THE CASE FOR INTRODUCING CRYPTO PAYMENT SERVICES
For many years, only digital innovators offered crypto payments, while established payment providers remained skeptical about the technology—for the major remittance players, cryptocurrency remained a marginal element at best.
But in the last 18 months, this has changed. The pandemic forced consumers to move all their transactions online and opt for contactless payment methods, in turn triggering an appetite for new, fast, and flexible digital payment methods. A survey by a leading card network reveals that most of the population will look at embracing at least one new payment method such as cryptocurrency, biometrics, contactless, or QR code in the next one year. A substantial proportion of people plan to use cryptocurrency payments next year while several people claimed to have tried a new payment option they would not have used in normal circ*mstances. The use of cryptocurrency payments for cross-border payments is also gaining ground, which has the potential to significantly disrupt the international remittances space. Moreover, cryptocurrency payment services have the capability to meet long-term goals such as enhancing the overall efficiency of payment systems and driving financial inclusion.
Recognizing that the tide is turning in the remittances space, some early movers have taken steps to add cryptocurrency payments to their portfolio of offerings. A leading US bank launched its crypto-based rail—one of the first bank-led, peer-to-peer (P2P) blockchain networks. On the other side of the fence, this rising demand for flexible payment options, including cryptocurrencies, is putting immense pressure on businesses to offer a multitude of new payment methods. Some major players have begun to accept payments in cryptocurrencies. Likewise, major card networks have announced plans to offer crypto payment options to customers, merchants, and businesses.
Volatility in crypto prices have led to the emergence of stable coins that are usually pegged to a dominant fiat currency. Use of stable coins has gained traction, especially in the business-to-business (B2B) segment, where the efficiency of blockchain-based payments and instant settlement can be delivered while managing the volatility. A leading card provider has launched B2B blockchain-driven payments facilitating faster and more efficient settlement cycles. Major players are attempting to create stable coin-based closed loop ecosystems—examples include Diem by Facebook along with other existing stable coins like USDC and Tether.
These developments have resulted in serious discussions and research at various central banks for issuing acentral bank digital currency(CBDC). Several central banks have published discussion papers about the potential launch of their own versions of the digital currency. Most major central banks believe that CBDC will become a reality in this decade and there are various models of implementing CBDCs under discussion.
Use cases
Despite the skepticism and the reluctance of established payment providers to offer cryptocurrency payment services, there are several areas where crypto payments can be successfully adopted in the financial services industry (see Figure 1).
With increasing interest from both consumers and payment service providers, the number of transactions will expand but whether the volumes will rival established payment methods remains to be seen. The confirmation times for crypto payment using proof of work algorithms is still significantly low compared with existing traditional payment mechanisms. Using alternative algorithms and building overlay networks on top of base frameworks are being explored to solve these issues. In our view, blockchain technology in combination with other emerging technologies will significantly increase adoption of crypto payments in the coming years, as purpose-driven use cases mature.
Benefits of crypto payments
Compared with credit card payments, crypto payments have faster settlement cycles and can be cheaper due to lower transaction costs. Crypto payment services have the potential to build a borderless payment network with the ability to enable seamless transfer of crypto payments from anywhere across the globe. Crypto payment providers claim to maintain transparency in the highly dynamic exchange rates between the cryptocurrency and the fiat currency. Such services offer merchants different ways to accept global payments. In addition, merchants can also gain a reliable and authentic identity in the world of virtual payments—customers would hesitate to pay into an individual’s cryptocurrency wallet but an established payment service provider processing the payment would inspire a lot more trust and confidence.
Accepting crypto payments can help merchants access new customer segments. A considerable proportion of customers using cryptocurrencies are new to the merchant and the ticket size is double that of credit card users. In our view, crypto payments are poised to rapidly scale in the near future given their ability to lower cost of transaction processing, reduce the risk of fraud, and enhance transparency sought after by customers.
