Part 1 of 2: Crypto Debit Card Payment and the HiveNet Debit Card

How does debit card payment with cryptocurrencies (“crypto cards”) work?

There are several companies in the blockchain and crypto environment who are mainly focusing on this topic. Some of them are, for various reasons, struggling to get their system working or get the cards to the users, whereas some others have already launched their services.

In the two parts of this article, we explain you some of the main principles and how the HiveNet debit card will be implemented.

Crypto debit cards aren’t all the same. There are three main differentiating factors from the user’s point of view (the three C’s):

1) Currencies: How many and which currencies are supported?

2) Comfort: Will the user have to manually exchange into local fiat before payment or is the exchange and the payment happening automatically and seamlessly in real-time?

3) Cost: How much does the debit card itself and its use cost?

Currencies: How many and which currencies are supported?

There are two kinds of currencies, which need to be considered here: Fiat currencies and cryptocurrencies.

For the users of a debit card it is crucially important that their local fiat currency is supported. Otherwise, the card would be pointless, because it couldn’t be used in local shops. Which fiat currencies are supported, is mainly depending on legal considerations. Each local fiat currency requires compliance with the respective local finance/banking legislation. Therefore, each supported fiat currency, doesn’t only require technical implementation, but also results a lot of additional paperwork, which needs to be created or reviewed by experienced lawyersbefore handing over to the local finance/banking authority, and (most likely) consecutive discussions with the authority. Consequently, the number of supported fiat currencies is a huge cost-driver and thereby many companies limit their initial effort to just a small set of them.

What cryptocurrencies are supported, is mainly a technical and risk consideration. For most systems, the card issuer provides some sort of a crypto wallet to the user. The card user transfers his crypto funds to the wallet and is then able to spend it by using the debit card. Each supported cryptocurrency needs to be integrated into the software and therefore creates costs. These costs are way lower than above mentioned costs for the implementation of fiat currencies but can still be significant. However, there are ways to reduce costs. For example, integration of Ethereum and ERC-20 tokens offers relevant synergy effects.

From a risk perspective, the stability and trading volume of a cryptocurrency needs to be considered. If a cryptocurrency is traded in low volumes and is very volatile, the card issuer subjects itself to large financial risks. Consider this: What happens if a card user pays a lot of money with a cryptocurrency that has a too little trading volume to perform the exchange immediately? The card issuer will then either have to deny the payment (bad user experience) or has to perform an in advance payment in fiat currency and might later lose money when trying to liquidate the crypto asset. In summary, debit card issuing companies will try to limit the number of supported cryptocurrencies to limit implementation effort and reduce monetary risks by focusing on “top currencies”.

Comfort: Manual exchange into local fiat before payment or real-time payments?

When you pay with a traditional (non-crypto) “card” (debit, credit, or other (e.g. Girocard in Germany), you just present your card, type in a PIN or sign something, and it’s done. Plain and simple. Not perfect, but quite comfortable.

When using a crypto debit card, people want the same comfortable user experience. But most cases don´t fulfill this expectation. Instead, most companies require their users to manually exchange their cryptocurrencies into the local fiat currency before they can pay with the card.

Why?

Because that’s easier to implement for the card issuing company and it eliminates any currency exchange risks. When a company offers real-time payments, the process works like this (simplified): The card user wants to pay at a shop, the card issuer pays the shop with fiat currency, the card issuer exchanges the user’s cryptocurrency for fiat currency to cover the payment. These risk for the card issuer results from the up-front payment in fiat and the high volatility of cryptocurrencies. Therefore, when the up-front payment in fiat is performed, the value of the cryptocurrency can be different from its value when the exchange into fiat is happening. Now you might think these differences shouldn’t be so much of a problem, but in fact they can be, if the value difference leads to a deficit of funds in the user’s balance or a crypto market crash is happening (we have learned they can happen out of nowhere and for no apparent reason). In either case the card issuer effectively loses money. Therefore, many card issuers prefer to reduce their risk at the cost of the user’s comfort.

Cost: How much does the debit card itself and its use cost?

This point is quite obvious. Issuing or using debit cards will have certain costs. Cost for development, cost for lawyers and to receive licenses, cost for daily operations, cost for crypto exchange platform fees, cost for financial service providers that are required to keep up the service (e.g. VISA or Mastercard).

There are different pricing models, but in most cases these three types of fees need to be considered:

• card price (for initially getting your card)
• flat service fee (e.g. annual flat fee, which is deducted from your balance)
• usage fee (e.g. fee for ATM transactions or fee for each payment process)

The card issuer uses these fees, which can be quite painful, especially if you don’t plan to use the card often, to cover its costs and maybe create some profit.

In the second half of this article, we will get into the details of the HiveNet debit card. If you liked the first part and want to make sure that you don’t miss the second part, stay tuned and feel free to follow us:

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