ rate. Third parties abstract the problem away but also have those same sunk and ongoing fees to pass on.

Wires are the simplest case to examine the economics:

  • Cost:

$200

minus 10% PLATFORM FEE

$180

minus WIRE FEE ($35)

$145

minus FX FEE (3-8%)

Total:            $135

(possibly less)

  • Time to receive: 3-5 days, during banking hours.

The worker ultimately receives ~70c on the dollar if they are lucky. So where does crypto come in and how can it help?

The version of cryptocurrency I do consider aptly named are stablecoins. The US dollar is the global reserve currency accounting for 58% of central bank holdings, it is the standard against which most assets’ values are measured and in which most debt is held. Simply put, if you offer an emerging market worker a US dollar-denominated asset, they are probably happy. Add to this the rampant 102% inflation in Argentina (there’s a reason I chose this country), holding US dollar-denominated assets is a form of capital preservation and diversification.

Now, let’s compare the economics again:

  • Cost:

$200

minus 10% PLATFORM FEE

$180

minus BLOCKCHAIN FEE 

$179

no FX FEE

Total:          $179

Remains USD denominated

  • Time to receive: minutes.

Most Argentinians I have spoken with would prefer to hold the USD than the Peso, however, their local banks rarely allow this. Once they hold USDC, it is easy to swap for BTC or other assets if they choose, or less easily but very commonly, to off-ramp at one of the many “cuevas” across the country as and when needed.

While we used a freelancer example here, it is a model that would apply across creator communities, gig economy companies operating internationally, P2P money remitters, B2B transactions, and more.

 

The clear case for stablecoins

Sending funds via stablecoins allows for the recipient to receive more value for the work they have done. As this is most prominent in emerging markets, anyone who values global financial inclusion and uplifting those not fortunate enough to be born in a developed nation should realize the life-changing value this can bring and welcome the adoption we are seeing.

Now, back to the question of whether crypto can be a currency and if merchants should accept it. Well, if a merchant operates in (especially) emerging markets, the incentives are in place for their customers to want to hold USD, now easily done using USDC or other comparable variants. If you, as a business, also prefer not to touch ARS – or not to pay conversion fees – then perhaps offering USDC as a “currency” option will work for both you and your users.

While I believe fiat-paired stablecoins moved on-chain are the best vehicle to drive adoption by solving real problems, I acknowledge that we are not all the way there yet. Stablecoins remain unregulated, although positive steps are being made in many jurisdictions to establish what should qualify and how we can regulate issuance and transmission. I doubt DAI or USDT will fall into the regulated bucket but for USDC, GUSD, USDP and others, which are frequently audited and backed 1:1 with cash or short-term equivalents, regulation could allow these to be viewed as money, with banks empowered to open digital accounts or issue stablecoins based on balances held. MiCA is a commendable piece of regulation from Europe that may prove the template other jurisdictions will adopt.

If this does transpire, we will see this segment of the ‘crypto’ sector go from bleeding edge to table stakes overnight. Banks would have the ability to settle 24/7, use cryptographic proofs to reduce fraud and send funds domestically and globally with almost zero cost. For a merchant or consumer alike, who wouldn’t want cheaper, safer, faster payments? 

New technologies often face opposition, but if they advance our capabilities, natural selection does its job and the best solution wins. 

This is not about speculation, this is about utility.


All opinions expressed by the writers are solely their current opinions and do not reflect the views of FinancialColumnist.com, TET Events. 

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