Editor’s Note: This article is part of our Founders Series where we get insights and analysis from founders of various different companies in the tech industry. Craig Vodnik is a co-founder and the vice president of operations at cleverbridge – a global full-service e-commerce provider for more than 300 international software and SaaS corporations like Acronis, Avira, Dell, Malwarebytes and Parallels. He is also the author of “Building Keystones,” a digital e-commerce industry focused blog. You can connect with Vodnik on Twitter, LinkedIn and Google+.
Since consumer e-commerce took off in the late 90’s, merchants have been looking for a solution to the problem of small dollar (micro) transactions. Fees on micro transactions are too great of a percentage of each sale for mainstream merchant adoption, so most attempts at selling products less than $10 have failed to gain mass acceptance. Bitcoin, a product from the geek underworld of the Internet, may be e-commerce’s savior within three years.
Digital product merchants want to sell their products in smaller and smaller chunks. Think about how you used to have to buy a full music album, but now everyone buys just a single song at a time. Software is moving from a buy at the upgrade time to a monthly recurring fee. The average price point for digital goods is dropping, but the costs as a percentage of the sale price continue to increase. For example, credit card fees average 2.5% plus a fixed cost of $0.25. On a $20 transaction, merchants are paying $0.75, which is 3.75% of the sale price. On a similar $1.99 transaction, the same financial model results in a $0.30 cost which is 15% of the sale price. And in the app world, merchants are paying Apple, Google and Microsoft 30% for each app purchase, regardless of the price point. As a business person, you can see why there’s a problem in the market.
Bitcoin is a technological payment solution owned by no organization – in contrast to credit cards owned by financial services organizations or even PayPal owned by eBay. The great thing about Bitcoin is that since no one owns the network, there are very low fees for merchants. Low like on the order of 0.25% to 1.5% without the fixed cost. Therefore, the costs to merchants are much lower when compared to other payment methods. As a result, merchants like Overstock, Tiger Direct and Zynga have announced plans to accept Bitcoin. This is the beginning of a tidal wave of merchants integrating Bitcoin into their e-commerce infrastructure in 2014. However, to see a real market appear, consumers need to see the benefits of using Bitcoin. My belief is that because merchants have been struggling to justify offering products at the micro transaction price point, they will push consumers to use Bitcoin as the solution. PayPal itself rose because of people’s concerns about using their credit cards online when paying for eBay purchases. I see an even broader need driving the Bitcoin trend.
Merchants have something to gain in this process: margin. Merchants may use a model like Discover card whereby the consumer gets cash back for making purchases with Bitcoin to try and incentivize consumers to pay with Bitcoin. Merchants could also throw in freebies that don’t cost them anything, like annual membership in a store discount club, if the consumer uses Bitcoin. In this way, merchants can gain margin, but also gain customers for a complementary product or service.
On the other hand, consumers who use PayPal may experience buying impulses that can be capitalized on with Bitcoin because the money contained in a Bitcoin wallet often is considered a “slush fund” for the consumer. Think about gift cards. If a consumer has a gift card in their wallet, do they view the value on that card the same as cash? Not from the perspective that it’s something that they earned.
Bitcoin has the potential to be one of the biggest innovations in payments in the last 15 years. There are likely many other business cases that Bitcoin will solve in the coming years, such as spam email as Marc Andreesen recently discussed in a New York Times op-ed. Keep your eyes on Bitcoin as 2014 progresses.