Right now, the main use case of cryptocurrencies is a vehicle for speculation. Think about it; how easy is it to actually spend your crypto on a real-world item or service? Have you have ever bought anything with crypto? The reason behind this pain point is the astonishingly low levels of merchant adoption. In a nutshell, it’s impossible for cryptocurrency to act as true peer-to-peer electronic cash if only a select few merchants accept it. That’s why many cryptocurrency projects have been focusing relentlessly on widening and increasing merchant adoption. It’s simply a very necessary step for cryptocurrencies to make the transition from being merely a tool for speculation to the electronic money system that so many of us believe in and envision.
In this article, we’ll explore what’s needed to usher in merchant adoption of cryptocurrencies at scale. When it comes to the potential wider merchant adoption of crypto, we have to accept that we are currently sailing without a map. However, some lessons can be drawn from merchant acceptance of cash and card to draw conclusions on future cryptocurrency adoption.
What Can Be Learned From Merchant Adoption Of Cash & Cards?
Most people don’t know that the earliest charge cards came into use in the early 1900s. These closed-loop cards began to be issued by travel, oil and retail companies to customers and could be used by the customer in the stores owned by the issuer. In effect, this was the birth of the store card. Credit cards were then introduced in 1946, multi-purpose charge cards then made it onto the scene in the 1950’s with the Diners Club Card and plastic credit cards made an appearance in the 1960’s. The late 1990’s saw the rise of PayPal and in more recent times we have seen the emergence of ‘tap and go’ cards or mobile payment solutions like ApplePay. The point is that payment card technology has been around for a very long time and cash obviously pre-dates this payment method by thousands of years.
What many people are unaware of is the merchant cost of accepting cash for bricks and mortar businesses. These include:
– The labor cost of tender time.
– The labor cost of cash reconciliations, getting the cash ready for deposit and costs associated with delivering the cash to the bank.
– Coin ordering and cash deposit fees charged by the bank.
– Cost of cash theft and counterfeits.
– The opportunity cost of cash in the float or in transit.
The Bank of Canada conducted research on merchant acceptance of cash and cards and found that the typical cost for a $36.50 transaction varied by payment method as follows:
– Debit cards: 19 cents per transaction.
– Cash: 25 cents per transaction.
– Credit cards: 82 cents per transaction.
With this breakdown, you can now probably understand why so many bricks and mortar merchants simply refuse to take credit cards as a method of payment. What’s interesting about the Bank of Canada’s research is that these cost breakdowns by payment method appear to be supported by their survey of 500 merchants. When asked which payment method the merchant preferred the following breakdown was returned:
– Preferred debit cards 53%
– Preferred cash 39%
– Preferred credit cards 5%
Unsurprisingly, the majority of merchants preferred accepting the cheapest payment method. Now when you consider that transaction fees for popular cryptocurrencies like Bitcoin, DASH, Nano, Litecoin etc are signficantly lower than the 19 cents charged for debit cards, you could be forgiven for thinking that the merchant adoption of crypto is inevitable. Sadly, things are not as simple.
The True Cost For Merchants To Accept Crypto
What can be learned from our previous section on cash and cards is that merchants seemingly state a preference for the cheapest payment option. If we take The Bank of Canada’s research as a basis, the cost of accepting debit card payments is around 0.52% of the full value of the transaction. Now, that’s a pretty low fee for a transaction.
Cryptocurrencies appear to have a massive advantage over debit cards due to their low transaction fees. Cryptocurrencies like DASH have a transaction fee as low as 1 cent per transaction. However, at the time of writing, Bitcoin transaction fees stand at 69 cents per transaction. Yes, scaling solutions like the Lightning Network can help solve the fee issue for everyday transactions. However, the transaction fees for some cryptocurrencies are already too high to adequately compete with the costs of debit card acceptance.
Though cryptocurrencies do have a fiat currency value, the problem for merchants is that they are probably paying their suppliers, employees and other business costs in fiat. This means it’s not as simple as accepting $36.50 worth of Litecoin. Because operational costs are in fiat, most merchants will need to convert any cryptocurrency received into fiat. That’s where crypto payment processors come in; these businesses convert crypto to fiat to merchants and can charge fees up to 5%. The crypto payment processor Bitpay typically charges 1% fees and higher fees for higher risk industries. The problem with this is that even if the cryptocurrency transaction fee was zero, this 1% in fee is almost double the merchant cost of accepting payment via debit card. Put simply, a cheaper solution is needed to enable merchants to prefer cryptocurrencies as a payment method and prioritize them over conventional debit card payments.
The next cost is education. Many people working for merchants in the field of payments simply do not know much about cryptocurrency. Educating them about crypto and how to accept crypto payments takes time and costs money. These training costs could be substantial and this acts as another disincentive for merchants to adopt crypto at scale.
What’s clear is that current crypto payment processor solutions are simply too expensive to enable exciting levels of crypto merchant adoption.
A New Solution To The Merchant Roundtrip Problem?
The merchant round trip in cryptocurrency is when the customer wants to pay in crypto and the merchant wants to receive fiat. Currently, cryptocurrency payment processors are acting as the solution to this problem. The issue with this solution is high fees and the fact that merchants and customers are required to trust the payment processor. Many crypto enthusiasts are probably already aware of the potential pitfalls of trusting third parties with funds in the cryptocurrency niche. This means that the custodial natures of current crypto payment processors could also act against wider merchant adoption of crypto.
Nimiq is not a cryptocurrency project that is well-known yet in the wider cryptocurrency community. However, the Nimiq team are working on perhaps one of the most revolutionary tech solutions when it comes to encouraging wider merchant adoption of cryptocurrencies.
The Nimiq OASIS initiative is currently a blueprint to create an innovative crypto-to-fiat bridge. This has been pursued with WEG bank, which plays a key role in the system by facilitating access to the SEPA Instant network. Nimiq OASIS is the middle player solution, which aims to enable BTC, ETH, and NIM to Euro trades, which are then triggered on a non-custodial exchange platform.
In short, the Nimiq OASIS approach is focused on making fiat currency, like the Euro, behave as if it were on a blockchain and could provide a completely new way to transfer value from the cryptocurrency and traditional banking ecosystems. Through WEG Bank, Nimiq OASIS could enable crypto-to-fiat swaps at over 2,000 European banks in the SEPA Instant network and empower retail bank account holders with an easy way to buy or sell crypto. Nimiq’s vision is to expand support for Nimiq OASIS and extend it to even more banking networks, cryptocurrencies, and fiat currencies in the future.
Nimiq also plans to integrate elements of Nimiq OASIS into an e-commerce platform and leverage a liquidity trader to enable customers to pay for items at merchants with BTC, ETH, and NIM and allow merchants with an easy and cheap way to receive Euros in return. This solution aims to solve the merchant round trip problem and do so in a non-custodial fashion.
What Nimiq is attempting to do here is astonishing and they have even backed this up with substance by acquiring a 9.9% stake in WEG Bank. Nimiq OASIS has a target go-live date of Q4 2019 and if you care about wider merchant adoption of crypto, it is certainly worth keeping up to date with developments on Nimiq’s official Twitter account.
Crypto merchant adoption is currently being held back due to high fees. One thing is quite clear; for merchants to truly embrace cryptocurrency as a payment method, the crypto community needs to devise solutions that lower the cost below those associated with accepting conventional debit cards. Without this cost advantage, why would merchants accept cryptocurrencies at scale?
The cost problem of the merchant round trip is also emphasized when we look at the typical margins of online merchants. Most operate of margins as low as 0.5% to 3% and this drives home the importance of a low-cost merchant solution for mass merchant adoption of crypto.
The Coordinator of Dash Colombia, George Donnelly spoke about merchant adoption and had the following to say on the matter:
“My theory is that sectors where the consumer has the greatest selection are the easiest to onboard, because merchants know competition is stiff and they are looking for any edge they can get. Commodities merchants, such as vendors of food, fuel, etc, however, can not tolerate volatility as their profit margins are slim. We need a BitPay-like solution to be able to onboard them in meaningful numbers.”
Could that BitPay-like solution be Nimiq’s e-commerce platform powered by OASIS? Watch this space because the infrastructure for mass merchant adoption of crypto could be just around the corner.
Disclaimer: The author holds some NIM in their portfolio and is compensated in a long-term independent consulting capacity by Nimiq. This article must not be construed as investment advice. Always do your own research.