With the 10-year anniversary of Satoshi Nakamoto’s famous white paper Bitcoin: A Peer-to-Peer Electronic Cash System approaching in November, it’s safe to say that Bitcoin, cryptocurrency, and blockchain have entered popular lexicon. Most businesses tuning into the crypto airwaves are figuring out how to leverage cryptocurrency and blockchain technology. The first in a series, this post will explore how cryptocurrency and blockchain are affecting payments in ecommerce.
The easiest start: how cryptocurrency payment works within existing payment strategy
As the best-known entry point, many businesses begin leveraging blockchain by understanding how Bitcoin fits into their current business model and if it’s the right time. Businesses may merely accept payments from consumers in-store and online. Although the list of ecommerce businesses integrating into Bitcoin, Ethher or various other cryptocurrency payments is still relatively small, some brands, such as Overstock.com have been providing crypto payment options for several years.
A practical application requires businesses to consider some of the fundamental concepts when governing cryptocurrencies. It’s important to address the security requirements that wallets or exchanges impose that are different from existing business practices, such as direct deposits, wire transfers or ACH transactions.
For comparison, while traditional transactions may require a routing and account number, cryptocurrency transactions use private and public keys and a public address to send and receive currency. Banks and other financial institutions offer security by providing privacy and helping to detect, stop, investigate and prosecute fraud. In cryptocurrency, the public component of transactions and public addresses are transparent on the ledger and offer pseudonymity but not anonymity. Moreover, the onus of security falls upon the sender or receiver of transactions, and best practices must be followed while generating keys, using wallets for security and to avoid fraud. Secure practices recommend different addresses, and therefore keys, be used for every transaction under pseudonymous, if not anonymous mode, to prevent attacks. Most organizations don’t have policies or processes in place to implement this.
You could go further and extend crypto payments to suppliers and maybe even incentivize employees, shares, and stakeholders. Depending on the business’ requirements, this can either be selective or all-inclusive.
Payment Processing at Lightning Speed
The problem: On the surface payments seem straightforward, but there is one important component of all payment transactions: settlement. On many crypto ledgers, settlement happens very slowly. The most popular and widely adopted cryptocurrencies – based on the “proof of work” concept (Bitcoin, Ethereum) – usually take several minutes or hours to settle, impacting customer experience on cart confirmations. It also impacts the merchant’s business processes. For example, if a merchant held an online flash sale, with integrations into traditional payments that process up to 24,000 transactions per second, all the user has to do is enter their payment and shipping information and then receive confirmation. If the same payment were to happen on Bitcoin with an average of 3-7 transactions per second, the customer could wait several hours for their transaction to confirm. The merchant in the meantime has to hold that inventory for as long as the payment confirms on the ledger, which is usually after 5-6 transaction block confirmations. With one transaction block confirming on the Bitcoin network every 10 minutes, this would be about 50 minutes to an hour of wait time per individual transaction. In effect, sales are happening in protracted flashes.
The solution: There are ways to get out of this ditch and reduce the processing time by using expedited processing techniques. For example, if a merchant decides to run a cryptocurrency transaction authorizing nodes themselves, the gains in transaction processing times will be limited. While protocols such as the Lightning Network make cryptocurrency transaction processing faster, they require other checks and balances to avoid double-spending fraud and establish trust among transacting parties. Platforms, such as particl.io, provide solutions to establish trust among transacting parties but do so without any testing. Particl’s concept of Mutually Assured Destruction (MAD) requires parties to wager a predetermined amount prior to transactions which can result in a loss of all transacting parties no matter who breaches trust.
The other way to avoid the problem is through purchasing extra transaction speed. Nodes settling transactions on Bitcoin or Ethereum usually charge transaction fees which, in theory, can be zero. In Bitcoin, this is a fractional coin called Satoshis and on Ethereum it’s called “gas.” The amount you spend determines your transaction priority among peer transactions with various nodes settling them and determining how fast your transaction settles. The fee also fluctuates based on how busy the network is at that time of day. The key component to consider here is that spenders always pay the transaction fee. Thus, the price of an item on your website might not reflect the true price that a spender pays. This works the other way around during returns. More on that shortly.
Other considerations: After accepting payments, it’s important to decide how to hold those assets or liquidate them. Holding on to crypto assets exposes businesses to the volatility that the market experiences whereas in traditional banking, the transaction fees can remain more predictable or even fixed. The fluctuations in the value of a cryptocurrency like Bitcoin impacts transaction costs both while receiving and returning payments. Businesses also need to consider if they will discount the transaction fee for customers because neither party ever gets it back for a product return. With cryptocurrencies being used globally, the network could potentially remain busy throughout the day keeping transactions fees on the higher side. As a result, if an SLA requires a retailer to return a product within a timeframe, the cost of returning now has to also account for transaction fees on top of logistics fees.
Once a transaction has been processed, linking the transaction to a profile potentially raises fundamental questions surrounding anonymity. A typical address on the Bitcoin or any other network is not tied to any account or individual. Unlike a credit card or bank account that has an owner, anyone that owns the private key to the Bitcoin public address is allowed to spend the coins sent to the address. Therefore, retailers will need to maintain the link between the customer order and the address from where payment is received. With a plethora of cryptocurrencies, wallet apps and exchanges, businesses may want to use a payment gateway to broker payments. They may also accept payments directly to an address with no intermediary whatsoever. Overstock.com provides two ways to pay with Bitcoin.
Not every business inspires the kind of trust Overstock.com likely does for customers to send their crypto assets to an address without any intermediary or an overseeing authority. Yet cryptocurrencies expect exactly that to happen. You are your own bank. There are other services for customers to use wallets and cryptocurrencies for payments which don’t require the merchant to support any cryptocurrency. For example, Shift issues Visa and Mastercard debit cards linked to users’ cryptocurrency wallets such as Coinbase. A payment using this debit card is similar to making payments using other cards. In the end, businesses need to ensure the cryptocurrency received ties into an order being fulfilled and customers can trust them.
Adapting traditional concepts
Another key consideration is how to handle return processing. Compared to traditional online payments, cryptocurrencies cannot reverse transactions. Retailers can only pay the spender back at either the original or a different public address. When the value of a cryptocurrency increase, paying back in fiat currency may be cheaper to the retailer. However, if the value drops, it may be more expensive to pay in fiat currency. Retailers must account for such situations when the volume of transactions starts to increase and make them transparent to customers.
In the case of a return, merchants need mechanisms in place to prove the funds were indeed returned since addresses are not tied to individuals. This raises additional moral dilemmas. For example, in traditional banking, if an item purchased with a credit or debit card is stolen, there’s no incentive for the person stealing to return the item. This is because returns would result in funds being deposited back into the credit or debit card account from where the purchase was made.
With cryptocurrency, however, anyone returning a stolen item can simply ask the retailer to send cryptocurrencies for the returned items to an address of their choice. Retailers then need to have processes for customers returning items to be able to prove that the original payments also came from public address owned by them using concepts, such as message signing and verification.
When handling international shipments and payments, businesses need to have safeguards in place to handle regulations that payment gateways and banks otherwise provide during traditional transactions. When a retailer or business is large enough to influence the market prices of crypto assets, it makes sense to have a coherent policy to decide what cryptocurrencies to support without causing conflicts of interest (that exchanges have been blamed for, sometimes).
With so many factors affecting the implementation of cryptocurrency-based payments, it’s essential to be able to fail fast while innovating or testing the waters. To accommodate for risks and volatility, consider incremental additions such as rolling out crypto payments support on a web app before making them available via native app capabilities or vice versa. No matter the approach, cryptocurrencies are here to stay, so it’s safe to bet on your investments with its adoption.
Stay tuned for the next blog post in the blockchain for ecommerce series, focusing on other ways that blockchain can help businesses, such as OMS to identity verification.