31 July 2014

Thoughts on payments

Remco Boer - Trevver

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Bitcoin: underperforming on trust

20 May 2014  |  1086 views  |  1

For me, last week was all about innovation and Bitcoin with Amsterdam hosting several large events on the crypto currency.

This got me thinking about what makes new payment methods successful or not.

The Bitcoin hype is immense, but numerous retailers told me that the widespread curiosity is not translating into mass adoption. For many retailers, the number of Bitcoin transactions has plateaued which seems to indicate that the masses aren’t following the trendsetters.  

This week Dutch online Payment Service Provider Mollie added Bitcoin to their product offering (press release) and are now one of the first PSPs to offer Bitcoin to online merchants. In the press release, Mollie CEO Gaston Aussems makes two important points.

(For the sake of full disclose and transparency, I should note that Gaston Aussems is also a partner at Trevver). 

First, he points to the fact that Bitcoin, like other payment products, is a classic two-sided market. This means that enough merchants need to accept the currency and at the same time enough consumers need to be willing to pay with it. Only when both merchants and consumers use Bitcoin, will it become successful. Bitcoin thus needs to address both sides in its business model.

Secondly, Gaston Aussems stresses the fact that Mollie’s service doesn’t simply offer a merchant the ability to receive Bitcoin payments, but offers the merchants risk-free Bitcoin as a value added service.

I think both points are essential in understanding Bitcoin’s potential for mass adoption.

Bitcoin offers both merchants and consumers a whole range of benefits such as privacy, independence, global reach, low costs and speed. In fact, Bitcoin outperforms just about every other payment method on all of these and as such should be set to conquer the globe.

But like all disruptive innovations, Bitcoin underperforms on something both consumers and merchants still value highly, namely trust.

Trust in payments is essential and it is an important ingredient of all payment innovations. Consider the introduction of chargebacks to instil consumer trust in credit card payments. Or the fortune paid out by Paypal in the early days to compensate clients for fraud in an attempt to maintain trust in the system (see The PayPal Wars). Or Dutch online payments method iDEAL that deals in trust in all facets of its business model.

But the trust in Bitcoin as a means of exchange has taken severe hits recently. Just consider the rapid increase and decrease in value, the failure of Mt Gox and other exchanges, the use in illicit dealings and the growing number of regulators that now advise against using the coin.

Bitcoin needs to regain some trust.

One way to do this for merchants is to route the payments through a trusted intermediary that absorbs the risk, which is what Mollie, Bitpay and other service providers do. 

But this is only one side of the market.

The Bitcoin community needs to find additional ways to enhance trust in the currency for consumers too. Numerous outfits offer wallet services, but none seem to have hit the mark. Perhaps the recently launched Circle will be different.

If the average consumer continues to feel that Bitcoin itself is risky and that he cannot trust the Bitcoin wallets, it is never going to be a success despite its many benefits and vast potential.

TagsVirtual currencyPayments

Comments: (2)

Colin Weir - Moroku - Sydney | 20 May, 2014, 23:12 Of course you are right. I order for payments to work you need counter party volume and trust The premise that banks and sovereign states will continue to have more of these than digital currencies and other forms of self organising systems is certainly being challenged. Whilst this may be hard to comprehend from the safety of advanced economies, the foundations are certainly being rattled else where as Cyprus, Crimea et al are illuminating
Remco Boer - Trevver - Amsterdam | 21 May, 2014, 10:09

Hello Colin,

Thanks for your comment and you are, of course, right as well. Trust in a payment method is not absolute but relative to the trust in other means of payment. Where conventional ways of payment fail, such as in Cyprus, Ukraine or Argentina, alternative means become much more attractive.

What I do wonder, however, is if Bitcoin is really being used by regular people and in large amounts in Cyrpus, Argentina or Ukraine. And if is it being used to transfer money out of the country or also used for domestic payments thereby creating a true alternative? A google search results in numerous article on the subject, but are media and bloggers pointing primarily to the potential of Bitcoin for these regions or is Bitcoin use a reality?

I would be very interested in additional insights or information on this subject.

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Remco Boer

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Partner

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Trevver

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2014

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Amsterdam

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