The way we pay for things has evolved rapidly over the past few years. It wasn’t that long ago that workers lined up at the pay office each week to receive a manila envelope with their week’s earnings in cash, and credit cards were seen as an expensive luxury. Retailers accepted paper-based travellers’ cheques from local and international tourists.
Today, meanwhile, millions of Australians are using their phone to pay for even $2 transactions and most people can’t remember the last time they paid in cash for anything.
What all these payment methods have in common is that somewhere along the line a bank was involved in the transaction, whether it was doling out money through a teller or an ATM or guaranteeing a travellers’ cheque or a credit limit on a plastic card.
However, even that is no longer the common thread, as new payment methods such as cryptocurrency, which allows people to make payments directly to each other, bypassing banks completely, are now being used for a wide variety of transactions, including at a retail level.
Cryptocurrencies have captured attention mainly for their speculative money-making potential, as individual cryptocurrencies such as Bitcoin have dramatically increased in value over time.
Some recent surveys claim that up to 20% of Australians are using cryptocurrency, although the Reserve Bank of Australia reports that the pool of survey respondents is demographically biased, and the true figure is much lower than that.
Is cryptocurrency a fad, or the way of the future for making payments? It’s too early to tell, but it’s worth getting an understanding of how it works and its applications for retailers.
How crypto works
Cryptocurrency is technically not money (which is why many financial experts prefer the term ‘crypto-assets’), but it serves many of the same purposes as legal tender backed by a central bank.
Rather than using the banking system, cryptocurrencies rely on the blockchain, which uses distributed ledger technology that aids the process of recording transactions and tracking assets across computer networks. The ‘crypto’ in cryptocurrency comes from the fact that people within the network need to decode transactions, which are then formed into blocks (it would take a whole other article to explain exactly how blockchains work!). A blockchain network can track orders, payments, accounts, production and much more. All members of the network share what IBM calls “a single view of the truth”, able to see all details of a transaction end to end.
According to the Reserve Bank of Australia, cryptocurrencies are ‘digital tokens’ that have no intrinsic value but are simply worth what people are willing to pay for them in the market. This contrasts with national currencies, which get part of their value from being legislated as legal tender.
At present, there are believed to be more than 7,000 different cryptocurrencies, and most of them, most notably Bitcoin, have swung wildly in value over time. A key reason for these changes in value is that, unlike national currencies, there are only a limited number of Bitcoins available (believed to be about 21 million). Since this number is not set to increase significantly, the competition for each Bitcoin can drive the price up – and down. As a result, the interest in cryptocurrencies is mainly concerned with speculation (buying and selling to make a profit) rather than using this as a new and unique payment system, particularly at a retail level.
Retailers who want to accept cryptocurrency payments need to decide whether to hold cryptocurrency directly or offer it as a payment option via a third-party provider that handles conversions and transfers fiat (government-backed) currency to merchants.
Although using cryptocurrency is promoted as an instantaneous way to do business, according to research company Forrester, “retailers need to be aware that settlement isn’t necessarily any faster than with existing payment mechanisms… (and)… there are potentially complex tax implications for both the merchant and the customer; and there’s no payment protection, no reversing of transactions, and no chargeback.”
Let’s look at the benefits and drawbacks of accepting cryptocurrency payments for retailers.
Advantages of crypto
- Probably the biggest advantage of using cryptocurrencies is that the transaction costs are lower than bank transactions, possibly as low as zero, although when using a conversion or exchange service provider there is some cost involved (the amount varies between suppliers).
- Accepting crypto payments can be a strong differentiator for early adopters, particularly for retailers whose customers include tech-savvy tourists.
- Cryptographic trades cannot be reversed, as opposed to the current system with card organisations (This can be both an advantage and a disadvantage).
- All you need is an Internet connection, and trades can be done via a smartphone.
- There are generally no foreign currency conversion fees for international transactions.
Disadvantages of crypto
- Cryptocurrencies and blockchain activities rely on trust between everyone involved. Forrester points out that cryptocurrencies “were designed specifically to evade central authority,” and as a result there is no regulation or consumer protection if something goes wrong.
- A potentially expensive disadvantage of using cryptocurrencies in retail is the aforementioned volatility. It can be tricky for both the buyer and the seller if no one is sure what the current value of a unit of crypto is, or how it might change from the time the transaction is made to when it’s finalised.
- There’s a strong argument that cryptocurrencies are contributing to climate change. The amount of electricity used by ‘miners’ (the name given to the computer systems that decode transactions reassemble them and enter them into the blockchain) to solve cryptocurrency codes just for Bitcoin is reportedly as much as that generated annually by Thailand, the world’s 23rd largest economy.
- Ironically, although cryptocurrencies are promoted as faster because there is no financial middleman, there can be a waiting time for transactions as they are formed into a block, solved and checked by the network and then confirmed as valid. Meanwhile, EFT technology used by most retailers confirms most small transactions almost instantaneously.
The state of crypto in retail in Australia
In the US, large retail chains such as Starbucks are now accepting crypto payments. In Australia, retailers that take crypto include On The Run convenience stores and IGA supermarkets, as well as some individual pharmacies, dentists, IT providers, fitness retailers and cafes and pubs. Most of these rely on using a crypto wallet to lower the hassle and risk. It’s worth noting that the list of Australian retailers accepting cryptocurrency at time of writing is small enough that it fits on one webpage.
An indication of the strength of interest in cryptocurrencies is the fact that several countries, including the Reserve Bank of Australia, are exploring the possibility of launching their own crypto, called a central bank digital currency (CBDC), which is a digital form of cash backed by a nation’s currency. Some Caribbean and African nations have already launched CBDCs and China is the largest economy which is seriously considering this form of crypto. It’s not known what effect this will have on private forms of cryptocurrency, although it would eliminate the volatility of value currently experienced by retailers accepting crypto.
Retailers who want to explore this further should consider reviewing the range of cryptocurrency brokerage platforms available in Australia, which allow you to both trade and invest in a range of cryptocurrencies.
At the end of the day, the use of cryptocurrency by retailers will be driven by consumer preferences. Cryptocurrencies such as Bitcoin may get overtaken by something simpler, more stable and more energy-efficient (such as CBDCs or stablecoins), but if not, then this may be a new payment option you need to embrace to offer sufficient options to customers.
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Ray Welling, PhD is a writer, lecturer and podcaster specialising in digital marketing and communications. He is the author of Digital Disruption and Transformation: Lessons from History, a retrospective on technology and marketing during the first decades of the Internet in Australia. |