Payments are building blocks of our society and we started transacting value long before we were able to read or write. The early payment methods were inefficient but we kept improving our technologies and now we have payment cards that allow us to pay for goods and services from any place in the world. Unfortunately, our current payment methods are not flawless but it looks like we'll be able to solve many of their issues pretty soon. So, what's wrong with payment cards in the first place?
Payment Cards are Expensive
You might not notice the difference between paying cash and paying with your card because the cost of card payments is intentionally hidden form the customers. The merchants pay a fee for each card payment they receive and they pass those additional charges onto their customers so anything between 0.2% to 3.0% of all of your purchases actually go to the banks and payment processors, excluding other fees that they charge you more directly.
Payment Cards are Surveillance Devices
Privacy is important and it's a hot issue nowadays, just remember the recent scandal with Facebook. People started to care more about their digital footprints and they want to control the data that many companies, including the banks and payment processors, have been silently collecting and analyzing. People and governments are calling for more transparency and accountability but it's still possible to collect and sell user data to make an extra profit so all of the data companies do that.
Of course, the data aggregating companies can't get away with everything and there are plenty of new regulations such as GDPR that help people to protect their privacy but those regulations are far from perfect and the corporate greed always finds a way to bend the laws in order to maximize profits. Even the well intended companies are dangerous to user privacy because they have to store the data somewhere and that data will always be a honeypot for hackers.
Payment Cards Add Counterparty Risk
We think of our debit accounts as “our” money but do we really control it? Technically your bank just takes your money and promises to return it later but the banks can't always fulfill that promise. Even the US banks went bankrupt in times of crisis and the US economy is the most stable and prosperous economy in the world so it's naive to think that it can't happen again. It's even worse in some developing countries, let's take Russia as an example. The Russian government guarantees to pay up to $25,000 to any individual in the event of a bank collapse but this amount is ridiculously small and those guarantees do not protect business accounts so it's practically impossible to keep your cash safe and secure.
Is There a Better Way to Pay?
I believe that those issues can be eliminated using a two pronged attack:
- Regulating the banks and data companies
- Experimenting with crypto currencies
Regulations can cut the cost of payments dramatically. One of my favorite examples is TransferWise, they dramatically reduced the cost of international payments and currency conversion and they are allowed to compete with big banks because of good regulations. We need to make it easy for small fin-tech companies to compete with large and ineffective banks and it will make our payments cheaper and more convenient.
We also need to build a set of rules that will stop the banks from obtaining more information than absolutely necessary in order to comply with the KYC/AML regulations, possibly even force the banks and payment processors to delete most of the historical data.
The counterparty risks may also be lowered by the proper regulations. Basel III is a good example of the efforts to limit the risks that some reckless banks might be willing to take and such regulations are good for the consumers.
Crypto currencies have gained a lot of traction recently and it's worth taking a look at their properties. They can compete with traditional payment methods in terms of fees, at least in some markets. It's often cheaper and faster to make an international payment with Bitcoin but it's neither easy nor convenient to pay for a cup of coffee with Bitcoin. Trust me, I've tried it!
What about data aggregation? Well, it's controversial. The Bitcoin transactions are open to the public, which is even worse than traditional banking, but the good thing is that data is not directly tied to your identity but, with enough effort, it's possible to track people's activity on blockchain so it definitely has a way to go in solving this issue.
Is there any counterparty risks involved in using crypto currencies? Not really, you don't have to trust anyone. That's the best feature of Bitcoin nowadays: no one can stop you from using your own money and that's a huge step forward in terms of empowering individuals and cutting the counterparty risks.
Lightning Network is a payment system built on top of Bitcoin protocol 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.
Although our current payment methods are easy and relatively cheap, there are many issues with the status quo and we need to address them by introducing better regulations and experimenting with alternative payment systems 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.