The large payment brands fiddle while Rome burns, seemingly unaware of the approaching bitcoin onslaught that is free of processing fees and political boundaries.
One of those barbarians at the gate, formerly known as WalletBit, has broadened its functionality and cut its pricing to expand directly into merchant processing. The company, based in Denmark, has rebranded itself Bitcoin Internet Payment System, or BIPS.
Best of all is that BIPS’ merchant tools and digital wallet services will be free unless, of course, conversion to national currencies is required, in which case it will charge 2.5% to convert out of bitcoin. Denmark and Canada have special reduced cash-out rates with same-day interbank transfers for Canadian accounts, says BIPS Director of Marketing Adam Harding. The strategy is to make it easy for merchants to get started and then aggregate their bitcoin balances with the company, which will make money over time providing foreign exchange conversion and premium services to the client.
This approach directly challenges the leading bitcoin merchant processor, BitPay, which just received yet another follow-on round of funding, and U.S.-only Coinbase, which appears to have a good future on the merchant side of the business.
Bitcoin's appeal to merchants is not only the lack of chargebacks and interchange fees but also the broadening of the customer base to include consumers from about 60 countries not served by PayPal. Also, traditional credit card products are typically not available in many countries either for political reasons, higher fraud rates, or lack of retail credit infrastructure.
The business model for bitcoin merchant processing was bound to mature and evolve, because an intermediary processor is not inherently required in this alternative payment system. In the world of Visa and MasterCard, it makes sense to have someone process transactions because authorization and settlement services are needed. But with bitcoin, the pure merchant processors are an interim step at best since third-party authorizations and chargebacks are not part of the architecture due to the distributed nature of transaction confirmation on the bitcoin block chain.
What's important to merchants is the coin management with various mobile apps and shopping cart plug-ins as well as the optional foreign exchange conversion. This is where the industry is headed and BIPS realizes that.
Merchant plug-ins are becoming commoditized and foreign exchange options are driven by strong partnerships with domestic and international financial institutions. This leaves the wallet technology as the wedge for innovative differences, such as management reporting capabilities and online secure access. All of the current so-called merchant processors offer online wallets that are under the control of the operator, meaning that bitcoin private keys are stored and protected by the operating company.
Smartly deploying two-factor authentication for wallet account access with a one-time passcode technique, BIPS (the former WalletBit) uses Secure Card and Google Authenticator, BitPay uses Google Authenticator, and Coinbase uses Authy.
As bitcoin wallet functionality becomes more mature and robust, merchants will simply elect to partner with the best standalone client wallets and the best eWallets. If and when those accumulated bitcoin balances need to be exchanged for national currencies, then the wallet providers with the most attractive conversion options and limits will be the leaders.
BIPS has an advantage here because it supports 42 different currencies for converting out of bitcoin at 2.5%, whereas BitPay supports 11 different currencies at 2% fee, and Coinbase offers cash-out only in U.S. dollars at 1% with strict limits. Additionally, the cost of conversion has to be looked at in conjunction with the merchant processing fees. On that score BIPS and Coinbase are free while BitPay charges 0.99%. So, for merchants choosing to store bitcoin with the processor rather than convert it to government currency, BIPS and Coinbase are zero charge. (For a merchant that takes in 10% or less of its monthly sales in bitcoin, storing it with the processor can be an inexpensive way to acquire the currency and have a market position.)
Looking towards the future, barriers to entry are very low for the bitcoin merchant processing business. The differentiators for success will be online wallet security configurations, foreign exchange conversion options, and merchant software tools – in that order. With the market spread regionally now, it's still a jump ball.
Jon Matonis is an e-money researcher and crypto economist focused on expanding the circulation of nonpolitical digital currencies. His career has included senior posts at Sumitomo Bank, Visa, VeriSign, and Hushmail. Currently, he serves on the board of the Bitcoin Foundation. Follow him on Twitter: @jonmatonis