How cryptocurrency is changing payments

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Date: 30 November 2021

Woman checking the stock prices of cryptocurrency on her phone and laptop

The global remittance market is expected to be worth $930 billion by the year 2026. Even with this impressive outlook, the payments industry isn't without challenges.

From hefty fees to long transaction times, some pressing challenges stand in the way of the industry's growth. While these challenges may not cause a lot of grief to many, they can put some people in situations that have dire consequences.

For instance, think about people in emerging economies that rely on receiving funds for their day-to-day needs. A day's worth of delay just before the weekend can have serious consequences on their well-being.

Enter cryptocurrencies.

How cryptocurrency is changing payments

Humans have been making payments for goods and services for as long as one can remember. Over time, though, the methods of payment have evolved. From barter to Bitcoin, payments have evolved drastically. 

Cryptocurrencies are about to bring another wave of change in the payments industry. They'll synergize with existing payment apps and portals, and over time, will normalize as a payment method that offers fast and low-cost payments.

Winds of change

American investors are opening up to cryptocurrencies. 48% of Americans bought cryptocurrency in the first half of 2021. Acceptance from investors is a step in the right direction, but for cryptocurrencies to become a mainstream form of payments, they require support from merchants and consumers.

Fortunately, there has been a rise in cryptocurrency payments, too. Reports suggest that over $12 billion worth of payments were made over Bitcoin. The number of transactions on Ethereum is likely to expand over the current average of close to 1.5 million transactions a day, as well. 

However, to sustain the rise in transaction volumes, cryptocurrencies need trust and support from businesses. For that to happen, both businesses and customers need to see the benefits of using cryptocurrencies.

Benefits of using cryptocurrencies for payments

Cryptocurrencies bring a strong line-up of benefits for businesses as well as consumers. That's precisely why even Amex is talking about the benefits of blockchain-based payment services. From no chargebacks to low-cost foreign transactions, cryptocurrencies bring plenty of value to the table. Following are the most prominent benefits of cryptocurrencies as a method of payment.

1. Lower fees

During the 90s, people primarily used cash for transactions. Slowly, people transitioned to debit and credit cards. They made it easy for people to spend without having to carry all that money around with them. However, the convenience came with fees… lots of them.

It's not just the customer that pays the fees, though. The merchant also shells out a hefty fee when receiving payments through a card.

The fees are even higher for international transactions. With the exchange rate spread, wire fees, and bank charges, there's a significant cost that goes along with international payments. It's annoying to see just how much money is lost during an international transaction, regardless of whether it's the business's cost or the customer's burden.

Cryptocurrencies like Bitcoin offer a lot of relief from fees associated with the way people currently transfer money, especially overseas. 

The reason? Bitcoin doesn't need an intermediary, which means there's no one to take a big cut out of the remitted amount for processing the transaction. In some cases, though, cryptocurrency transactions are entirely free. 

It's also fairly easy to pay with cryptocurrencies. For instance, for paying with ETH, a person needs two things: ETH and the receiver's wallet address. The receiver will be able to provide a wallet address, and the payer can use the ETH in their wallet or buy ETH on Moonpay or any other exchange.

2. No chargebacks

Chargebacks cost businesses money and time. A chargeback is an event wherein the money is credited back to a payment cardholder's account after having disputed a transaction on their statement. Put simply, it involves requesting the credit card company to refund the money paid for a good or service, claiming that it was charged to the account fraudulently. 

Businesses can and do fight chargebacks, but that requires investing time—a commodity that businesses value dearly. 

Crypto payments can solve this problem as well. A crypto transaction can't be undone or modified because they're now on a decentralized public ledger. This means no-fuss digital payments for businesses, without having to go through the ordeal of protesting chargebacks.

3. Better security

In a digital world rampant with cybercrime, entrusting money to an online platform can be a scary proposition. Fortunately, cryptocurrencies like Bitcoin live on the blockchain, a decentralized digital ledger.

A blockchain stores all transactions permanently, and they can't be deleted or modified. This significantly reduces the chances of fraud. A lot of payment processors also provide a range of additional security measures such as blockchain monitoring and KYC, which help add another layer of security.

Regardless of the bells and whistles that your service provider offers, the fundamental idea of a blockchain (and cryptocurrencies) is to offer a secure way of transferring funds. Plus, the blockchain also encrypts any sensitive information transmitted during a transaction. 

How cryptocurrency may change money-transfer platforms

The likes of PayPal saw a hyena coming for its prey from a mile away. Think about it. Cryptocurrencies can make such money-transfer companies, that make a truckload of money through foreign exchange transactions, obsolete.

Companies are quite keen on switching to cryptocurrencies for cross-border payments as well. As people start getting access to more options, traditional companies will be forced to lower their charges to survive the competition. 

What reason is there to stick with PayPal when there's a faster and equally (if not more) secure alternative? 

Unless companies like PayPal revise their fee structure, they run the risk of becoming obsolete. Regardless, the transition to cryptocurrency payments is happening. It's no longer about if it will happen, it's about when it will happen.

Cryptocurrency is changing how some countries transact

So, El Salvador is building Bitcoin city.

Why? 

Well, El Salvador has purchased its bread with USD for two decades. But in September, El Salvador became the first country to declare bitcoin as its legal currency.

So, what's the tea?

President Nayib Bukele wants to finance the creation of a bitcoin city with bonds that are linked to a virtual currency. Bitcoin, being the world's largest, was Bukele's choice to link its $1 billion worth of bonds to.

The city will be built near the Conchagua volcano, which will produce geothermal energy and power both the city as well as the bitcoin mining process. The bitcoin city will be “a fully ecological city that works and is energized by a volcano,” claims Bukele.

The government argues that since remittances made up for roughly 24% of the country's 2020 GDP, recognizing bitcoin as a legal currency will make remittances significantly easier, thereby boosting the economy.

It's not just Bukele that's impressed with how cryptocurrencies can reshape payments and economies though. Some other countries are also experimenting with digital currencies. The difference? They want a more regulated form of digital currency, called CBDCs.

Central Bank Digital Currencies (CBDCs)

A CBDC is a central bank-issued digital currency. It represents digital money that's a direct liability of the country's central bank. 

Several central banks across the world are experimenting with CBDCs, but it will take a while before anything meaningful comes out of it. For instance, Sweden, Nigeria, Japan, and China have all started trials. However, the Bahamas leads the pack with the world's first CBDC already out, called the sand dollar.

The fundamental difference between CBDCs and other coins like bitcoin is decentralization. CBDCs will be controlled by a single entity, the central bank, unlike other decentralized cryptocurrencies. This is a significant deviation from the original intent of cryptocurrencies.

Regardless, over time, the world could very well be using a CBDC—a digital currency—for a large portion of its payments. The rationale of a CBDC is debatable. However, governments will certainly push for CBDCs to enter the mainstream before cryptocurrencies do so they can retain their share of control.

Massive potential to change payments

The potential of cryptocurrency payments to create a borderless, globalized economy is undeniable. It will also provide the currently underbanked sectors the opportunity to claim financial equality by gaining access to fast and secure financial services. 

The wheels are in motion, and cryptocurrencies are already disrupting a range of industries. It's only a matter of time before the payments industry witnesses a massive shift in how transactions work, and how people exchange money. 

However, the good thing is, there are no losers. Everybody wins with faster, cheaper, and secure payments. Companies that currently facilitate payment of fiat money may need to go through a rough patch as they adapt to the new normal, but they'll most likely pivot and redefine their role in the payments supply chain.

Copyright 2021. Article made possible by SKALE.

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