Unless you work in the payments industry, you’ve probably not spent a great deal of time thinking about how credit cards work. You take your item to the cash register, you swipe your card, and then the purchase shows up on your bank or credit card statement.
… it’s complicated
Like with many things in life, there is more to this process than meets the eye. Consider this scenario: your laptop has just had its third birthday, which means that it’s well on its way towards planned obsolescence.
You go online, find the model you like, and make the purchase for $1000.
Behind the scenes
Your $1000 purchase goes straight into the pocket of the merchant, right? Well, not exactly. In total, there are about a dozen steps from the initial purchase to the merchant reaching your payment. You can find a good breakdown of the process here.
From this initial $1000 purchase with your Visa card, after each intermediary has taken its cut, the merchant will receive $944.20.
That seems like a lot… so where does this $55.80 go?
First up is the interchange fee of $25.10, which goes to the acquiring bank — i.e. the merchant’s bank.
The payment processor (PayPal in our example) then takes a cut of $29.30, comprised of 2.9% of the purchase + $0.30 processing fee.
Finally, assessment fees of $1.40 (0.14% of the purchase) are levied by card/payment network (Visa).
Surprise! Blockchain payments are cheaper!
We already know that payments made on blockchain networks can be faster and much cheaper than more traditional methods. But adoption amongst both consumers and retailers lags behind contexts like trade finance.
Luckily, there are a growing number of popular companies like Microsoft, T-Mobile, and Shopify that allow consumers to use crypto to pay for goods.
What if the shop accepted crypto?
For this same $1,000 purchase, let’s look at the fee structure using Nano. The transaction fee is $0.00 and the processing fee from CoinGate is $10, or 1% of the purchase cost. There are no assessment fees, meaning that the merchant ends up with $990.00 worth of Nano.
Depending on preference, the merchant can then decide to convert this crypto back into fiat currency for a fee of 1% + $0.15, bringing the total fiat currency they receive to $979.95. This means that an extra $35.75 goes into the merchant’s pocket if they accept Nano. Transactions with Stellar and XRP yield similar values.
So why isn’t everyone accepting crypto payments yet?
Arguably, the main obstacle to widespread adoption is that the speculative nature of cryptocurrencies represents an uncomfortable level of risk for merchants. The good news is that despite there being a number of issues to overcome, many companies and services are hard at work addressing these areas. From our example above, transaction costs for medium and big ticket items are already lower than through traditional non-cash payment channels.
Want to learn more about blockchain’s impact on the world?
Blockdata is all about helping people understand how blockchain is changing the way business is done. If you want to learn more about these developments, you can sign up on our insights page. We’ve also written about blockchain disruption in the $700 billion remittance industry and the $16 trillion world of trade finance.