Can Coinbase Take Bitcoin Mainstream?
Start With Social Mobile Payments
Note: Bitcoin with capital “B” denotes the p2p network, and bitcoin with a lowercase “b” denotes the unit.
Explaining Bitcoin to someone today is akin to explaining email to someone in 1990.
“What is a blockchain? How do bitcoins work? Isn’t it used for illicit activities?” People have heard about Bitcoin to some extent — good or bad news, but are oftentimes misinformed and confused by the technicalities. Simply put, Bitcoin proves and transfers ownership without the need for a trusted third party. In terms of money, that solves the double-spending problem, or in layman’s terms “Bitcoin makes money transfer cheaper, safer, and faster.”
However, I find it hard explaining the concept to friends and family. After many failed attempts, I soon realized I didn’t need to explain the technicalities of Bitcoin — just like email users today don’t need to understand the underlying protocol — I just need to demonstrate how it works. Bringing Bitcoin to the masses as a monetary tool will require pretty packaging and social acceptance.
Pretty Packaging
Apple revolutionized consumer electronics in part through pretty packaging and selling benefits. Not only did their products look amazing, they were sold in layman’s terms: 4,000 songs in your pocket vs. X GB of storage, blah blah blah some technical jargon I don’t understand. Bitcoin is a tough to understand concept that needs this type of packaging in order to penetrate mainstream. Coinbase is taking Bitcoin mainstream through popularizing bitcoin as a digital currency.
What is Coinbase?
Coinbase is a $107mm funded bitcoin wallet bringing bitcoin to the masses. The company has created a seamless bitcoin payment app that is consumer facing. It has also struck partnerships with many merchants; in Sept. 2014 Coinbase partnered with online and mobile payments platform BrainTree (owned by PayPal), which opens up an ecosystem of merchants ready to accept bitcoin across various devices.
Savings for merchants
One of Coinbase’s current Bitcoin strategies helps merchants save on transaction costs. In the US, retailers pay a percentage of purchase volume called the merchant dicount rate (MDR) in order to transact electronically. US average MDR is 2.5% off retail payments and 3.0% for online retail payments. Bitcoin incurs a 1% conversion cost. Thus, the larger volume of transactions a merchant does on credit electronically, the more savings it can get from using bitcoin. Merchants generating up to $1mm of annual purchase volume can reduce their payment processing fees by at least half. To ease merchants into bitcoin transactions, Coinbase is waiving fees for the first $1mm in bitcoin sales.
To further reduce merchants’ exposure risk to bitcoin volatility, Coinbase offers its “Instant Exchange” product. This product allows merchants to immediately exchange payment receieved in bitcoins to be sold to Coinbase at the current sell price, based on time of customer’s purchase. But the Achilles Heel is: all transactions need to be done in bitcoins for Coinbase to make money.
Making bitcoins mainstream is a chicken and egg problem. Coinbase has built up a strong network on the market side but needs to now bring in bitcoin-using customers. It’s tough to convince someone who only uses cash or credit card to sign up for a virtual currency and replace their existing user habit. Therefore, Coinbase needs to target the right end-user to gain mass appeal, not just first-adopters. That first step to mass-appeal is through social acceptance of bitcoin, and BrainTree’s subsidiary and popular mobile payments app Venmo is Coinbase’s best bet.
Gaining Social Acceptance
Social acceptance leads to mainstream adoption
Bitcoin isn’t mainstream yet because it is confusing. People don’t understand it much less know how to use it. Like email, to get people to adopt Bitcoin, they don’t have to understand the underlying technology, they just need an easy interface through which they can use it. Coinbase has built such a product; it now needs to get the general public comfortable with transacting with bitcoin. Coinbase needs to get people comfortable with 1) transacting in digital payments, 2) linking up their credit or debit card to a mobile app (to transact in bitcoins), 3) understanding bitcoin.
Broaden appeal through Venmo
Venmo is the perfect conduit for Coinbase to build social acceptance for bitcoin, and ultimately, bring it mainstream. Venmo is the popular social and mobile payment tool that has a large, dedicated and young user base. Venmo allows users to transfer money to each other seamlessly and enables them to publicly broadcast a description of the payment, making the interaction social. In some ways, Venmo is similar to Bitcoin — peer to peer transfer of money with all transactions documented on a public ledger.
BrainTree’s CEO Bill Ready sees Venmo as an easy first step to get users accustomed to mobile payments. Venmo users have already 1) transferred payments digitally from peer to peer and 2) linked up their credit or debit card to their Venmo account. The next step is exposing them to bitcoin.
Coinbase complements Venmo’s and BrainTree’s current strategies
Venmo currently collects revenue from a 3% processing fee on credit card transfers; however, receiving money is free. Venmo reportedly processed over $700mm of transactions in Q3 2014, up from $141mm a year ago. This is just a small slice of the mobile payments industry. A 2013 Forrester Research report estimates Americans will spend $90bn in mobile payments by 2017, compared to $12.8bn in 2011.
However, Venmo has stated it will not implement ads into its social payment summaries stream and not seek to monetize its p2p transfer network. Instead, it charges merchants. BrainTree’s umbrella strategy seeks to design a system for startups to accept and process mobile and web payments through whichever payment tool most relevant and useful for them. By enabling bitcoin transactions, Coinbase opens another channel for merchants to join BrainTree’s ecosystem. Coinbase can also help Venmo monetize its asset base without interfering with its p2p network.
Coinbase can further monetize Venmo users
Venmo users already have money “stored” on Venmo. This is the amount in each users’s digital wallet and the locked up asset Coinbase needs to target. Coinbase can launch a campaign to onboard digital-payment-primed Venmo users to using bitcoin through Venmo’s social feeds, similar to WeChat’s Red Envelope campaign. Coinbase can allow users to convert money in their digital wallets to bitcoins to pay friends or make discounted purchases at in-network bitcoin merchant vendors. Through Venmo’s social scroll of payments, mentions of bitcoin could increase user engagement and exposure, drawing familiarity and broader social acceptance.
Merchants save on electronic transactions with bitcoin. BrainTree offers flexible payment tools to its merchants. With more users engaged with bitcoin payments, BrainTree can leverage this expanded user base to sign up more merchants to its platform.
A Coinbase-Venmo partnership not only broadens bitcoin exposure, it also monetizes Venmo’s “idle” user wallets and onbaords more merchants to BrainTree’s platform.
Simple proposed business structure
Venmo charges processing costs via a 3% fee for credit cards and non-major debit cards. Most credit cards charge around 2.5%, so Venmo makes at least a 0.5% spread. Assuming 10% of transfers are via credit card, $700mm transactions processed at 0.5% yields $350K in revenue.
For bitcoin conversions via Venmo, Coinbase will charge 1%, of which ~0.75% is profit margin. To gain bitcoin users, Coinbase can remit up to this amount to Venmo for all converted dollars, or use a sliding scale for determining payment to Venmo. Assuming 10% of the $700mm transacted remain in user wallets and if 10% is converted into bitcoins, Coinbase earns (.75% of the 1%) $52.5K; a full remittance to Venmo yields +15% in additional profit for Venmo. Key variables here are how much digital cash are in users’ wallets and conversion rate to bitcoin. Assuming 80% remain in user wallets, a 50% conversion to bitcoins, and a full remittance, Venmo earns $2.1mm, or an additional 600% vs. existing profits from processing credit card transactions. Regardless, a partnership with Coinbase on top of growing transactions processed yields greater user-monetization potential for Venmo.
Long-term and other considerations
Despite the benefits Bitcoin offers in the financial space, there is a long-term consideration. Current cost advantage comes from the lower 1% conversion fee. But as bitcoin operational costs rise and mining incentives drop (due to the halving nature of Bitcoin mining), transaction fees will rise to compensate. Can Bitcoin gain enough of a network effect before fees reach parity with the 2.5% credit card fees? What happens after cost advantages erode?
Today, Bitcoin and its use are “still for hobbyists.” Coinbase is working to take Bitcoin mainstream through a well-designed mobile app. It has signed up a strong network of merchants willing to accept bitcoin as payment and now needs to gun for bitcoin end-users. A partnership with Venmo helps Venmo monetize its existing users without damaging its p2p transfer model, onboards merchants to Venmo’s parent BrainTree’s platform, and broadens Bitcoin exposure.
People are beginning to become accustomed to digital payments through Venmo. The next step is using digital currency to pay for items and Coinbase could position bitcoin to serve that purpose. Pretty packaging and social acceptance, in the future, could enable people to transact with digital currency without knowing they’re actually using bitcoin!
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