One of the most often cited benefits of crypto is the savings of transaction fees, particularly when compared to wire transfer fees or merchant credit card fees. Merchant accounts like Paypal charge 2.9% + $0.30 per transaction (assuming domestic transaction). Volume merchants can get better rates and even develop their own payment systems to reduce costs further, but let’s assume that most merchants pay 3% to process credit card transactions. The promise of most payment crypto currencies is to reduce transaction costs to mere pennies regardless of the size of transaction and regardless of borders. With this promise, there is much hype that retailers will jump at the chance to accept crypto currencies just to save these fees and boost the bottom line. An often cited example is the profit margin of a super market being 1 to 3%. The suggestion is that if a super market can almost eliminate the credit card merchant fees, they could practically double their profit margin!
In theory, yes. In the real world, probably not.
What crypto enthusiasts overlook is that the merchant fees go toward providing benefits for consumers. These are benefits that consumers relish and are not going to give up for free. Why would a consumer pay for their groceries with crypto when they can use their credit cards and get cash back or airline miles or defer the payment for up to 30 days or finance it? Consumers can carry credit cards which if they lose or if they get compromised, they are not responsible for any charges and incur no losses. Many credit cards also provide additional features like warranties, price protection, and allow for charge backs. Crypto transactions are near-instant and irreversible and come with no frills. If your crypto wallet gets compromised, your funds are gone with no recourse. This is not attractive for a consumer.
So what would it take to get consumers to buy their groceries with crypto?
In a match-up of a 2 grocery stores with identical prices, one takes crypto and the other accepts credit cards, the credit card grocery store is going to win every time. There is no incentive for consumers to use crypto over their plastic. In order for “Crypto Grocery Store” to compete, they will have to offer an incentive to consumers. Such incentive would most likely have to be in the form of lower prices. I’m not convinced that a 3% savings is going to be enough of an incentive to sway a consumer against using their plastic. And if I don’t already have crypto, it could easily cost me 3% to convert my fiat to crypto thus negating any savings. I do see that it is wise for grocery stores to start accepting crypto as an available payment method because (assuming they can hedge or eliminate risk of currency volatility) they will stand to make that extra margin on any crypto customers who appreciate the option, but this will probably be just a small percentage of sales, especially at first. The point is that to encourage crypto use grocery stores would probably end up giving away all or most of the savings achieved by accepting crypto over plastic for a net gain of zero. Additionally, the unbanked population who exclusively deal with cash transactions will be adopting crypto currency as a better alternative to carrying valuable fiat paper, but those customers are currently using cash so there is no gain to be had with that demographic. In the end the only way crypto can really compete in the purchase of groceries or other commodities is if plastic is not an available option. This same argument can likely be applied to non-commodity retail markets as well.
All hope is not lost though. One of the few arenas where crypto payments can really shine is with regular or repeat payments for services and utilities, many of which do not currently accept credit card payments or charge surcharges for use of credit. If we break down the opportunity in the case of electric utilities and the typical transaction, consumers consume a month’s worth of electricity, get billed a week or so later, and then take a few more weeks submit payment. This means retail electric providers (REPs) are financing the production of electricity for 30–60 days (assuming they pay on time)! With automated daily crypto payments, REPs could eliminate the expense (or opportunity cost) of floating about 8–16% of their annual production for their customers! Arizona Public Service (APS) is one of the two primary electric utilities serving the Phoenix area. If most of APS’ $3.7B in revenue is from sales of electric power, and if APS could convert all customers to daily crypto payments, they could potentially free up about $500M in cash. APS’ 2018 year end balance sheet shows Net Receivables of $401M so these figures are probably reasonable. This, my crypto enthusiasts, is the killer app of blockchain! The problem with utilities in regulated markets is that the REP’s have a monopoly on supply so it is doubtful that these savings would end up in consumer’s pockets.
I know this article comes across as a little anti-crypto or anti-blockchain, but I hope it is seen as crypto-realist. We have to be realistic about what crypto offers and what it does not and I feel the crypto community can be a little over-zealous and blind in their aspirations for the technology. Keep in mind that this article is written from the viewpoint of the Western World and some of this might not apply in locations where credit card payments are as prevalent as they are in the US. Just because cryptos-for-groceries might not be a “killer app” in the US, there are probably much better opportunities for this in other countries and regions of the world.
