Here’s a 2007 video of Howard Lindzon trying to buy food in Manhattan using Canadian dollars. He tells people that CAD is a commodity currency, backed by Canada’s oil and gold, and Americans should treat his money as a valuable asset. None of the street vendors want his Canadian dollars and it is all very sad.
CANADIAN DOLLARS HAVE FAILED AS A PAYMENT SYSTEM, is a blog post we might see in the WSJ.
Just kidding. But here’s the umpteenth article about how Bitcoin sucks because merchants don’t accept it and customers don’t use it. American merchants don’t accept bitcoin for the same reason New Yorkers don’t take Canadian dollars: They have to pay their employees and landlords in USD. Beyond that, everyone in this country has one very big US dollar creditor in common, and that’s the IRS.
Eventually Howard manages to get two raspberries for $20 CAD. He’s basically getting screwed, but the fruit vendor isn’t much better off. The vendor will have to go through the asspain of changing CAD for USD to pay his raspberry suppliers. The only reason this exchange can occur is because the fruit vendor values his time even less than Mr. Lindzon does.
A few years ago, retailers like Overstock and Microsoft made a point of adding bitcoin payments so that they could look cool and innovative. It was a good effort, but few customers ever chose the bitcoin option. When using bitcoin, the customer has to pay an extra transaction fee to the miners. With a credit card, the merchant covers transaction costs. On top of that, many cards reward their customers with airline miles for sticking it to the merchant. If presented with bitcoin versus credit card, a customer should choose the credit card every time — it’s cheaper!
A medium of exchange will only be successful if it lowers the transaction cost for both the customer and the merchant. Stripe is a payment processor that charges 0.8% to process a bitcoin payment, and 2.9% + 30 cents to process a credit card payment. A Stripe merchant could potentially offer a 2% discount to bitcoin users and still come out ahead, but that’s pretty weak. You don’t want your customers deliberating a 2% discount at the final stage of the checkout process.
Bitcoin will never become a mainstream payment system, because mainstream retailers already have access to low-cost payment processors. Spending bitcoin at Overstock is like trying to spend Canadian dollars in New York — it increases the transaction cost for both parties with no benefit.
Bitcoin isn’t competing on low-cost processing. It’s competing on settlement risk, which is a cost suffered by the merchant when a customer payment falls through. There are some businesses that mainstream payment processors refuse to serve, because of legal risk or because the business operates in an industry that sees a lot of fraud. Stripe gives a pretty good overview of high-risk industries here. Online pharmacies, crowdfunding, gift cards — This is where bitcoin adds the most value.
High-risk industries attract high-risk customers, which means merchants get a lot of payment disputes and chargebacks. That’s expensive. Bitcoin’s biggest benefit is that chargebacks are impossible. If you want to know how much this is worth to a merchant, check out some of the scuzzier parts of the internet: Online pharmacies typically offer discounts of 25% or more for choosing bitcoin. Bitcart sells Amazon gift cards for 15% off, and Purse.io offers around 20% off for bitcoin. The customer gets a big discount, the merchant avoids the risk of chargeback, and everyone is happy.
Bitcoin is a perfectly fine payment system, just like the Canadian dollar is a perfectly fine currency. You just have to find the right place to spend it.
The Value of Settlement Finality