Table of Contents
Preface
Transactions are the glue of society. For centuries, we’ve experimented with ways to store wealth and exchange value, constantly pushing to lower costs and speed things up. Today, we can buy almost anything instantly, often with no fees. So, the problem is solved, right?
Payment Cards Hide Their True Cost
You might not notice the difference between paying cash and paying with a card because the true cost of card payments is hidden from customers. Merchants pay a fee for every card transaction they accept, and they pass that cost on to you by raising prices. Between 0.2% and 3.0% of what you spend ends up going to banks and payment processors, not counting the other fees they charge you more directly. In the end, you’re the one paying for it.
Payment Cards Are Surveillance Devices
Privacy matters. It’s no surprise it’s a hot topic, just think about the Facebook‑Cambridge Analytica scandal. People are becoming more aware of their digital footprints and want to control the data that companies, including banks and payment processors, silently collect and analyze. Although people and governments are pushing for more transparency and accountability, it’s still profitable to harvest and sell user data, so most data‑hoarding companies do exactly that.
Granted, data brokers can’t get away with everything. Regulations like the GDPR are helping people protect their privacy. But those rules aren’t universal, and they’re far from perfect. Corporate greed always finds a way to bend the law for profit.
Even well‑meaning companies are a privacy risk: they still have to store data somewhere, and that data will always be a honeypot for hackers.
Payment Cards Add Counterparty Risk
We think of the money in our checking accounts as “ours”, but do we really control it? Technically, the bank takes your money and promises to give it back when you ask. But banks can’t always keep that promise.
Even US banks have collapsed during crises, and the US has the world’s most stable economy. Thinking it can’t happen again is naive. The risk is far worse in many developing countries.
Take Russia. The government guarantees up to $25,000 per person if a bank fails, a ridiculously low amount. Business accounts aren’t protected at all. Keeping cash safe in a bank is practically impossible.
Is There a Better Way to Pay?
I believe these problems can be tackled with a two‑pronged approach:
- Regulations to set clear rules and guardrails.
- Solving trust and privacy at a fundamental level with Bitcoin.
Regulations
Good regulations can drastically cut the cost of payments. One of my favorite examples is TransferWise. Thanks to regulatory shifts, they were able to compete with big banks and dramatically lower the cost of international transfers and currency exchange. We need more of this: making it easier for agile fintech firms to challenge slow, inefficient banks, which will drive down costs and improve convenience for everyone.
We also need rules that stop banks from collecting more data than is strictly necessary for KYC/AML compliance, and ideally force them to delete most historical data after a short period.
Counterparty risk can be reduced with smart regulation, too. Standards like Basel III aim to curb the reckless behavior that can put consumers’ money at risk. These kinds of frameworks are ultimately good for users.
Bitcoin
Bitcoin has gained a lot of traction recently, and its properties are worth a look. It already competes with traditional payment methods on cost in some markets, international transfers, for example, can be cheaper and faster with Bitcoin.
But paying for a cup of coffee with it? Neither easy nor convenient. Trust me, I’ve tried.
What about data privacy? This one’s tricky. Bitcoin transactions are public, which can be even more revealing than a bank statement. The silver lining is that the data isn’t directly tied to your identity, but with enough effort, someone can track your activity on the blockchain. So, yes, Bitcoin still has a way to go on this front.
And counterparty risk? Practically none. That’s Bitcoin’s killer feature today: you don’t have to trust anyone. No one can stop you from using your own money. In a world full of middlemen, that’s a huge step forward for individual control and cutting out counterparty risk.
Lightning Network
Lightning Network is a payment system built on top of Bitcoin, and I believe it has a huge potential for many kinds of payments. Here you can see it in action:
Not too bad, right? There is room for improvement in terms of the interface, and I would like to see it supporting NFC enabled devices in order to simplify the payment process, but the underlying network works, and it works fast. The fees are negligible, and, unlike Bitcoin blockchain transactions, Lightning transactions are anonymous, so you don’t have to worry about the privacy of your payment history.
Conclusion
Although our current payment methods are easy and relatively cheap, there are many issues with the status quo. We need to address them by introducing better regulations and experimenting with alternative payment methods such as Bitcoin and Lightning Network. Reduced transaction costs, increased privacy and reduced counterparty risks will benefit us all, so the progress in those areas seems inevitable.