There is growing appeal for many countries to become cashless societies and the expanding reach of mobile computing is helping the cause. Thanks to increasing smartphone adoption, 29 percent of consumers have made in-store mobile payments in 2017 – up by 50 percent from 2016. Digital payments is expected to become a $726 billion industry by 2020.
As such, the payments space has become a hotly contested market. Despite credit and debit cards still being the go-to funding sources for most transactions, traditional players like Visa and Mastercard have been working on efforts to solidify their positions. Competition is coming from all sides. PayPal continues to post strong profits. Digital wallets from Apple, Android, and Samsung are also gaining ground in select markets. Even e-commerce giant Amazon is ramping up its investments to push Amazon Pay.
The emergence of blockchain and cryptocurrencies also brought forth new crypto-based payments services. Interestingly, these crypto payments services are also gaining support. Singapore-based TenX raised more than $80 million in its ICO last year. Open payments system OmiseGo already reached a market capitalization of over $2 billion at its peak. Upcoming projects like COTI also seek to disrupt the space by delivering a payment solution that cater to the demands of modern commerce.
But are blockchain and crypto payments really the ways to move forward?
Strengths and Weaknesses
Technically, as digital currencies, the likes of Bitcoin can be used for payments and e-commerce. Unfortunately, they have not gained wider adoption for these use cases. Several businesses have enabled Bitcoin as a payment method including some high-profile companies like Microsoft and WordPress. However, other merchants avoided offering the option due to Bitcoin’s high volatility and expensive transaction fees.
Established payment methods such as cards and digital wallets hold several advantages over cryptocurrencies. To start, they enjoy wider acceptance especially for brick-and-mortar transactions. Merchants readily support them. The introduction of contactless systems has also made checkouts quicker and more convenient for shoppers.
Depending on the blockchain and token being used, crypto payments can take minutes to complete depending on the block time and network congestion. Bitcoin is only handling around 2 to 3 transactions per second (TPS) while Visa’s network can handle more than 50,000. Transactions via conventional methods are done using fiat currencies. Most consumers still have little access to cryptocurrencies.
These said, crypto services do bring certain advantages to the payments space. Depending on the use case, crypto services can be faster. For remittances, cryptocurrencies are credited to recipients more quickly compared to traditional methods. Traditional remittances often have to be routed through various financial institutions and are often subject to clearing processes. Crypto transactions are often cheaper because of the various fees and unfavorable currency conversion rates of conventional means. OmiseGo seeks to remedy this by partnering with payments solutions and allow them to use its blockchain-based infrastructure. Solutions that use the network can save on costs allowing them to trim fees and provide quicker transactions. The transparency inherent with blockchain also prevents any fraudulent claims between parties.
Enter the Next Wave
Clearly, there is room in the payments space for improvement. This is where new crypto payments services can step in. Next-wave crypto payments services seek to leverage blockchain’s strengths and combine them with the ease of established methods. TenX, for instance, makes virtual currencies readily spendable by linking blockchain assets to payment platforms. It also allows users to withdraw funds in fiat from ATMs worldwide using a physical card.
Payments services also need to feature more functionalities beyond just facilitating the transfer of value. Up-and-coming payments service COTI aims to bridge the gap between crypto payments and the realities of commerce today. With the boom of cross-border transactions, payment methods now have to be speedy, secure, and affordable.
As a payments network, COTI leverages directed acyclic graph (DAG) architecture which differs from conventional blockchain. With DAG, the network becomes more scalable the more it is used. This is a similar approach to what IOTA uses for its Tangle. DAG provides a high throughput that allows more transactions to be processed while minimizing the fees levied upon each transaction.
Perhaps what would make crypto payments truly is the trust that blockchain brings to the space. COTI aims to maximize this by implementing its Trustchain protocol which includes a trust scoring engine and a mediation system. The protocol encourages consumers and merchants to do right by each other. COTI relies on decentralization and transparency of blockchain to promote trust. Trustworthy users are then incentivized by lower fees. In contrast, traditional payment services often act as non-transparent arbiters to disputes.
Best of Both Worlds
So, it seems that blockchain and crypto do offer ways for digital payments to move forward. While cryptocurrencies have limitations for payments use cases, these next-wave crypto payments appear to offer solutions that address the key concerns of the payments space. Of course, established players will continue to fight for relevance but they might now be hard pressed to match crypto’s strengths particularly its inherent mechanisms for trust.