E-commerce is expected to surpass $4.6 trillion globally by 2022, with the seamless experience of e-wallets boosting its popularity. The simplicity of services like PayPal and Stripe has helped to improve customer experience while giving merchants easy access to new markets.
Blockchain-based solutions represent the next logical evolution of this trend. By eliminating middlemen, cross-border blockchain payments can result in even faster transfers while significantly reducing costs for both merchants and customers.
The cost in trust in traditional payments
In a traditional payment flow, three to five parties facilitate a single transaction. Together, they make up what is called the “payments stack.” These different parties work together to create trust. They check that transactions can be carried out and manage the transfer of funds. At the same time, this trust has a cost, which is ultimately borne by merchants. Each party within the payments stack takes a small cut of a transaction.
A typical transaction involves a payment processor checking with the issuing bank if a customer’s card can be charged. Once a transaction is validated, which occurs within a few milliseconds, a merchant has a guarantee that they will be paid at a later date. Over subsequent days, funds are transferred from the issuing bank to the acquiring bank.
The traditional stack involves numerous charges. Card networks and other parties can also raise their fees. As recently as September 2019, Visa added a fixed charge of 0.02 EUR for merchants using 3D-Secure, which is increasingly required under new PSD2 legislation.
Cash flow, holdbacks and fraud
Cost isn’t the only issue merchants face with the traditional stack. The speed of transactions can also be a problem. While validation takes place in milliseconds, it can be days before money finally arrives in a merchant’s bank. This is not ideal for small-to-medium-sized businesses that depend heavily on cash flow to pay suppliers and employers.
When we look beyond card payments, the picture is even worse for merchants. In the US, the average B2B payment cycle takes 34 days to complete, with 47% of invoices being paid late.
So-called “holdbacks” are another issue that has come to prominence recently. Here, acquirers keep a percentage of a merchant’s revenue as collateral in case a service is not provided, and refunds must be issued. Holdbacks have particularly affected the travel industry as a result of the COVID-19 pandemic. Most travel is booked long in advance, and given the uncertainty introduced by COVID-19, holdbacks have increased significantly. This has led to reduced cash flow for merchants – and ultimately to the insolvency of Thomas Cook and Flybe.
While traditional payments are geared towards creating trust, 78% of businesses reported attempted or actual B2B payments fraud during 2018, with international fraud rising 136% from 2017–2019. Although nearly half of payment fraud is related to pen-and-paper processes, digital methods and credit cards are not immune.
Faced with this situation, it is not surprising that more and more companies are turning to fintech to reduce payment costs, particularly when it comes to B2B payments, where 1.8% interchange fees for cards introduce excessive overhead.
The promise of blockchain
When we view the payments stack as a means of generating trust, the promise of blockchain becomes clear: eliminating the stack entirely. Customers send funds directly to merchants, with transactions being verified by a decentralized network.
Blockchain promises great improvements for merchants in terms of speed and cost. No middlemen are required to check whether funds can or cannot be sent – the network will reject a transaction if a wallet has an insufficient balance. Once a transaction is confirmed, funds arrive within minutes. The only cost is a network fee, paid by the customer themselves.
What’s more, blockchain is ideal for protecting against fraud and encouraging transparency. The fundamental problem blockchain solves – the “double spending” problem – is directly related to preventing fraudulent transactions. Blockchain is designed to make it impossible to spend coins you do not have. Moreover, since blockchains are public ledgers, regulators can easily perform automated audits.
Blockchain is also a universal solution. While the U.S. has ACH for bank transfers and the EU has SEPA, Bitcoin works the same everywhere. No bureaucracy is required to send funds overseas. Not only does this make designing integration protocols relatively simple, but it gives merchants easy access to new overseas markets.
A 2019 report from the European Payments Council indicated an increase of cryptocurrency use alongside the growth of e-commerce.
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