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Ecommerce is projected to exceed $ 4.6 trillion globally by 2022, with the seamless experience of e-wallets boosting its popularity. The simplicity of services like PayPal and Stripe has helped improve the customer experience, giving merchants easy access to new markets.
Blockchain-based solutions represent the next logical evolution of this trend. By eliminating intermediaries, cross-border blockchain payments can lead to even faster transfers while significantly reducing costs for both merchants and customers.
In a traditional payment flow, three to five parties facilitate a single transaction. Together, they make up what is called the “payment pile”. These different parties work together to build trust. The process confirms that transactions can be executed and manages the transfer of funds. At the same time, this trust comes at a cost, which is ultimately borne by the traders. Each party within the payment stack takes a small part of a transaction.
A typical transaction involves a payment processor checking with the issuing bank whether a customer’s card can be charged. Once a transaction has been validated, which happens within milliseconds, a merchant is assured that he will get paid later. In the following days, the funds are transferred from the issuing bank to the acquiring bank.
The traditional stack involves numerous fillers. Card networks and other parties can also increase their fees. As of September 2019, Visa added a flat fee of 0.02 EUR for merchants using 3-D Secure, which is increasingly required by the new PSD2 legislation.
Cost isn’t the only issue traders face with the traditional stack. Transaction speed can also be an issue. Although validation takes place in milliseconds, it can take days for the money to finally arrive at a merchant’s bank. This isn’t ideal for small and medium-sized businesses that heavily depend on cash flow to pay suppliers and employers.
The picture is even worse for merchants when we look beyond card payments. In the US, the average B2B payment cycle takes about 34 days to complete, with nearly half of invoices paid late.
So-called “holdbacks” are another problem that has recently emerged. In this case, buyers keep a percentage of a merchant’s revenue as collateral in case a service is not provided and refunds must be issued. The restrictions have particularly hit the travel industry due to the COVID-19 pandemic. Most trips are booked in advance and, given the uncertainty introduced by COVID-19, withholdings have increased significantly. This led to a reduction in cash flow for merchants and ultimately to the insolvency of Thomas Cook and Flybe.
While traditional payments are geared towards building trust, 78% of businesses reported attempted or actual B2B payments fraud during 2018, with international fraud increasing by 136% between 2017 and 2019. Although almost half of payment fraud is related to paper and pen processes, digital methods and credit cards are not immune.
Faced with this situation, it is no surprise that more and more companies are turning to fintech to reduce payment costs, particularly when it comes to B2B payments, where interchange fees of 1.8% for cards introduce excessive overheads.
When we look at the payment stack as a means of generating trust, the promise of the blockchain becomes clear: it can completely eliminate the stack. Customers send funds directly to merchants, with transactions verified by a decentralized network.
Blockchain promises big improvements for merchants in terms of speed and cost. No intermediary is required to check whether funds can or cannot be sent – the network will reject a transaction if a wallet has an insufficient balance. Once a transaction is confirmed, funds arrive within minutes. The only cost is a network fee, charged to the customer.
Furthermore, the blockchain is ideal for protecting against fraud and encouraging transparency. The fundamental problem that the blockchain solves – the problem of “double spending” – is directly related to the prevention of fraudulent transactions. Blockchain is designed to make it impossible to spend coins you don’t have.Furthermore, since blockchains are public records, regulators can easily perform automated audits.
Blockchain is also a universal solution. While the US has ACH for bank transfers and the EU has SEPA, Bitcoin works the same everywhere. No red tape is needed to send funds overseas. This not only makes the design of integration protocols relatively simple, but also gives merchants easy access to new foreign markets.
A 2019 report from the European Payments Council indicated an increase in the use of cryptocurrency along with the growth of e-commerce.
Blockchain has too many advantages over traditional payment solutions for merchants to ignore. By accepting cryptocurrency, traders can tap into a growing multi-billion dollar market and get a taste of a cashless, borderless future.
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