19th March 2021
The Case of Disruptive Payment Systems
This week on Fintech Fridays, we look at the progressive disruption of payment systems. The advent of financial technology has opened doors to all forms of alternatives to minted fiat currency and card transactions, with companies such as PayPal, Afterpay, and Square taking mobile payments to new heights. However, we've barely reached the tip of the iceberg, and this iceberg is expanding deeper and deeper. Companies such as Stripe are making a huge scene in the financial payments ecosystem, and with the increasing adoption of cryptocurrencies as a store of value and medium of exchange, even Bitcoin is becoming a lot more agreeable as a means of payment. So, let's dive a little more into all the fuss around the changes in the way we pay.
Stripe: The Top US Fintech Startup
Stripe is a payment processing platform founded in 2010 by two Irish brothers, Patrick and James Collison. This week, the fintech company saw a valuation of $95 billion, making it the most valuable US startup firm to come out of Silicon Valley, the epicenter of technological unicorns and venture capital targets. Though having been estimated of processing just less than a fifth of the online purchases in the entire world, Stripe has enabled itself to add more than $60 billion to its value in under a year. This has been predominantly driven by their role in being a beneficiary of the e-commerce boom that has been accelerated by the coronavirus pandemic. To understand why Stripe has become valued as such, we look to its products.
To process online transactions, online websites will need a payment gateway and a payment processor, which are both integrated into Stripe's services. The payment gateway captures the credit card details of a customer and then transmits the customer's card payment information to the processor, where it runs security and fraud tests before the transaction is processed. Funds are then routed from the customer's bank account to Stripe’s merchant account, where fees are deducted and then processed to the merchant’s actual bank account.
Stripe employs multiple integration options, which also provide merchants flexible invoicing methods. Merchants can choose how their customers pay, whether being through subscriptions, outgoing invoicing, or personal payments. This is one of the main advantages of Stripe's utility as a payment suite, differentiating itself from its competitors such as Paypal, which only supports online payments.
Stripe also simplifies any PCI DSS (Payment Card Industry Data Security Standard) compliance, where it ensures that all companies that process, store, or transmit any credit card information maintain a secure and safe environment, where your business and your customers are protected.
Last Monday, Stripe announced that it has finished its $600 million fundraising initiative, with investors and venture capitalists such as Andreessen Horowitz and Sequoia Capital, saying it will be used to focus on expanding its presence around the world, in countries such as India, Brazil, Thailand, Indonesia, and the UAE. However, while Stripe is continuing to seek ways of growth, it is not focused on an IPO right now. But, they have shared that the next decade and beyond will reap an even more exciting time for the company.
Cryptocurrency as a Payment Medium: Do You Accept Bitcoin?
Can I pay with Bitcoin? Perhaps in the near future, you could be paying for your brand new Tesla vehicle using BTC. Is it totally bizarre that crypto could be used in everyday transactions? Well, today, some ways in which you can use cryptocurrency as a means of payment include renewing your Microsoft subscription, tipping streamers and content creators on Twitch, and making online purchases from merchants on e-commerce websites such as Shopify.
Cryptocurrency payment service providers such as Bitpay are leading the way in making cryptocurrency payments more widely adopted. Cryptocurrency payment service providers process payments for merchants, enabling them to seamlessly accept digital assets such as Bitcoin, Ethereum, Ripple, and other cryptocurrencies from their customers.
From large market-cap tokens to dollar-pegged stablecoins, Bitpay is a longstanding custodian of the cryptocurrency payment service providers
However, given merchants still pay their wages, suppliers and bills with fiat currency, naturally, their prices for goods and services would still be priced in dollar terms. At the checkout, the cryptocurrency payment gateway would automatically convert the order's fiat value into crypto at a real-time exchange rate. The customer would then proceed to transfer the specified cryptocurrency to the merchant using a QR code or wallet address to complete the purchase.
Due to the high volatility of cryptocurrencies, customers are required to pay within a specified timeframe (usually one hour) to limit the risks faced by merchants. After a transaction is completed, the funds are transferred to the merchant’s account where the business may choose to hold, withdraw, or convert the digital assets to fiat currency. Alternatively, merchants could choose to automatically convert crypto-to-fiat, directly eliminating the volatility risks.
Cryptocurrencies are all the hype right now, and many investors view cryptocurrencies as a speculative investment vehicle rather than using it to make transactions like a currency. The price volatility of cryptocurrencies is one of the main deterrents. Spenders might lose out in gains if the price of crypto goes up right after they spend their cryptos, whereas merchants might face losses if the accepted cryptocurrency payment has a sudden price correction. That being said, large corporations and investment funds are starting to take notice of cryptocurrencies and including them on their balance sheets. Perhaps it would not be such a bad idea for businesses to get some exposure to cryptocurrencies too.
The views expressed within this article are those of the authors and do not represent the views of the Finance Student's Association. All images and references in this article are for fair and educational purposes only. The content in this article is not intended as legal, financial or investment advice and should not be construed or relied on as such.