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GUEST COMMENT The rise of bitcoin – online retail game changer or a passing craze?

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The rise in popularity of bitcoin has been well documented. The virtual currency is slowly moving from online craze, towards mainstream use and acceptance. However, how successful this mainstream adoption becomes will depend in large part on how online merchants embrace bitcoin as a legitimate method of completing online transactions. Could it be a game changer in online retail or will it be another short-lived internet phenomenon which falls away as quickly as it came to prominence?

Bitcoin uncovered

Let’s start with the basics: what is bitcoin and how could it benefit online retailers? In essence, bitcoin is an online crypto-currency. It is a virtual currency that uses peer-to-peer technology to operate with no central authority or bank. This makes it unique in the money markets since it means that managing transactions and the issuing of bitcoins is carried out collectively by the network, rather than by a single entity or organisation. This means that bitcoins can be traded in exchange for goods and services much like any other currency, but it has no central owner or control in the way that governments traditionally issue and manage national currencies.

The potential presented by bitcoin is exciting for online retailers. Since it is both virtual and borderless, it has the potential to break down barriers in international commerce. As the market for bitcoin evolves and online growth in emerging economies intensifies, it offers merchants another important avenue for expanding their online businesses globally, without the initial limitation of cross-border hurdles. If a retailer accepts bitcoin payments, it means that it can accept payments from anywhere in the world, without worrying about the local currency in that market. This means that bitcoin could, if it becomes widely adopted, be a major disruption to the existing online retail ecosystem.

Another incentive for merchants to accept bitcoin is an economic one. Bitcoin transactions would likely entail significantly lower fees for the accepting business. Currently, bitcoin fees are typically a lot lower than those for credit cards, which can be as much as 3%; making a bitcoin transaction less expensive than a credit card transaction for the retailer.

The bitcoin tipping-point

While a number of retailers are waiting to see how bitcoin evolves, the most progressive and innovative leaders are starting to embrace the possibilities that bitcoin offers. However, we are still at the early adoption phase. As with any new payment method, this means we are experiencing something of a ‘chicken and egg’ situation where merchants have been gauging the level of consumer interest in using bitcoin for transactions before they commit to accepting them, while consumers have also been waiting to see which outlets start accepting bitcoin before they fully embrace the currency. As with any new payment method, consumers will use bitcoin more for purchases when more merchants accept it as a form of payment, and more merchants will accept bitcoin when more consumers are purchasing with it.

However, there is good reason to believe that we are now at – or very close to – that tipping-point of mainstream adoption. Over the last year, we have seen a number of businesses such as Overstock, Expedia and CVS announcing that they will be accepting bitcoin transactions. Approximately 35,000 online merchants accepted bitcoin as payment in November 2013, ranging from bricks and mortar businesses with online facilities to purely internet based businesses. For example, blogging platform WordPress has accepted bitcoin since 2012; mobile gaming company Zynga is also accepting Bitcoin, with Paypal currently considering it for the future.

The value of bitcoin, like any other currency, is subject to fluctuation. Given bitcoin’s virtual nature, retailers can find this daunting. Therefore, in order to ensure widespread adoption, the entire bitcoin ecosystem will have to mitigate these risks as much as possible in order to make it even more attractive to merchants and consumers. For example, at Digital River our business model and our ability to function as a merchant- and seller-of-record on behalf of clients enables small and mid-sized companies selling into the U.S. to offer bitcoin as a payment option for customers, even when it may be in earlier stages of adoption in their domestic market. As merchant- and seller-of-record, ecommerce providers such as Digital River can also handle the tax management and regulatory compliance associated with the payment transaction.

Similarly, digital wallet services such as Coinbase are also important for helping companies mitigate the risk associated with processing bitcoins. Services like Coinbase’s Instant Exchange can help to manage the currency risk associated with holding bitcoin. This means that when an end-consumer elects to make a purchase with bitcoin, the merchant – or their ecommerce provider – will receive the bitcoin and then immediately sell the bitcoin to a digital wallet in exchange for the local currency. This process happens instantaneously and protects the merchant against any possible fluctuations in the value of bitcoin. The real world cash is then transferred to the merchant instantly, giving them the benefits of accepting the currency without any need to worry about the potential risk of holding bitcoin.

Looking ahead

It would appear that bitcoin’s impact will be particularly strong in emerging ecommerce markets, where it can be a game changer and open up ecommerce opportunities where they don’t exist today. It is, however, unlikely to significantly change the preferred transaction methods in mature ecommerce markets; instead remaining an alternative and viable payment option rather than the default or preferred option.

As it stands today, while bitcoin may not be an online retail game-changer in the UK, it will certainly be a disruptor. Businesses, particularly online merchants that want to sell across borders, should definitely consider including bitcoin as a payment option in order to widen the net of potential customers. Bitcoin has already had a huge impact on how we handle and think about payments online. And, as the ecosystem around bitcoin and the public’s understanding of it matures, we are sure to see many more fascinating developments. One thing seems certain; whatever becomes of bitcoin and the retail industry, it will no doubt be an exciting journey!

Souheil Badran is senior vice president and general manager of Digital River World Payments

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