I spend a lot of time thinking about in which frontier markets Bitcoin is going to explode and really change the game of value. What grand equation can I concoct in favor of Bitcoin’s success somewhere? Not that I am trying to make things up as I go, I am just trying to be hip. But, I thought about something Wendy McElroy from The Dollar Vigilante wrote recently:
“Simplify, simplify.” — Henry David Thoreau
“Simplify.” — [her]
So, I got to thinking about the future of Bitcoin, simply, and it dawned on me: the future of Bitcoin depends on the US’s posturing towards Bitcoin, not how it is adopted in cash economies of today in countries on the outskirts of the modern empires.
The mostly cash-based economies will be brought to the digital payments by big money, most likely at the behest of companies with the money to finance at least the marketing needed to popularize anything.
Keystone Bitcoin participants will have to organize and spend lots of money towards education in the regions of, say, North Africa and the Middle East for Bitcoin to catch on there before “credit or debit.” This would amount towards a voluntary tax by well-monied bitcoin users, businesses and investors, to frame it in the parlance of the modern world.
But, digital payments in the US are run-of-the-mill. Merchants and consumers are used to payment processors and the like. They also have reason for dismay of “credit or debit.”
You’re probably familiar with the scene. A small business owner or employee grimaces when you take out your card to pay for your $2 tea or the $3 Altoids before your big date.
That small business owner, particularly if they operate in the US, is thinking about the inter-charge fees on credit and debit cards, which nearly nullify retailer profit.
The Merchants Payment Coalition (MPC), which represents retailers, claims fees levied on American-based supermarkets, stores and gas stations by Visa and MasterCard are as much as three times more than in other parts of the world, inflating prices for US consumers.
In July 2012, Visa, MasterCard and several major banks agreed to pay U.S. retailers a record $7.25 billion in penalties to settle a long-lasted lawsuit alleging the card giants conspired to fix so-called “swipe fees” paid by shops and supermarkets.
Swipe fees are levied on retailers for using their cards for each transaction. The fee is deducted by the card’s issuing bank.
The MPC claims that two dollars of every $100 spent using plastic goes directly to the credit card industry, with Americans paying in excess of $48 billion in swipe fees in 2008. That’s more than three times than Europe.
In Europe, cross-border swipe fees are 0.3% of the purchase coast. In Australia they are 0.5%. In contrast, Visa and MasterCard charge US merchants approximately 3%, says Doug Kantor, counsel of the Merchants Payment Coalition.
European Union anti-trust regulators in 2012 objected to Visa Europe’s credit card fees. arguing they hurt competition.
“Our preliminary conclusion is that Visa’s [fees] inflate the costs of payment card acceptance and ultimately increase consumer prices,” said Antoine Colombani, spokesman for European competition commissioner Joaquin Almunia.
“We believe at this stage that these fees are a restriction for competition.”
That was hardly the first action by EU regulators against Visa and MasterCard.
In 2009, the commission brought antitrust charges against Visa Europe, and in May 2012 a European court outright rejected a legal challenge by MasterCard, which was appealing an EU ruling over fees from 2007.
“European regulators are taking action to deal with Visa’s outrageous swipe fees — even though the fees in Europe are a tiny fraction of what they are in the United States,” Kantor said.
“This should be a wake-up call that credit-card swipe-fee reform is long overdue here.”
The above-mentioned July deal – the largest antitrust settle in US history, according to some sources – aimed to resolve dozens of lawsuits filed by US retailers in 2005 accusing card companies of fixing fees for processing credit and debit card payments and prohibiting stores from steering their customers to cheaper payment options.
Visa, MasterCard and over a dozen banks offered to pay a number of high-profile retailers, like Kroger supermarkets, Rite Aid and Payless ShoeSource, the National Grocers Association and the American Booksellers Association, $6 billion in compensation and agree to reduce swipe fees for eight months, a move estimated to save retailers $1.2 billion, the Chicago Union Tribune reported.
There have some attempts to scale-back the exorbitant processing fees charged by Visa & MasterCard. The Durbin Amendment of the Dodd-Frank financial regulation bill was designed to lower interchange fees on card purchases. The Federal Reserve estimated that the fees amounted to 4 cents per transaction.
The fee reduction was met with determined opposition from large banks (banks with assets under $10 billion were exempt), but passed in Fall 2011.
Average fees for debit cards fell 44 cents to 24 cents were swipe. Banks, in turn, charged significantly more for small transactions.
Since the early 1970s, the five largest banks in the US have tripled their share of financial assets from 17 percent to 52 percent.
The retail sector, on the other hand, is far more diverse and competitive. The first quarter of 2012 saw a median profit margin of 7% for discretionary consumer goods and 8 percent for consumer staples, compared to almost 16 percent profit margins for financials.
Even more concentrated than banking (though, these companies are basically owned by banks), Visa and MasterCard comprised 82% of all credit receivables outstanding.
These companies made it unlawful to offer a cash discount or better terms to customers with less expensive cards. Merchants were left little choice but to pay the fees. Stopping the acceptance of cards would hurt their businesses sales and appearance.
Intercharge fees are one of the highest costs of doing business in retail. The National Association of Convenience Stores reported in 2006, “interchange fees totaling $6.6 billion exceeded the $4.8 billion profits of all U.S. convenience stores.”
Low-income participants of “System D” (read: underground economy), who might receive cash compensation for odd-jobs, end up paying the high prices passed along by the card companies. These low-income customers are, in effect, subsidizing the frequent flier miles of card-swipers.
Despite so much controversy, a lack of competition leaves credit and debit cards as a central payment option. According to Steve Durham, COO of Customer Focus Services, which accepts over $50,000 in Credit/debit card purchases each day.
“Studies have shown that customers are more likely to make a purchase when they can take advantage of the financial flexibility that a credit card offers over using cash or a check,” tells me.
“Studies have also show that the average customer will spend 20-25% more when using the financial flexibility that using a credit card gives them. When purchasing with a credit card customers are also less likely to suffer “buyer’s remorse” due to temporary budget constraints, so your sales are more likely to stick.”
Along with the likelihood of more consumer spending when they have a credit-card in tow, comes a hidden-cost beyond the intercharge fees. That cost? Your data.
According to documents obtained by the Washington Examiner, the Consumer Financial Protection Bureau is seeking to monitor four out of every five US consumer credit-card transactions; that would mean 42 billion transactions monitored.
From gas to groceries, these crucial items are higher than they otherwise would be, costing the average family more than $400 a year,” Jeremy Darko Darko Media Omniversal tells me. “And, they squeeze merchants in the brutally competitive retail business which hurts our communities and the broader economy.”
How can they get away with this?
“This is because the credit card companies still set credit card fees in secret. Banks don’t compete on price, and merchants can’t negotiate the fees. This kind of price-fixing is illegal in other parts of the economy and should be here as well,” says Jeremy.
In MENA countries like Lybia, there are restrictions on using big credit-card processors.
“When launching an online business in a MENA country, one of the main obstacles is forgetting credit cards and accepting online payments,” Moad Rgeyi, co-founder of Linguistify, tells me. “This is due to the fact that most MENA countries have restrictions on big credit card chains, like PayPal and MoneyBooker.”
When his company developed the website, they had to contact several companies to have the Sandbox access in which we could test online payment processing. In most cases, we ended up with closed doors.”
In Spite Of It All, Some Small Business Owners Satisfied With Visa, MasterCard, Square & Swipe
Despite all the buzz about payment alternatives to cards, such as the more private Bitcoin, many small business owners are in no rush to make the switch, especially with technologies like Square & Swipe facilitating card transactions. Many have found success with options like Square or Swipe, like Megan Peterson of Megan’s Beaded Designs.
“In this day and age of the smart phone and easily accessible merchant accounts for secure online checkout systems, I am pleased to report that accepting credit card payments has been a breeze,” she tells me.
“I use the Square app via my smart phone for accepting cards at shows with only a 2.75% fee, and I use Stripe to accept credit cards via my website, which is also low in processing fees. I am happy to report only good experiences so far.”
For businesses serving a global clientele, credit cards and debit cards still make sense.
“With a company that works with clients all over the world, accepting credit card payments is a necessary evil these days,” says JP Jones, Co-Founder of Collipsis Web Solutions. “Credit card processor fees for business owners are through the roof, however, nothing is worse than a check that’s ‘in the mail’ for months, so there is a definite advantage to accepting an automatic payment.”
Some small businesses like the idea of Bitcoin, but dislike the reputation it’s received, like Carole Holden of Gelmtree advertising.
“…There is too much risk and negativity associated with the [Bitcoin], and I don’t want that attached to my company. Most recent news on the subject is unflattering, like the Japanese company [Mt. Gox] that just had over $5 million in assets seized.”
“It would take a complete image and functionality overhaul for me to gamble with it,” she continues.
Chuck’s Furniture is a family owned furniture center that has served the Morgantown, WV area for over 40 years. James Prutilpac, a manager and 3rd Generation family member at the company, answered GSBTC’s questions.
James believes Bitcoin still leaves a few things to be desired.
“In order for Bitcoin to even be considered for our business I would need three things. It would have to be better established with a wide variety of businesses so the use would be fairly well-open. It would need to be more beneficial to us than using traditional forms of currency, such as lower rates, less risk, etc.
James Prutilpac, a manager and 3rd Generation family member at Chuck’s Furniture, doesn’t believe Bitcoin can compete with credit cards.
“It would need to prove viable in the long run. I suspect that if it became a large competitor to credit cards they would alter their practices to better compete. Being so well established would give them a huge advantage and I’m not so sure Bitcoin could survive it. I would need solid evidence that supported the benefits of Bitcoin if we would put time into adopting it”
Bitcoin has a lot to overcome in the US, despite the dissatisfaction with “credit or debit” on behalf of, namely, merchants. Beyond that, Bitcoin has outperformed the US Dollar by orders of magnitude. Still, despite that, it has a reputation and “viability” problem.