Marcell Nimfuehr

@marcell74

The Need & the Folly of Bitcoin as Payment Method

Only Cash Makes Happy. Or Does It? Photo: Jonathan Saavedra (Unsplash)

Will Bitcoin prevail as a means of payment and in which areas? Let’s first look at what Bitcoin sets out to replace: Credit cards.

The process of paying by credit card for online purchases is more complicated than customers usually think. The procedure is the following:

• Customer orders in the online shop with a credit card.

• The online shop forwards the data to a payment gateway.

• This is software that processes payment data.

• From there it comes back and is sent to a credit card processor. He ensures that the merchant has an account at all and can accept this payment.

• The payment is then transferred to the credit card company, which debits the customer and credits the merchant.

  • Finally, the last booking is sent to the bank that issued the merchant’s credit card. Only then does the merchant receive his money.
Payment procedure for online purchases with a credit card. Photo: Fabio Bracht (Unsplash). Illustration: Author

But this is not the end of the payment process. Because credit card transactions are fraught with risks. A merchant takes the money in advance and offers a compliant right of return and warranty. If the merchant does not deliver, then the customer can reclaim the transferred amount from the credit card company. Until the warranty has not expired, MasterCard, Visa, and Co. grant a credit, so to speak. Due to the complicated processing of a payment, a chargeback process is several times more expensive than the amount paid.

Risk is not a game

This Risk is a Game. Source: Wikimedia. CC-by-sa

Credit card companies are not exactly poor. Yet they want to protect themselves from problems, payment defaults, and warranty cases. They, thus, try to exclude “bad” merchants from their service. The risk is high. In August 2017, the airline Air-Berlin files for bankruptcy. There is a risk that they cancel flights. Customers will demand reimbursement for ticket costs and the airline will not be able to pay. The payment providers are close at hand for every round of negotiations.

Since they shy away from the expense of examining every application of a merchant down to the smallest detail, they bundle the default risks in:

Industry Risk Profiles

In restaurants, the credit card companies have an average loss of 0.01%. This means that for every 1,000,000 euros of restaurant payments, the company writes off 100 euros in dealer losses. So the risk is extremely low, restaurants are very welcome as customers.

Low risk: restaurants and retailers (except clothes and jewelry).

Medium risk: health and beauty products, telecommunications, political organizations, lawyers (except bankruptcy).

High risk: financial service providers, aid organizations, advertising, software, jewelry

Then there is a category whose merchants have little chance of being able to offer credit cards as a method of payment. These include online auctions, event ticket sellers, Internet pharmacies, travel tours and hotels. Also health products that promise miracles. Airlines go bankrupt all the time, making the entire travel industry risky.

Finally, there are industries that are generally excluded. Among them are money collectors, barter, illegal activity, memberships for life, resellers who do not own their own product.

Some who are prohibited should be allowed

A legal product, online pharmacy, dated 1887. Source Wikim.

Merchants with illegal products should not receive support from PayPal and others. We can all agree on that. But it’s not that easy. Because what is illegal in Austria is legal in the Netherlands. What are you thinking? I do not mean marijuana, but online pharmacies. In the USA, medical marijuana is legal in some states, but prohibited at federal level. Credit card companies like to play it safe. They exclude all such merchants from all countries, thus depriving legal online merchants on the basis of their business.

In other areas, the merchant is dependent on the goodwill of the credit card company. This also concerns the question: Is this still multi-level marketing or already a pyramid scheme? The sale of “How to get rich with Bitcoin” e-books is also part of this. You can buy this book with PayPal, because you will be well informed, but probably not rich.

The restrictions go further. Industries suspected of money laundering do not get a merchant account. This includes the entire gift and voucher card industry. Last but not least, the restrictions apply to industries that are ethically poohed for American Express et al. This concerns pornography or sex toy mail order.

Bitcoin to allow those who otherwise can’t

Legitimate — and unfortunately also illegal — merchants and service providers start to accept Bitcoin as payment. Bitcoin has the advantage that a customer can’t reverse a payment. An advantage for the merchant, mind you.

Sometimes risk industry merchants offer both credit cards and Bitcoin. You can often see that Bitcoin payment offers discounts of up to 30%. In reality, this is not a discount, but a risk premium for credit card customers. The sum of the discount is then a good sign of how high the probability of default of the credit card is.

Bitcoin thus makes thousands of legitimate merchants earn money. And the whole thing is secure. Compared to credit card data that is sold in bundles of thousands for 800 euros in seedy Darknet marketplaces. Wonderful, case closed. Or not.

Where light, there shadow

Paying with Bitcoin shifts the risk one hundred percent to the customer. There is no longer any default liability. Besides, merchants who only use Bitcoin are often excluded from credit card trading for good reason. Every buy always carries a risk. Purchases with Bitcoin are many times riskier for customers and also show how much they want the product. The more urgent, the more illegal.

Bitcoin only makes sense where you can’t trust either the seller or the buyer at all. H&M is not interested in our Bitcoins, because customers pay with the card in their hand. Very unlikely that the card was stolen. With Zalando, the risk is already greater, as online fraud is much more common than offline. The question remains about where the applications for Bitcoin as payment lie.

Paragon for the cannabis industry

There have been at least eight attempts to introduce a Bitcoin alternative for the cannabis market. But not because Bitcoin is so poor for making payments. Each commercial project issues its own currency to generate start-up funding. That’s the reasons for having an own coin. None of these currencies are actually used today.

One of the weirdest of those ganja projects was Paragon. It was seeking financing in the form of an ICO (Initial Coin Offering) in September 2017. They promised to offer an anonymous and convenient payment option for the legal medical cannabis industry. To differentiate itself from Bitcoin, Blockchain technology is also used to certify the origin, THC grade, and age of products sold. With this, the company wanted to introduce standards in this industry.

Rapper The Game and Paragon CEO — Your trusted business team. Ad screenshot.

In an advertorial, the company reports that even cannabis gurus like the rapper “The Game” were on board. They claim that the CEO is a former Miss Iowa Pageant winner and has indirectly gained experience with medical hemp products. Well, I’d rather trust doctors, blockchain gurus, and economists, but who am I to judge.

I give you this example to show the futility of specialized coins for fringe payment corridors. Why would I buy my medical black Afghan with THC, Hemp or Paragon coin if I can pay with Bitcoin instead? Given the variance of the product, I’d probably buy it at the local pharmacy if that was an option.

Bitcoin and other blockchain currencies will at best lead a niche existence as means of payment over the next few years. Bitcoin enthusiasts always argue low commissions versus credit cards. But that is actually paid for expensively by shifting the risk to the customer.

My bet is with the credit card companies making their transactions much cheaper with blockchain technology. What’s your bet?

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