Earlier this month, we looked at the convoluted process by which merchants get paid when you buy something from them. Today, we discuss merchant processing services that use blockchain payments to reduce costs for merchants.
Today, we will discuss how blockchain payment gateways could save merchants up to 70% in processing fees
For this example, we are again using a $1,000 purchase made online. We are comparing payment gateways that don’t use blockchain: PayPal, Stripe, and Square. Each of these gateways has a similar fee structure of 2.9%, plus $0.30 for PayPal and Square, or $0.25 for Stripe. Square has the shortest advertised processing time of 1–2 days, with PayPal coming in at 3–5 days. A portion of these processing fees end up going to banks.
By contrast, most of the popular crypto payment processors charge around 1%, with CoinPayments charging 0.5%. For a breakdown of transaction times, read on below the image.
For the sake of simplicity, let’s will look at transactions made in bitcoin. The average bitcoin transaction needs 6 confirmations from miners to process. Depending on traffic on the bitcoin network, this can take anywhere from 15 to 90 minutes. As block confirmation is determined by the network, the likelihood of a quicker confirmation can be increased by raising the mining fee. This is a small reward offered to miners on the network to perform the first confirmation. Historic mining fees can be viewed here, and in April ranged between $0.20 and $2.15.
The bitcoin transaction process is as follows:
1. Once the payment is initiated from the customer’s to the merchant’s wallet, the transaction goes into a pool of unconfirmed transactions.
2. Bitcoin miners, distributed across the globe, will choose a transaction from this pool and put it into a block of transactions.
3. The miners then solve a cryptographic puzzle (Proof-of-Work). This requires computing power (and thus electricity) for the miner, hence the incentive of a transaction fee for processing. This mining fee is a flat fee that doesn’t depend on the size of the transaction.
4. The transaction is then confirmed by other agents on the Bitcoin Network.
5. The block is then added to the blockchain, finalizing this process. The merchant will now have the bitcoin payment that has been confirmed to not be double spent.
But what about volatility?
One of the primary concerns for merchants is the volatility of cryptocurrencies. After all, the $990 worth of bitcoin that they receive today might be worth more or less tomorrow. Depending on how risk averse the merchant is, there are a few scenarios to consider:
- The merchant holds onto the bitcoin, converting it to fiat currency at a later date.
- The merchant immediately converts the bitcoin into fiat currency. This will incur a fee of 1% + $0.15. See our last article for the table laying out these fees.
- The merchant immediately converts the bitcoin into a stablecoin that is nominally pegged to a fiat currency, such as Tether. This helps to address the volatility issue, but stablecoins do have their own problems.
Payment processor CoinGate launched a pilot program for Lightning Network(LN) payments last summer and now allows LN payments on all stores that use its payment gateway. LN allows for near-instant transfers of bitcoin and litecoin without requiring the normal network confirmations.
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