Bitcoin recently celebrated its 16th anniversary with an all-time high price. One of its big promises among others was revolutionizing the way we pay for day-to-day purchases such as groceries. Crypto enthusiasts actively promoted moving away from plastic cards—which were conceived in the 1950s and increased consumer dependency on banks—to modern, cyber-friendly methods that allow independence from centralized financial institutions. But when you approach the checkout lane in your local grocery store, you won’t see a “pay with crypto” sign.
Merchant Challenges
It’s often argued that merchants are conservative about adopting new technology, and this is partly true. The main reason for that is low net profit margins that don’t leave a lot of room for experimentation and investments in costly hardware and software. But that’s not the reason, or at least not the only reason for mainstream merchants not offering crypto payments. If we look at other new tech such as artificial intelligence (AI), which is younger than Bitcoin, we will see that AI tools are being enthusiastically embraced by many retail chains. So why isn’t crypto so fortunate?
Merchants follow the technological trends for one of two reasons: operational cost reduction or demand from customers. The ideal situation is when a new tech provides for both, but this would be rather a rare, lucky case. Examples of technologies that represent both cases and a combination of them are self-checkout lanes, Apple Pay feature, and automatic product recognition respectively.
Self-checkout lanes dramatically reduce retailer costs by requiring only one attendant to oversee multiple stations instead of employing several cashiers. Apple Pay, on the other hand, came as a trend from buyers requesting wider support for their favorite gadgets. AI-based systems like automated product recognition are both convenient for the buyers and reduce the average checkout time for merchants.
Customer Incentives
Unfortunately, crypto payments still can’t find their place balancing between the merchant cost efficiency and customer demand. For retailers, they introduce hurdles like regulatory compliance uncertainties and require investments in implementation, maintenance, and security. From the consumer side, the overall demand is low as the percentage of mainstream buyers who want to pay with crypto is still relatively small, but there is an even more important factor that prevents customers from actively lobbying for retail crypto payments: lack of financial incentive.
Over a third of transactions at brick-and-mortar retailers—don’t cost the buyer anything, as merchants cover the processor fees for credit card payments. Moreover, most credit card users benefit from paying by credit card as they get cashback from the bank that issued their card—up to 5% of the total transaction amount. In contrast, crypto payments often require the sender to pay network fees, which can fluctuate widely depending on network congestion. And even if a merchant decides to cover that fee, which will significantly increase its transaction cost while making it unpredictable because crypto fees are fluctuating, they will never be able to compete with cashback incentives.
The banks have a huge resource to pay out those cashbacks not just using the transaction processing fees paid by merchants but with endless late fees and interests on credit card balances paid by the cardholders themselves. Merchants and crypto payment processors can’t compete with banks in this area. They don’t offer credit to customers and, therefore, can’t offset costs through interest and late fees to fund large incentives. Nevertheless, from the point of view of the average consumer, credit card payments still look financially more attractive than crypto payments.
The Privacy Advantage
If there is a light at the end of the tunnel, it should come in the form of a unique benefit that crypto payments can provide to consumers that banks can’t. Could privacy be the key to unlocking widespread crypto adoption?
Formally, credit card transactions are considered private, but in reality, it is courtesy of several companies such as payment processing bank—the one that works on the merchant side —and an issuer bank—the one that gives you the cards and sends you the monthly statements. These corporations are heavily regulated and their databases are vulnerable to cyberattacks. So, information about your transactions can either be subpoenaed by government organizations or stolen by hackers.
Crypto transactions offer enhanced privacy because they are processed on decentralized networks, removing the risk of centralized data breaches and possibility of disclosures to any third parties. There are also privacy-focused cryptocurrencies such as Monero that, unlike Bitcoin or Ethereum, completely protect transaction history from anyone except for the wallet owner.
While freedom from interference is still not a big concern for many people, as our lives shift into cyberspace, we become more aware of the importance of privacy and, the benefits of crypto payments may become evident to a critical mass of consumers, justifying any cost differences. This shift could occur sooner than we expect.