The Problem with Credit Cards, and How the Bitcoin Lightning Network is the Answer
We all use credit cards, but very few of us know exactly what goes on behind the scenes when we tap or swipe our card. In this article, you will learn about how credit cards really work, the problems associated with them, and how the Bitcoin Lightning Network is the solution.
Behind the scenes, credit cards work in a convoluted way, but it is designed to solve 2 key problems that plague credit card transactions:
- Unauthorised transactions — Generally, any banking or credit card transaction that you didn’t make or approve is an unauthorised transaction.
- Customer disputes — When a merchant doesn’t fulfil their promise, and won’t accept a refund, a customer dispute arises. Examples of this are if you buy defective tablet or laptop the store won’t take back, or missing shipment that the merchant insists arrived.
In both cases, a “chargeback” occurs, and the merchant is forced to refund the transaction. What if the merchant goes bankrupt before they get a chance to refund the transaction? It’s got to come out of someone’s pocket, and credit card networks such as Visa and MasterCard don’t want to be the ones left holding the bag.
Enter: Acquiring Banks. They are the institutions that take on the risk of a merchant being unable to pay for chargebacks. In return, they skim extra fees on top of the fees that credit card networks charge.
This system introduces 3 main problems for merchants:
- Payment aggregators and acquiring banks are gate keepers
- Credit card transactions are expensive for merchants
- Unauthorised transactions are coming out of your pocket, often times after you’ve provided the product to a scammer
Gatekeepers
If you are a merchant looking to get credit card processing, and you are unable to use a payment aggregator like Stripe or Square (they don’t accept all businesses), you must partner with an acquiring bank. Payment aggregators and acquiring banks are effectively gatekeepers for your ability to transact with credit cards. If you have an online business, this pretty much means they are gatekeepers for your ability to transact.
There are many situations in which this is a very real problem. For example, if your online business caters to mostly customers in the USA, but you are not based there, and do not have a US SSN (Social Security Number), it is pretty much impossible for you to get an acquiring bank in the US. If you get an acquiring bank in your country, the additional foreign exchange fee on top of the already high credit card processing fees can make your business infeasible. The reason an SSN is required in this case is because acquiring banks check your US credit score to get a sense of how reliable and risky you are. Even if you have an amazing credit score a few kilometres north of the border, they refuse to take that into account.
High Fees
After the cost of the credit card network, the acquiring bank, the payment processor, and the merchant’s business bank account, the business is sometimes left with very little. This is exasperated if the customer’s average cart size is very small. A $4 purchase can have a 25 cent fixed fee + 4% transaction size fee + a 1.5% currency conversion fee (on top of an already bad rate). The merchant can be left with $3.53, with almost %12 going to fees! This doesn’t include monthly costs that acquiring banks and merchant banks could charge. In countries outside the USA, business bank accounts can be very costly.
Unauthorised Transactions
Whether a fraudster steals a credit card or a consumer maliciously claims an authorised transaction, the end result is the same, the transaction has to be reversed, and you have to fork it up. If you provided a costly product or service, now you are out double!
Answer: Lightning Network
Bitcoin’s lightning network solves all three problems for merchants. The Lightning Network is a “layer 2” payment protocol layered on top of Bitcoin. It is intended to enable fast transactions among participating members. It enhances the privacy and speed of Bitcoin payments, while maintaining the same level of security.
Gatekeepers: First of all, there are no gatekeepers. Anyone with an internet connection and relatively cheap hardware can participate in the lightning network.
There are also companies like MinatoPay.com that empower merchants to accept payments globally without arbitrary gate keeping rules.
High fees: fees on the lightning network are often quoted in parts per million. The transaction fees of a typical payment on the lightning network is usually less than 1%, and often times free.
Unauthorised transactions: unauthorised transactions are almost nonexistent in lightning and Bitcoin in general. There is an obvious yet elusive reason for this: with credits cards, we share our “private keys” every time we transact. If we want to make an online transaction, we provide our credit card information to the website. That same information can be used to make other purchases. It’s a given that our credit card information is on multiple databases all around the world. We hope that information doesn’t get into the hands of anyone with malicious intent.
With lightning, we always keep our private keys private. We can cryptographically sign transactions, that is, prove that we made a transaction, without giving up information that allows others to make transactions on our behalf.
Conclusion
Many merchants and entrepreneurs have felt a lot of pain from the current system of gatekeepers and high fees. Bitcoin’s lightning network is an elegant payment rail that solves these pain points globally. It’s just a matter of time before we see increased adoption!
If you are a merchant or developer interested in accepting Bitcoin and Lightning payments online, visit MinatoPay.com!
