The year 2014 has brought meaningful bitcoin adoption by merchants around the globe–certainly an early bullish sign for the future growth of the broader bitcoin network. Despite this early traction, though, many have commented that consumers still aren't utilizing bitcoin as much as expected. There are obvious reasons for this, all boiling down to a lack of consumer value proposition from bitcoin versus alternative payment options.
Taking a look at online payments in particular, bitcoin's most direct competition comes from credit cards. While credit card processing is, in fact, a very expensive form of paying for goods online from a high level perspective, it is only costly for merchants. For consumers, paying with credit card is a profitable proposition through the inclusion of rewards programs. The attractiveness of rewards are undeniable, and frankly, they're unlikely to go away.
When deciding to pay with bitcoin or a credit card, consumers quickly come to realize that bitcoin has a few drawbacks:
Drawbacks #2 and #3 are problems that can be solved on the application layer. However, drawback #1 is more difficult to solve. It is also the number one reason why bitcoin isn't being adopted by consumers today: bitcoin is far more expensive to use than credit cards.
Why have bitcoin users put themselves in the position of paying more for the "privilege" of paying with bitcoin? I believe this problem has sneaked its way into the purchase process without much thought. The simplest way for bitcoin payment processors to build their systems has been to dictate the exchange rate at which the consumer must pay for the item, defining how much BTC is due for the purchase. Unfortunately, dictating a merchant-favoring exchange rate has pushed the majority of costs onto the consumer. While payment processors may make the argument that consumers are receiving the same exchange rate at which they could sell their bitcoins, that still leaves consumers paying the fees and spreads associated with the transaction while the merchant removes nearly all costs on their end. Whether you side with the consumer or the merchant on the issue, the status quo leaves bitcoin noncompetitive versus credit cards if it is to be used as a behind-the-scenes payment protocol.
In order to introduce a value proposition to consumers that makes bitcoin competitive versus credit cards, we must find a way for consumers to negotiate more favorable exchange rates. The goal should be for consumers, on a $100 purchase, to have the same $100 amount pulled from their bank account from the transaction–and they preferably would still earn a 1% reward on top of it too. While some of the cost savings can come from efficiencies associated with using the bitcoin protocol, most of the difference will come from the merchants' current windfall. This should still be accepted by merchants, since they continue to see a substantial reduction in payment processing costs and remove the possibility of chargebacks.
All of this begs the question: how do consumers move to a position where hidden fees are placed back onto the merchant? Well...
Rather than accepting the current "take-it-or-leave-it" exchange rate that merchant processors offer bitcoin users today, consumer wallets should instead have the ability to dictate the same favorable "take-it-or-leave-it" rate, or potentially the ability to negotiate a rate that is fair for both parties. Said another way, for a given dollar amount, consumers are being required to send too much bitcoin to complete a purchase. We should instead find a way for merchants to accept a bitcoin amount that makes the transaction profitable for the consumer.
I see a few ways this can be solved.
Option 1: The simplest solution is for consumer wallets to send a bitcoin amount that is adjusted for a discount rate. To reduce errors on merchant processing applications, we could establish an industry standard where bitcoin payment processors require flexibility from merchants to provide a 2% discount on purchases. Merchants' unit prices theoretically already reflect a cost of at least this amount, and the discount would likely come down over time. That would make bitcoin very competitive versus credit cards, and it would shift the costs of payment processing off of the consumer.
Option 2: The next solution is for wallets and merchants to solve the issue on the B2B application layer. In this scenario, a wallet provider (i.e. Circle) would negotiate a deal with a payment processor (i.e. BitPay) whereby merchants would be required to grant a discount on purchases made by the wallet's customers. This is similar to an interchange or discount rate in credit card payments. When a payment is sent, an encrypted message could be included in the bitcoin transaction confirming that a reduced BTC amount is approved.
Option 3: The most difficult-to-implement but widely impactful solution is to solve the issue within the bitcoin protocol itself. Perhaps the method described in the second option may provide guidance on how this could be achieved. I welcome all developers with ideas on implementation to reach out to me.
The power of bitcoin as a protocol cannot be underestimated. It will be truly transformational to global finance. That said, it will take thought and action from the community to build a consumer valuation proposition that enables it to expand to mainstream usage. Solving this issue will prove to be the magic bullet that makes bitcoin valuable to consumers versus the other options currently available.