If Bitcoin can’t beat credit cards based on transaction costs alone, then what can it do?
At this point we’ll pull back from the microeconomics of transactional efficiency and take a 30,000 ft. macroeconomic view.
Bitcoin’s greatest strength is that it has many strengths. But this can sometimes make its message confusing. Is it a currency? It is a payment system? Is it an ownership ledger? Is it a commodity? The answer to all of these questions is “maybe.” It really depends on what happens in the future – what people make of it. Similarly, take an ordinary piece of cloth and ask if it is a blanket, a dress, a sack, or a sail. It certainly could be. It could even be all four. But what is it best at being? Nobody knows yet. People have different opinions, but only the future holds the definitive answer.
Possibility 1: Bitcoin begins acting like a currency.
If Bitcoin fulfills its promise as a means of exchange and a store of value, then it can get an adoption boost by merchants who will discount their prices even further than the transaction cost savings because they expect Bitcoin to rise in value.
The advantage of this dynamic is that it doesn’t matter whether fiat currencies are falling, or Bitcoin is rising. All that matters is the differential. As long as Bitcoin undergoes a steady and prolonged increase in value vs. the dollar, euro, yen, etc., it will be immaterial whether these currencies are falling precipitously against goods and services, staying steady, or even increasing in value.
Possibility 2: Global recession pressures slaughter the credit companies’ cash cow.
Depending on your economic world view, you may believe that the world is teetering on the brink of collapse, or in the early stages of a full blown recovery. Regardless of which scenario you find most likely, it always helps to at least acknowledge the historical precedence for sharp corrections in stock markets, bonds markets, and currency markets.
In particular, some worrisome developments are that the largest banks are about 30% bigger than they were before the 2008 recession – creating the possibility of very large systemic risks, debt to GDP ratios have increased in almost every Western nation, and global stock markets are near all time highs at the same time as underemployment figures – indicating a disconnect between valuation and production.
If the world undergoes a new recession, it may very well be a sovereign debt crisis. At the very least, the “good” credit card customer pool will certainly be diminished, perhaps dramatically so. As a result, in the same way that banks slowly eliminated the interest paid on regular bank deposits from 5%+ to almost 0% over the last 15 years, credit card companies will feel the squeeze and see their earnings become more reflective of transaction revenues than revolving debt. Essentially, the rewards programs will vanish, along with the competitive edge that credit cards have over Bitcoin as a means of payment.
Possibility 3: The only way to beat a credit card company is with another credit card company that uses Bitcoin.
Even if the above two scenarios do not pan out – i.e. Bitcoin doesn’t grow into a proper currency and the world chugs along without hyperinflation – there is still the remaining fact that credit card companies are very sensitive to cost, and that using the legacy ACH/SWIFT banking “tubes” generates a lot of unnecessary overhead.
So this brings us back to the transactional efficiency of Bitcoin. If you can’t beat them, join them. A credit card company that properly integrated the Bitcoin payment mechanism into its business could reduce many underlying costs that it currently takes for granted. As a result, it could pass these cost savings on to its customers in the form of even more generous rewards. If you thought that 1% or 2% was a good deal, how would you feel about 7% cash back?
Surprisingly, in this respect it may not be the merchants, nor the consumer who would benefit the most from Bitcoin, but rather the credit card companies that seem so obviously at odds with the world’s favorite fledgling crypto currency. And once one company executes correctly, the others will have to follow suit to keep up.
Conclusion: Whatever its going to be, it’s going to take a while.
Every day brings us closer to figuring out what Bitcoin will grow up to be. But progress takes time, code takes coding, and business takes building. Wherever Bitcoin ends up in 10 years, I’m sure it will surprise us all (hopefully in a good way).