Can Bitcoin Surpass Credit Cards for Low-Cost Fraud Protection?

Daniel Cawrey
Sep 5, 2014 at 13:49 UTC
Updated Jun 10, 2015 at 10:13 UTC

It’s almost essential today for merchants to accept credit or debit cards. Indeed, it is often the only form of payment in a customer’s wallet.

However, in exchange for accepting cards, merchants must pay for a number of services that they may not need or want as part of the blanket fees charged by payment processors.

There are even some examples where merchants offer customers a discount in exchange for paying in cash, such as gas stations in the US, which often advertise a cheaper price to customers using physical money.

The card companies, banks and payment processors cooperate together to charge a good chunk of these fees both to cover the cost of fraud and to protect against it. But can bitcoin offer better, or at the very least lower-cost, fraud protection for merchants and consumers?

Alan Safahi, CEO of ZipZap and a veteran of the payments industry, said that banks should be interested in bitcoin’s potential for lower overhead operational merchant costs, explaining:

“Banks don’t make a lot of money for payment processing. They couldn’t care if they are processing Visa, MasterCard or bitcoin.”

Merchant perspective 

One of the biggest issues with credit cards that merchants simply cannot avoid is chargebacks – when a card transaction is reversed after a payment for a variety of reasons.

“For more developed economies with stable currencies, chargebacks is one of the biggest selling points to bitcoin adoption for merchants,” said Michael Dunworth, whose startup snapCard allows users to pay for things online in bitcoin whether a merchant accepts bitcoin or not.

“[Chargebacks are] a drain on all fronts, and an incomparable value-add of accepting bitcoin,” he added.

The number of bitcoin-accepting merchants is expected to grow steadily. Source: CoinDesk Q2 Report

The number of bitcoin-accepting merchants is expected to grow steadily. Source: CoinDesk Q2 Report

Safahi’s ZipZap allows users to obtain bitcoin from kiosks around the world.

He said the issue of chargebacks comes down to a perhaps needless use of third-party trust. It’s important to remember bitcoin is a system that can eliminate the need for this sort of trust because of cryptography.

Safahi noted:

“Any time you have a group of people that don’t trust each other that need to trust each other, you need consensus and that’s what bitcoin and other digital currencies do really well.”

So, without third-party trust, how does a merchant know to trust a consumer and vice versa when using bitcoin?

Steve Beauregard, CEO of digital currency payment processor GoCoin, said that emerging peer-rating platforms can help lead the way to a new form of trust relationships between parties, explaining:

“With the advances in reputation systems like Yelp! and the peer economy created by services like AirBnB and Uber, you will quickly weed out the scammers from the legitimate consumers.”

Consumer perspective

There’s still not a large contingent of consumers paying for purchases in bitcoin – in part, of course, because many merchants do not yet accept the digital currency.

Tom Longson, CEO of bitcoin gift card startup GogoCoin believes that a strong community of bitcoin purchasers could emerge – similar to the strong enthusiast community that enabled bitcoin to get this far.

He said:

“Loyal customers are very important to small and large businesses. The merchants support the bitcoin ecosystem, and customers support the merchant in return.”

Longson echoed Beauregard, saying that the network effects peer recommendation systems could provide are an opportunity for overall growth.

“The community makes merchants who accept bitcoin better, both in spending power and [by] recommending their service to others,” he added.

The complicate process of a chargeback in one chart. Source: Emerchantbroker

The complicated process of a chargeback in one chart. Source: Emerchantbroker

There is another alternative to peer-based systems as well. With bitcoin’s multi-signature technology, companies like Purse.io are building escrow bitcoin wallets to enable dispute resolution in the form of three separately held keys.

This would mean one key for the merchant, one for the consumer and another for Purse. When all parties agree, the funds are paid, but, in a dispute, Purse mediates. Such a system could be an alternative to the credit card chargeback.

Purse co-founder Andrew Lee says that consumers will need something like this in order to feel fully comfortable spending bitcoin:

“The world is full of fraudulent merchants. Consumers wouldn’t spend with the same confidence if they couldn’t dispute a transaction.”

Underlying bitcoin issues

It would seem the chargeback system to prevent fraud in credit cards is flawed, ripe for disruption.

That is exactly how GoCoin’s Beauregard sees it: “The removal of the chargeback mechanism finally equals the balance of power between the consumer and the merchant,” he said.

Universal bitcoin companies like Circle, Coinbase and Xapo will need some form of reversal or mediation mechanism order to ensure a degree of consumer protection.

Credit card companies see no alternative other than to develop competing digital systems to rival bitcoin. Amazingly, after working with payment technology companies like PayPal, the major players didn’t do a whole lot in this regard until bitcoin finally came along.

SnapCard’s Dunworth said:

“Given the success of PayPal so early on, then only recently seeing Visa and MasterCard open up their own digital wallet style services (V.me and MasterPass), that was a long time.”

Add to the fact that it is rumored Apple will be partnering with American Express for a mobile digital wallet on iPhone’s iOS 6 operating systems, and it is quite obvious the digital payments industry is expanding quickly.

It is still not clear exactly where bitcoin will fit into the big picture, yet the fact remains that the digital currency enables a rethinking of the  standard fraud protection and dispute resolution models.

The big-brand card companies will desperately need to figure out a solution for all of this, especially given that digital and mobile payment efforts aren’t going too well for them.

This is evidenced by the vast majority of people still making in-person electronic payments through credit and debit cards and not the mobile wallets most bitcoin users embrace.

The dispute resolution for PayPal looks simple, but can take a long time to complete. Source: PayPal

Dispute resolution for PayPal looks simple, but can take a long time to complete. Source: PayPal

“I think Visa and MasterCard … they need to embrace it; find a way to work with it. If they don’t come on board, then merchants will start accepting bitcoin anyway,” said Safahi.

Credit Cards image via Shutterstock

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