I originally wrote this as a combination piece for both consumers and business owners but the business piece became a much longer write-up as I fleshed it out and I chose to split them. You can read the consumer write-up here when published shortly at Building a “Why” of Spending Bitcoin at the Point of Sale that Resonates with Consumers.
Business Owners:
Do you want to save on ridiculous credit card processing fees?
Do you want to stop fraudulent charge-backs in its tracks?
Do you want instant final settlement of funds?
Bitcoin, a decentralized digital currency, is disrupting traditional payment systems, offering unique advantages for businesses. In this article, I explore a few compelling reasons why Bitcoin should resonate with business owners, particularly in terms of saving on credit card processing fees, preventing fraudulent charge-backs, and providing instant final settlement. By understanding these key benefits, business owners can make informed decisions about integrating Bitcoin into their payment infrastructure.
Saving on Expensive Credit Card Processing Fees
One of the primary pain points for business owners is the exorbitant fees associated with credit card processing. One of my clients generates $7,000,000 in sales with a vast majority of the payments by credit cards. This processing costs this business $225,000 in fees. $225,000! This business absorbs these fees as a cost of doing business which is passed onto the customer as higher prices at the register. With traditional payment systems, dominated by credit card companies and banks, these high transaction fees eat into business profits severely. Bitcoin, on the other hand, offers a cost-effective alternative. By leveraging the Bitcoin blockchain as well as Bitcoin layer2 technology such as Lightning Payments, Bitcoin enables direct peer-to-peer transactions, bypassing bank intermediaries, and reducing processing fees significantly. Business owners can enjoy substantial savings by accepting Bitcoin payments, allowing them to allocate those resources towards business growth and customer experience improvements.
As a business owner that takes credit cards, you generally have two card fee choices, tiered rates, and flat rate. Tiered rates are usually a form of “cost plus interchange” or a 3 level qualified rate depending on (1) risk taken on by the card processor, and (2) benefits of the card issuer provided to the consumer holder of that card. The industry calls these tiers ‘qualified’, ‘mid-qualified’, and ‘non-qualified’. You may see a tier structure such as 1.9%/2.5%/3.5% (this represents an example of standard rates). The first tier, Qualified, at 1.9% represents the least risk – a card that is presented at the point of sale in person by the buyer and inserted into a card reader with a chip embedded. The second tier, Mid-Qualified, at 2.5% is a card present purchase but with a card that offers benefits such as loyalty points, cashback, flyer miles, etc… The third tier, Non-Qualified, at 3.5%, is generally a card not present transaction such as a web purchase or over the phone (there is more risk of a fraudulent transaction so the rate is higher as the risk is higher). Tiered rates are generally priced better for higher volume merchants but reading a tiered rate monthly statement is incredibly difficult to understand to actually figure out if you are actually saving on fees. You will also get hit with fees on the back-end 30 days later (in the next statement) from the intermediaries that transmit funds from bank to bank until the payment from the customer is received finally in your bank account. You could see fees from 30 different intermediaries on a tiered statement where each one is getting their slice of the payment transmission fee pie with your business paying for their indulgences.
A flat rate processing fee such as 2.7% is typically provided to merchants that have lower volumes. You won’t be surprised by back-end fees 30 days later. You pay 2.7% to process a card payment. The industry gives flat rate pricing to make it easier on those merchants that do not want to decipher a tiered rate statement. However, you will generally pay more in fees as the banks blend the average tiers and give you a higher rate to absorb the intermediary fees they will pay 30 days later.
How do you save these fees in a Bitcoin payment? Bitcoin fees on layer 2 Lightning are designed to be economical through market incentives. Routing of payments goes between routing nodes by finding the most economical route between buyer and seller. This can lead to costs that are fractions of a traditional fee. An example, I routed 8,500,000 sats (sats are the smallest unit in Bitcoin – think penny to a dollar) in May (equivalent to $2200 US at the time) and paid $3.46. I just routed 1,000,000 sats ($278) and the seller paid 216 sats ($0.06, six cents!). It saves significant fees to pay in Bitcoin. And even if you use a 3rd party bank to convert Bitcoin to your local currency, you’ll probably pay about 1/2 a percent (0.5%) for the service. On a $1,000 purchase, credit card merchant processing will charge you 2.7% plus a $0.30 transaction fee totaling $27.30. A $1,000 purchase paid for in Bitcoin (3,761,250 sats) and swept to your bank may cost you 27,609 sats ($7.63) for the purchase and $5.00 for the conversion fee for a grand total of $12.63 to receive in $1,000. You just saved $14.67 per $1,000 in sales, or $14,670 per $1,000,000 in sales. Take that to the bank (or to your Bitcoin cold-storage hardware wallet).
Preventing Fraudulent Charge-backs
Fraudulent charge-backs pose a significant challenge for businesses, leading to financial losses and operational inefficiencies. The charge-back process, inherent in traditional payment systems, allows customers to dispute transactions and seek refunds, often exploiting loopholes or engaging in fraudulent activities just because they can, and just because some politician enabled consumer protection laws pandering to his electorate. Bitcoin transactions, once confirmed, are irreversible. This characteristic eliminates the risk of charge-backs, providing greater protection to businesses. By embracing Bitcoin, business owners can mitigate the financial burden and administrative overhead associated with charge-back disputes, resulting in more secure and trustworthy transactions.
Further, accepting Bitcoin is more secure than accepting credit cards. There are no counterfeit transactions to deal with in Bitcoin – it is either accepted or declined based on funds available. And you will not have to deal with “carding” events on your ecommerce shopping cart. Carding is the act of running fraudulent transactions on your shopping cart with the intent of disrupting a business and causing it financial harm by either having bogus transaction paid for by stolen valid credit cards, or by running tens of thousands of stolen cards that are not valid but cause a transaction to be run through the payment card processor causing real-life fees to rack up. I had an example of a client get hit on three separate occasions by 10,000 and 20,000 transactions that attempted to run through her ecommerce site and the credit card company charged her $0.30 a transaction for the attempts. That cost her $3,000 and $6,000 respectively that she now has to try to claw back from the credit card company as they withdrew those funds from her checking account at the close of the batch! Insanity. You will never see that happen in Bitcoin transactions. It is just designed better to protect against fraud and counterfeit spending.
Instant Final Settlement
In the conventional payment ecosystem, settlement of funds can take days or even weeks, creating cash flow challenges for businesses. And FINAL settlement is actually 90 days or longer with credit cards in order to allow for charge-back capability for the consumer (remember that potentially fraudulent tool available to consumers?). Bitcoin, on the other hand, offers near-instantaneous final settlement. Once a Bitcoin transaction is confirmed, the funds can immediately be transferred to the recipient’s wallet. This enables business owners to access their funds faster, improving liquidity and facilitating smoother operations. With instant final settlement, businesses can streamline their cash flow management, enhance financial stability, and seize opportunities that require immediate access to capital. Further, in reality while Bitcoin usage grows (also known as a circular economy on the Bitcoin standard), businesses need local currency to pay their bills. Many services are out there, as well as more being built, that provide options to convert Bitcoin to cash and sweep to your bank account in 24 hours. This deposit into your bank account is comparable to the 24-72 hours that credit card companies take to sweep funds to your bank account. But remember, this is final settlement funds that you are receiving. You can’t get a notice 60 days later that the customer has decided to attempt a charge-back on those funds and the bank freezes the amount from your account.
Miscellanea
Also note that these services that convert Bitcoin to cash can mitigate the current discussion of Capital Gains Tax in the United States. These services can instantly convert the received Bitcoin into the $ and you will never experience a difference of the current Bitcoin price to the price of Bitcoin when you received it.
Further, Bitcoin is just a payment method, just like Stripe, Venmo, PayPal, CashApp – it just has unique properties that those payment rails do not have as explained above. The first rule of retail is to not let the customer walk away with money just because you don’t accept the payment method. That’s foolish and short-sighted as a business owner. Your customers will vote with their wallet, and you may lose a sale if you aren’t accepting all payment types. And it is an easy thing to accept Bitcoin. If your point of sale supports it, Bitcoin can be directly integrated as a payment method (BTCRetailX Consultants can help with this). Or you could move to a full service point of sale and retail management system such as BTCRetailX that accepts credit cards and Bitcoin/Lightning payments and teaches both your customers and your staff how products are priced in dollars and in Bitcoin at the sales screen, and on the receipt.
And lastly, Bitcoin doesn’t judge your business model. Merchant processing banks are infamous in how they justify pricing or denial of service or with charge-backs based on the product type you may sell. If you have a “risky” product such as adult toys, CBD, guns, liquor, or some other product that they disapprove of, you may not even get approved to accept credit cards, or you’ll get much higher rates (I have a client that sells smoothies and CBD products and her rates are exorbitant), or they may arbitrarily close your account because a board member of the bank doesn’t want your business model. It has happened. As a business owner accepting Bitcoin, you won’t get judged by Bitcoin.
Bitcoin presents a compelling value proposition for the payments industry, resonating with business owners seeking to address critical pain points in credit card processing. By embracing Bitcoin, businesses can save significantly on credit card processing fees, prevent fraudulent charge-backs, enhance their payments security, and enjoy the advantages of instant final settlement. As the adoption of digital currencies continues to grow, business owners need to evaluate the potential benefits that Bitcoin can bring to their operations. Embracing this disruptive technology can lead to a more efficient, secure, and cost-effective payment ecosystem, ultimately empowering businesses and driving their success in the rapidly evolving digital landscape.
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