How often do you think about what happens “under the hood” every time you make a payment with your debit card or cryptocurrency holdings? You might wonder which of the two methods of value transfer are more complex when all you see is that your payment went through. These two following charts, which were posted by crypto researcher Kevin Rooke, provide a rough outline of how card payments and cryptocurrency payments compare in terms of simplicity and intermediaries.
Left chart: Over $8,000,000,000,000 in e-commerce payments rely on this process every year.
— Kevin Rooke (@kerooke) September 11, 2018
Here’s a hint: Every time you make a payment with your credit or debit card, the payment processing network charges the seller an average of about 3% of the transaction’s monetary value for the convenience of taking plastic, and that’s already on top of the interest rate you’re already paying on your credit card. Credit card companies are basically “double dipping” because they can get away with it, even when a majority of individuals like the convenience of swiping a card instead of messing with cash.
When you pay with cryptocurrency, you’re the one paying the transaction fee. On the days when Bitcoin isn’t facing congestion bad enough to significantly drive up transaction fees, one of crypto’s main selling points is that sending cryptocurrency payments can be way cheaper than using Western Union, an expensive and slow payment processing service for global transactions.
Number of Intermediaries an Issue
The graph showing what has to happen for a credit card payment has more steps due to the number of intermediaries involved in processing a centralized card payment. There’s a payment aggregator, the vendor’s bank, the credit card network, and the customer’s bank. That’s a lot of entities with their fingers in the pie and all of them will want to be paid for acting as an intermediary in every, single transaction. Hence, they work together to charge vendors a percentage of every transaction.
This second chart depicting the path that cryptocurrency payments take indicates the relative simplicity from wallet-to-wallet. It’s way simpler because blockchain-based transactions don’t have to go through as many steps to be confirmed.
The chart does seem to miss a step. Payments still need to be processed, validated, and confirmed, but still, it’s impressive, to say the least. With card payment networks, this requires four intermediaries. With cryptocurrencies, this requires only access to processing power and nodes that store transaction data. Transaction fees paid by the transaction’s sender are meant to pay off the owners of mining rigs that confirm transactions but can be way lower because it reduces the number of intermediaries involved.
Heads up to entrepreneurs: If vendors could ditch plastic and the fees that come with it while still provide convenient payments to their customers, they probably would. Retailers can be more competitive when they can quit paying 3% of every credit card purchase to effective squatters in the payments industry.
Customers will like the convenience of just paying by scanning a QR code instead of digging a plastic card out of their wallet. They still won’t have to care about what happens under the hood if their transactions can be confirmed in seconds, tops. They may also like that their credit card information can’t be stolen if it’s not being stored on anybody’s computer system.
In an environment where so many Bitcoiners are hyperfocused on cryptocurrency prices, it may not be easy for Bitcoin to keep up with its existing competition. Any crypto that can successfully compete with Visa and Mastercard will have ditched the mentality that cryptocurrency is only useful as an investment vehicle and paid attention to making it useful to people who just want to go about their daily lives.
As these two charts demonstrate, cryptocurrencies can reduce transaction costs by reducing the number of intermediaries involved in transactions. This means opportunities for vendors who want to be more competitive and entrepreneurs willing to do the work of building on crypto and blockchain technology to make it useful for true widescale adoption.