Using bitcoin instead of credit cards could put up to $50 billion back into the pockets of merchants and consumers and create 300,000 jobs every year. It is one way to boost the economy without spending any taxpayer dollars or having Congress passing a law.
Credit cards allow the holder to purchase goods or services on credit. Different consortiums of giant banks started both MasterCard and Visa credit cards, which account for 80% of the market share. Of the rest, American Express dominates a very fragmented minority made up of mostly credit cards issued by some large merchants (like a Sears charge card).
Each has built a proprietary electronic network where the transactions are routed and charge the merchant a fee per transaction to use. Those fees range between 2% and 4% of the total charge and there is usually a minimum fee. Merchants with huge volume of transactions can sometimes get discounts on the transaction fees.
Those fees are big bucks. In 2012, credit card companies raked in over $50 billion of transaction fees. The house always wins because crony capitalism protects their market share, prevents competition, and blocks transparency to customers. For example, U.S. law protects this oligopoly by preventing the merchant from charging one price for cash and one price for credit card purchases. Because the fees are hidden, the costs are built into one price and in turn, all customers end up paying higher prices.
Merchants have been trying to change this through new laws. The current model for reform is the European Union’s proposal to cap swipe fees to 0.3%. Note that Europe is fed up with excessive swipe fees but that it costs eight times more to swipe in America. The problem with legislating reform is twofold. First, even the best laws have loopholes, can be worked around, or manipulated by a lobbyist’s influence. Second, every government good intention results in unintended consequences, which are usually worse than the good created.
There is another way. It is competition by using bitcoin.
One of the main reasons for using a credit card is that it is cumbersome and inconvenient to carry enough cash for all the transactions in daily life. Cash is fine for buying mints at the drugstore, but not for a grocery store run, a big client dinner, or snagging that new flat screen TV, especially all in one day. That’s a few trips to the nearest ATM.
Using bitcoin for a transaction is akin to using a digital form of cash. Here’s how it would work.
Let’s say I went to dinner at a restaurant that accepted bitcoin. After showing me the bill, I let them know I’m choosing to pay using bitcoin. The restaurant would show me their QR code with instructions to send the appropriate bitcoin amount. I would scan it using my digital wallet (which is an app on my smart phone) and confirm that I want to do the transaction. Bitcoin is transferred out of my wallet into the restaurant’s wallet. That’s it.
I recently had $18.00 lunch at a local restaurant. The owner said his margins were 3.5% of the total bill. So his profit on my lunch was $0.63. Because I paid with a credit card, he had to pay the credit card company $2 for the swipe, which he built into the cost of lunch. If I paid in bitcoin, his profit would increase to $2.63 or 14.6% of the total bill. He got it instantly.
Can you imagine the impact low margin industries? This would boost gas stations, car dealers, furniture stores, grocery stores, book stores, textile mills, magazine shops, and music stores, to name a few. Struggling important industries could become viable again.
The direct benefit to me is that because I did not use my credit card, I don’t have to worry about a credit card breach compromising my information and the resulting hassle of canceling cards, getting new cards, and challenging charges that weren’t mine. The best a hacker can do is to steal my money from the restaurant.
Further, you can instantly add to your digital wallet. Just like a traditional wallet, I usually only have enough in my wallet to handle the transactions I expect each day. When I run out, I need to go through the hassle of trying to find my banks ATM nearby or using another bank’s ATM while paying them a fee to withdraw my own money. But when I run out of bitcoin, I can use my smart phone to access my home wallet (like a home safe) to transfer money instantly to my digital wallet.
Merchants and consumers will inevitably start using bitcoin more, and once that happens, expect the credit card industry to focus on two concurrent strategies.
First, use their lobbying power and crony capitalist status to slow the use of bitcoin.
Second, co-opt elements of bitcoin’s technology into remaking their legacy payment system more efficient and secure.
But they cannot stop the future and all will be better for it. But when I run out of bitcoin, I can use my smart phone to access my home wallet (like a home safe) to transfer money instantly to my digital wallet.
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