Cryptocurrency solves the problem of why credit card acceptance is not as ubiquitous as travellers would like it to be, writes Ethan Lou.
I’m a die-hard American Express fanboy who loves my platinum credit card. I love the generous points that grant me free travel. I love the unlimited airport lounge visits. I love the annual US$150 travel credit.
I also love that, every once in a while, the company just gives me free stuff. Most of the time it has been movie tickets, but I once got an unconditional US$75 credit at a jewellery chain. In my view, the perks outweigh the US$500 annual fee for my Canadian version of the card.
But when I travel, few places accept it, so I’m forced to lug around notes and coins. And I travel a lot. Over the years, I’ve found myself filling a shoebox with small amounts of various foreign currencies that just grows heavier and heavier.
There’s a better way: cryptocurrencies such as Bitcoin. They are nowhere near as widely accepted as credit cards, but they have far greater potential. Cryptocurrency solves the problem of why credit card acceptance is not as ubiquitous as travellers would like it to be.
Running American Express is expensive. It’s not just all that free stuff they give away. It’s the cost of the call-centre staff who help me cancel cards and reverse transactions, the salaries of all the other staff at American Express, and their electricity bill to keep the lights on.
Charging users US$500 a year just doesn’t cover it, so there’s another fee credit card companies exact. It’s an invisible cost that the users do not feel. But it’s there. It’s borne by the merchants.
They get saddled with a fee for every transaction. It varies by card and can be complicated to calculate. Sometimes it’s as high as 3.5 per cent per swipe. Merchants bake them into the prices we pay, making everything slightly more expensive. Sometimes merchants don’t want to do that and thus do not accept credit cards. In 2016, a famous dispute resulted in Walmart Canada temporarily dropping Visa. Across the world, American Express seems to be the least popular because it’s among the most expensive for merchants.
That’s the reason I have to have my shoebox. The credit card company needs its cut. Otherwise, it has no incentive to facilitate the convenient, cashless transaction. But many merchants do not want to give that cut.
That’s a problem that can be solved if we simply cut the middleman. As it happens, that is the entire point of Bitcoin, the first and dominant cryptocurrency. Bitcoin has been known for many things. At one point, it was the primary medium of exchange on the dark web, a hidden part of the Internet where drugs and weapons are for sale.
Now, even as Bitcoin endures crashes of up to 80 per cent, it has risen from its initial 1 US cent value by more than a million-fold. Bitcoin and its associated blockchain technology have inspired thousands of other cryptocurrencies and have become the billion-dollar darlings of the worlds of finance and technology.
But when it was first proposed in 2008 by a creator known only as Satoshi Nakamoto, all Bitcoin was meant for was to cut the middlemen. Its users process transactions collectively, without a central authority.
That still incurs transaction fees, paid to the users who process transactions. But there is no building whose lights need to be kept on or any call-centre staff to pay. As a result, the fees can be negligible. They vary, but you can pay as low as a few cents to send any amount. Bitcoin transactions are irreversible, meaning victims of fraud have no recourse. But, hey, that applies to cash as well, and I’m forced to use cash all the time when I travel.
We are not yet at the stage of mass adoption. The technology is only a decade old, and most people have little exposure to it. Perhaps because of its newness, cryptocurrency prices are also highly volatile.
But these are all problems that will go away in time. Accepting cryptocurrency can be of negligible cost to merchants, far more attractive than credit cards. The potential is clearly there for cryptocurrency to overtake credit cards as the dominant electronic payment system that can be used all over the world.
There will be no more points, airport lounge visits or jewellery store credit for users. And I will duly mourn that loss. But if I can be cashless wherever I go, that is a price I’m willing to pay.
Ethan Lou is a cryptocurrency investor and a former Reuters and Toronto Star journalist.