E-commerce is expected exceed $ 4.6 trillion globally by 2022, with the perfect experience of e-wallets that increase 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 result in even faster transfers while significantly reduce costs for both merchants and customers.
The cost of trusting traditional payments
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. They check that transactions can be executed and manage 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 is validated, which takes place 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. No later than September 2019, Visa has added a flat fee 0.02 EUR for merchants using 3D-Secure, increasingly required by the new PSD2 legislation.
Cash flow, holdback and fraud
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.
When we look beyond card payments, the picture is even worse for merchants. In the US, the average B2B payment cycle takes 34 days to complete, with 47% of invoices be paid late!
So called “holdbacks” are another problem he has come to the fore recently. 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 well 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 the insolvency of Thomas Cook and Flybe.
While traditional payments are geared towards building trust, 78% of companies reported attempted or actual B2B payment fraud in 2018, with international fraud increasing by 136% from 2017-2019. Although nearly half of payment fraud is related to pen and paper processes, digital methods and credit cards are not immune.
Faced with this situation, it is not surprising that more and more companies are turning to fintech reduce payment costs, particularly when it comes to B2B payments, where interchange fees of 1.8% for cards introduce excessive overhead costs.
The promise of the blockchain
When we look at the payment stack as a means of generating trust, the promise of the blockchain becomes clear: to 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, the funds arrive within minutes. The only cost is a network fee, paid by the customer himself.
Furthermore, the blockchain is ideal for protecting against fraud and encouraging transparency. The fundamental problem 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 required to send funds overseas. This not only makes the design of integration protocols relatively simple, but also gives merchants easy access to new overseas markets.
A Report 2019 of the European Payments Council indicated an increase in the use of cryptocurrency in parallel 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.
Kellogg Fairbank is Executive Sales Leader for Nash Link, a solution for merchants designed to make it as easy as possible to accept cryptocurrency from customers.