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Paying in Bitcoin

Author: Zaid Khatri (Master in Management, TUM)

Supervisor: Prof. Dr. Isabell Welpe (Chair for Strategy and Organization, TUM)

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The advent of Bitcoin and other cryptocurrencies is disrupting financial services globally. One of the major products and services of the traditional financial system is the payments domain.

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According to the McKinsey Payments report 2021, the global payment revenue is expected to be $2 trillion and $2.5 trillion in 2021 and 2025 respectively.

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Even though the industry is innovating continuously, the current payment system still has major pain points. This thesis explores how cryptocurrencies can help address these problems.

🌐 Crypto Payments Landscape

Source: Own illustration [Zaid Khatri, Prof. Isabell Welpe]

📝 Results

⚡ Lightning Wallets and Layer 2 Solutions

The Lightning Network is an open protocol and decentralized network built by the Lightning Labs on the Bitcoin base layer which facilitates faster transactions with lower fees
The lightning wallet has already found widespread adoption in multiple applications such as Strike app for Twitter tips payments and Chivo wallet in El Salvador
The Lightning Network thus addresses important factors such as instant payment, micropayments, and scalability which makes it suitable for retail point-of-sale, peer-to-peer transactions, and online transactions

Source: Lightning Network Capacity (The Block Crypto, 2021)

🚀 FinTech Sector Leads the Crypto Adoption

Both the incumbent financial services and FinTech companies realize the potential of cryptocurrencies and its effect on their existing markets and therefore have been entering the sector
Large payment processors such as Mastercard and Visa have partnered with the crypto payment processors, decentralized exchanges, and wallet providers to avail access to cryptocurrency-based credit cards, debit cards, and rewards programs
FinTech firms, on the other hand, have also introduced the option of trading cryptocurrencies on their platforms to complement their traditional financial products

🪙 Crypto Payment Potential Use-Cases

🛒 E-commerce payments:

Online payments currently are ubiquitous in the e-commerce sector. There are multiple payment processing costs which are on an average around 2% to 5% of the total business revenue. By accepting crypto payments, e-commerce companies can reduce these costs and gain more customers. To tackle the volatility of cryptocurrencies, stablecoins can be used as a solution in e-commerce payments

✈️ International remittance and cross-border payments:

The global remittance market size is projected to reach $930.44 billion by 2026. The two major issues in the existing process are the time required for settlement and cost of a transaction. The global average fee cost of a remittance transaction through a payment processor is 6.38% and through a bank is 10.66% for a small transaction. By using cryptocurrency for remittances, these payment processing companies can be eliminated, and the cost of the remittances be saved.

🍬 Crypto cashback and loyalty rewards program:

The crypto payment processors have partnered with fiat payment processors to offer credit and debit cards that reward customers in cryptocurrencies instead of credit points for spending using the card. In the case of a normal credit card, the bonus credit card points are at risk of inflation, devaluation, and even cancellation; crypto loyalty programs avoid these risks.

🧭 Future Trends

💻 Web3 Development

Web3 implies the decentralization of the web and taking away the control of power from these organizations and giving it back to the user. Currently, users have to switch between different DeFi applications for different use cases. By embedding the crypto stack directly in the Web3 experiences will allow users to sign up for the native app, buy the tokens needed, and transact all in one place.

Source: Overview of the Web transition (Peracha & Grace, 2021)

🎮 Metaverse and Crypto

Metaverse is described as an online arena where decentralized finance reigns - combining cryptocurrencies, blockchain technology, non-fungible tokens, and video gaming. For these applications, the payments are required on the token on which these applications are built. As the metaverse applications gain popularity, more and more crypto payments will be used in the space.

👀 Countries to Watch Out For

🇸🇬 Singapore has allowed crypto companies to apply for the Payment Services Act, a law that regulates companies handling digital payments and trading of tokens

🇸🇻 El Salvador became the first country that made bitcoin a legal tender. The challenges faced by El Salvador would result in lessons for the rest of the world for cryptocurrency implementation

🇺🇦 Ukraine passed a law legalizing and regulating Bitcoin with the aim to become one of the top jurisdictions in the world for crypto companies

🇳🇬 Nigeria is seeing Bitcoin payments flourishing despite government crackdowns. Peer-to-peer transactions and merchant payments are commonly used by Nigerians