Payments has been the boulevard of broken dreams.
Payments gets entrepreneurs and investors salivating because it is a huge market. According to Boston Consulting Group:
“In 2013, payments businesses generated $425 billion in transaction revenues, $336 billion in account-related revenues, and $248 billion in net interest income and penalty fees related to credit cards. The total represented roughly one-quarter of all banking revenues globally. Banks handled $410 trillion in noncash transactions in 2013, more than five times the amount of global GDP.”
Yet dreams of disrupting the current payment rails always seem to get dashed against the rocks of reality. A quick glance at the stock price of Visa and Mastercard tells us that the market does not buy any disruption story. Ventures that play within those credit card rails, by making it easier for merchants to accept Credit Card payments, do well enough but there are stories of merchants simply getting Basis Point reductions by playing off one against the other. That sounds like a commodity race to the bottom, not a recipe for Unicorn status.
Eeyore feels justified in saying “I told you so” and Tigger is seen looking rather sheepish (which is unnatural for a tiger).
Today Bitcoin is totally broken as a payment rail for small transactions – slow and expensive. This chapter/post suggests a contrarian thesis that Bitcoin will finally disrupt those credit card rails by describing how:
- Lightning Network will bring scale, speed and low cost to bitcoin payments
- Recent announcements from two big payment innovators – Stripe and Square – point to this future.
- Bitcoin can address the biggest issues in credit card payments
- Two variants of payments will coexist, secret and open.
- We should be looking at the Rest not the West for this disruption.
Lightning Network will bring scale, speed and low cost to bitcoin payments
Lightning Network will enable:
- Human real time transactions (within seconds). Consumers see no reason why payments should take longer than messages and Facebook updates.
- Borderless payment. Location will be as irrelevant as it is in messaging and social media.
- Micropayment transactions (even below what is possible via credit card networks). Today we accept a three tier world – really big transactions on SWIFT, medium big transactions on credit cards and really small transactions via cash and mobile wallet. All can be processed on the same network, via different systems.
- Greater scale than credit card networks today – millions or even billions of transactions per second. This is like moving from Post Offices (big enough) to email (so big that everything changes).
- Permissionless. Anybody can set up a Lightning Network node and transact “offchain” or can choose to be a Miner and transact “onchain”.
This will change human behaviour and enable a whole range of new applications.
As I write (February 2018), Lightning Network is being tested. So we read stories of transactions getting messed up. You can take two points of view on this:
- These messed up transactions prove that all the talk of Lightning Network was simply hype.
- That is why we test new technology. We expect to find bugs when we test. Those bugs will get fixed.
By the time this book gets published, we will know which one is true. I am clearly making my bet on 2. There are persuasive arguments for 1, but when you read these bear in mind that there is a lot of money at stake as Altcoins battle to take over the pole position from Bitcoin and as incumbents fight the narrative that the credit card rails will be disrupted.
2017 was the year that Bitcoin became an asset (one leg of the stool) and 2018 is the year when the other leg (means of exchange) gets built onto the Bitcoin stool.
Announcements from two big payment innovators – Stripe and Square – point to this future.
Both Stripe and Square are highly valued startups that got traction within the existing credit card rails, while keeping their options open in the cybercurrency market.
There the similarity ends. Stripe is private and has been making noises about an IPO. Square is already public.
The other big difference is in their public stance about Bitcoin:
- Stripe is making negative moves. Specifically they are “ending Bitcoin support”. The official PR from Stripe says “Bitcoin has evolved to become better-suited to being an asset than being a means of exchange.” However it should also be noted Stripe has an investment in an Altcoin called Stellar and that disruption to the credit card model will damage Stripe’s core business.
- Square is making positive moves.Square allows you to buy and sell Bitcoin right from your Cash App. Most of the commentary from this announcement focussed on Bitcoin as a store of value and gloat that this happened just as the bitcoin price was crashing (one leg of the stool). This misses the point that once a user has bitcoin in their cash app they can pay anybody, anywhere using bitcoin (the other leg of the stool). This enables the small vendors who are Square’s core customers to trade among themselves either to meet their own needs (a dairy farmer buys some vegetables to make dinner) or new supply chains (restaurant buys both dairy and vegetables using bitcoin).
Bitcoin can address the biggest issues in credit card payments
The biggest issues for consumers and merchants are:
- cross border payments cost too much for consumer. This is a cash cow for banks because consumers who travel have no real option and merchants don’t care because they get paid in local currency.
- fraud can destroy a small-business owner. If they accept payment from a stolen credit card they will a) not get paid for the product they sold b) banks may look for reimbursement for permitting the fraudulent transaction and c) payment processors may terminate their account and put them on a blacklist.
- Small transactions either require credit card fees (which can kill their margin) or the pain of handling physical cash.
Credit card networks have won by isolating the problems between consumers and merchant. The change will come from small business merchants, because they are most affected and will happen initially between small business merchants as they understand both sides of the issue. That is why the Square announcement is so critical.
Two variants of payments will coexist, secret and open
Cash is amoral. Cash does not care what you do with it. You can buy legal drugs or illegal drugs. You can use it to kill somebody or save somebody’s life.
The same will be true for digital cash. Some darknet aka illegal transactions will move to currencies that specifically cater to this niche and some may get done using bitcoin in ways that protect secrecy (just like cash does today).
We should be looking at the Rest not the West for this disruption.
Most people are looking in the wrong place for this disruption – it will happen first among the “next billion” consumers entering the global middle class from the Rest of the World, from places such as China, India and Africa.. In those countries, most employment is in the small businesses who are most motivated to take bitcoin because the 3 big problems described above are an existential risk for them