The Long And Bumpy Road to Crypto Acceptance

ISOs have been slow to jump on the bandwagon for digital currency because the list of barriers to mainstream use remains too long.

Merchants such as Overstock.com and Newegg.com may be leading the charge to accept Bitcoin and myriad other crypto­currencies, but if crypto is to make serious progress toward mainstream merchant acceptance, it will need the backing of independent sales organizations. Right now, that backing is in short supply.

There’s a laundry list of reasons why—setting aside a few exceptions—ISOs aren’t lining up behind cryptocurrency, but one of the biggest is the ambiguity that surrounds its potential to be a daily payment option.

For example, few, if any, of the cryptocurrency payment applications that have emerged can meet merchants’ expectations for a fast, frictionless transaction. Because of that shortcoming alone, ISOs refer to digital currencies as “not retail ready.”

“While a lot of cryptocurrency application developers have emerged in the past year, nothing has really clicked,” says Jim Parkinson, chief information officer for North American Bancard Holdings LLC, a Troy, Mich.-based ISO that backed away from piloting cryptocurrency acceptance last year after failing to see a strong enough business case.

The other primary problem has to do with crypto’s lack of recognition as legal tender by the United States government. Instead, the federal government has classified cryptocurrency as an investment, reasoning that its rise to fame has been propelled by the buying and selling of the currency, which directly determines its value.

‘No Common Standard’

This lack of recognition as a currency and crypto’s thriving existence on specialized exchanges pose problems for ISOs.

First, because cryptocurrency is traded as an unregulated investment on exchanges, its value, or purchasing power, can be extremely volatile. The uncertainty surrounding value at any given time poses risk, since merchants expect to be paid $100, minus transaction fees, for a $100 purchase.

Because it can take 15 minutes or more to complete a cryptocurrency transaction, depending on the brand, the value of a crypto transaction could fall below the purchase amount, leaving ISOs on the hook for making up the difference to merchants.

“ISOs either need to guarantee the merchants’ funds and absorb the price volatility that goes along with processing crypto transactions or find a way to convert cryptocurrency immediately into dollars to lessen the risk the volatility poses,” says Jared Poulson, chief integration officer for Payroc LLC, a Tinley Park, Ill.-based ISO that plans to begin supporting cryptocurrency this year. “Price volatility is a big issue.”

Second, because of cryptocurrency’s status as an investment, the proceeds for a sale may be subject to taxation if they represent any gain once converted to dollars. Not surprisingly, most ISOs trading crypto are not equipped to deal with the tax implications, payments experts say.

“The tax issues around liquidating cryptocurrency complicate ISOs’ accounting records, which is enough to give them pause about pushing cryptocurrency to merchants.” says Tim Sloane, vice president, payment innovation at Maynard, Mass.-based Mercator Advisory Group.

Third, the current lengthy wait times to complete a crypto transaction, which stem from network congestion, are a huge turnoff.

Bitcoin transactions can take 15 minutes or longer, Ethereum transactions six to seven minutes, and a Litecoin transaction between one minute and 90 seconds, according to payments experts. And those time frames are just ballpark figures. They could run longer depending on the time of day or month.

By contrast, consumers and merchants are used to having card-based transactions completed in seconds. “Crypto generally has no common standards in relation to speed of funds transfer,” says Seamus Smith, executive vice president, global payments and banking, at Sage Group Plc, a United Kingdom-based provider of business software.

“This is against a background where markets generally are developing near or real-time settlement propositions, such as Faster Payments in the U.K., which is also due to come on-stream in the U.S. in late 2019, so crypto has a lot of catching up to do,” says Smith.

In 2017, Sage sold Sage Payment Solutions, its U.S. merchant-services arm, to investment firm GTCR LLC. GTCR renamed the unit Paya as part of a rebranding effort intended to grow its merchant portfolio.

Finally, the federal government’s refusal so far to recognize cryptocurrency as a form of legal tender makes merchants and ISOs skittish about accepting it as a form of payment. “The government’s lack of support for cryptocurrency works against its ability to enable commerce,” North American Bancard’s Parkinson says.

Bullish Pioneers

Overcoming these barriers will require lots of time, since cryptocurrency-payment applications are in their infancy and face a huge uphill battle, much as credit and debit cards did when they were first introduced, payment experts say.

“(The issues surrounding) crypto don’t sit well with other forms of regulated, compliant electronic payment mechanisms like cards, wallets, or bank-to-bank payments,” Sage’s Smith says. “There are some potential use cases in economies where local currency is sometimes even more volatile than crypto—Argentina for example—but these alone do not make crypto ‘top of the pile’ for acquirers or [payment service providers].”

The lack of potential use cases among merchants is what prompted North American Bancard to back off a planned cryptocurrency pilot last year.

“We didn’t see a large enough use-case group to gather the data needed to make the case for a pilot,” says Parkinson. “The merchants accepting cryptocurrency are catering to consumers that already play with cryptocurrency as a person-to-person payment and invest in it, but’s that not a large consumer segment. Plus, most merchants struggle to fully understand cryptocurrency.”

Still, despite all the reasons ISOs can name for not supporting cryptocurrency, a select few have dipped their toes in the water.

What makes these pioneers bullish on cryptocurrency is their deep understanding of the way the currency works and the problems holding it back as a payment option. They argue future generations of consumers will embrace cryptocurrency payments.

Among the benefits they see for merchants is that the currency can be marketed as a low-cost payment option. Also, crypto transactions are resistant to fraud, and crypto represents an opportunity for merchants to attract new customers with an affinity for the currency.

Executives at Payroc and Fort Lauderdale, Fla.-based Aliant Payment Systems, another ISO that offers crypto acceptance, say they spent months, even years, learning about cryptocurrency by trading it and using it for person-to-person payments. Only then, they say, did they apply the knowledge gained from those experiences to develop payment applications that support crypto acceptance.

“This isn’t something we just fell into,” says Eric Brown. Aliant’s chief executive. “We got into it through my trading of cryptocurrency, then spending 14 months learning about its potential as a payment option.”

‘The Real Fraud Risk’

A big part of the appeal some payments providers see in crypto is its low cost of acceptance compared to card-based payments.

For example, BitPay, an Atlanta-based provider of cryptocurrency payment solutions, charges merchants 1% of the transaction. In comparison, merchant fees for card acceptance are based on interchange, on top of which processors charge a fee. That equation usually means merchants will pay more—often two or three times more—to accept a card payment than a crypto coin at 1%.

The low cost of acceptance for crypto transactions can be a huge incentive for merchants selling big-ticket items such as travel and computers, since interchange is levied as a percentage of the transaction amount. “We are seeing a lot of interest for crypto from regional airlines, cruise lines, and Web sites selling luxury travel,” Aliant’s Brown says. “These are purchases that can amount to thousands of dollars.”

Another merchant segment ripe for cryptocurrency is sellers of precious metals and jewels. “Some credit card holders don’t have a high enough credit limit to purchase these items with their card,” says Sonny Singh, chief commercial officer for BitPay. “And purchasing these items by bank transfer can take days to complete, so waiting up to 15 minutes to complete the transaction isn’t as much of a deterrent for the consumer in that instance.”

Not surprisingly, many of the merchants accepting cryptocurrency cater to customers that invest in it, Parkinson says.

Reducing fraud is another potentially big selling point to merchants. What makes a crypto transaction fraud-resistant is the blockchain, a distributed, software-based ledger that provides an accurate, up-to-the-minute record of every transaction at any point in time. Miners processing each cryptocurrency maintain the blockchain. Because all crypto transactions are registered on their respective blockchains, the value of a crypto coin cannot be spent twice.

“Double spending a crypto coin is the real fraud risk with the currency and the blockchain prevents that from happening,” says Singh.

As accurate a ledger as the blockchain is, one drawback to it is that some crypto coin exchanges will wait for confirmations from multiple miners that a transaction has been made before posting it to the blockchain, which is the final step in completing the transaction, Payroc’s Poulsen says. That practice can add several minutes to the transaction.

‘A Long Way To Go’

Despite these perceived benefits, ISOs know they will never crack the code of selling cryptocurrency to merchants unless they can manage the digital currency’s price volatility.

To manage its risk, Aliant immediately sells crypto coins received as part of a transaction on an exchange and converts the proceeds into dollars that are deposited into the merchant’s account once the transaction is complete. Aliant guarantees the merchants’ funds from the transaction.

By selling the coins immediately, Aliant avoids holding the currency and paying the merchant out of its own pocket, then recouping that cost by selling the crypto coin later when the price may be higher. This practice, known as hedging, is another way for ISOs to offset the volatility of crypto coins, payment experts say.

While there are ways to manage cryptocurrency’s volatility, none is foolproof, Parkinson says, because the price changes can occur before a transaction is fully entered into the blockchain. “This risk works against cryptocurrency from a commerce perspective,” he adds.

As with any new technology, payments experts are confident that ISOs will eventually solve the technological hurdles involved with crypto. What concerns them, however, is how long it will take for cryptocurrency to be recognized by the U.S. government as a stable currency. Until that happens, don’t expect a merchant stampede to accept crypto.

“Recognizing crypto as a legitimate currency is a pressing issue to solve for government and economic leaders,” Parkinson says. “The technology hurdles are likely to get solved sooner, and we will certainly continue to look at offering cryptocurrency as a payment option, but there is still a long way to go before merchants truly understand and demand cryptocurrency.”