Friday, February 20, 2015

Bitcoin vs. Credit Cards

Stripe announced bitcoin support.  There has been much discussion on hacker news about it.  Lots of people are not seeing the benefits of bitcoin over credit cards for individual shoppers. They talk about the fraud protection that credit cards provide them as customers and the 1% or whatever cash back they get on each purchase from the credit card companies that they would be giving up.  I don't think they fully understand the trade-offs here.

First of all, the cash back.  Credit card companies are charging merchants a percentage of each transaction larger than the 1% whatever they are giving you back (how else do they stay in business?).  What people may be forgetting is that retailers are not just eating that percentage cost that the credit cards are charging them.  They are most definitely passing that cost on to all of us consumers in the form of higher prices.  If enough transactions happened with bitcoin that would lower prices for all of us.  Merchants could also offer a cash/bitcoin discount.

Next is the fraud protection.  There are two kinds of fraud protection that the credit card companies provide.  The first kind is if if someone steals my credit card and starts making charges that I didn't authorize.  The credit card companies protect me from the fraudulent charges the thief makes.  Hopefully we all realize that if it weren't for the credit card in the first place this kind of fraud wouldn't be possible.  If Target, for example, hadn't had a bunch of their customers' credit card information stored on their servers when they got hacked their customers wouldn't have needed this kind of protection.

The thing to understand here is that paying with a credit card is a pull operation and paying with bitcoin is a push operation.  To pay a merchant I have to give them my credit card information and they pull money from my card.  Anyone that has that information can pull money from my card, making this kind of fraud easy.  With bitcoin a merchant gives me their bitcoin address and I send (push) bitcoin to them.  I don't have to fork over any sensitive information. The merchant is safe too, by the way, because that bitcoin address they gave me cannot be used to withdraw funds from them, only to give them funds.

Another cost of this kind of fraud protection that I discovered recently is that once it is discovered that someone has stolen your credit card information you lose the use of that credit card until a new one can be issued.  That can take up to two weeks.  Over this last Christmas both of my credit cards were cancelled due to fraud.  I was leaving on a trip soon and didn't have a credit card to take with me.  I really didn't like the idea of carrying a bunch of cash around on a trip instead of a credit card (fortunately I still had a debit card).

The other kind of fraud protection that credit cards provide is chargebacks.  If someone doesn't give me the thing I thought I had paid for with my credit card I can essentially take my money back by asking the credit card company for a chargeback.  You can't do this with bitcoin because it works like cash.  Once the bitcoin leaves your hand (so to speak) you don't have any control over it anymore.  The think to keep in mind again is, this fraud protection does not come for free.  Those fees I already talked about are partly there to pay for this[1].  Now think about it, how often are you required to resort to using a chargeback?  I personally have never needed to.  I have had disputes with merchants where I thought I might need to, but I have always been able to resolve the problem by talking things out with them.  Merchants are very motivated to protect their reputation and their relationship with their customers.  Since this is the case, why are we all paying for the ability to request a chargeback with every transaction?  Could I say to Visa when buying from someone I trust such as Amazon, "hey, I don't want to pay for chargeback protection for this purchase?"  The answer, unfortunately, is no.

I do understand that there will be times when buyers will want or even need chargeback protection.  You could simply use your credit card for times like that, but could we ever get chargeback fraud protection on a purchase made with bitcoin?  I don't personally know of an easy way to do that right now, but escrow services have existed since before credit cards were invented precisely for this reason.  Escrow services could easily work with bitcoin.

I titled this "Bitcoin vs. Credit Cards" but I'm not trying to say that There Can Only Be One.  More options is better.  I see a lot of people dismissing bitcoin out of hand due to misunderstandings about the costs and benefits of bitcoin when compared to other forms of moving money around.  Hopefully this helps clear things up for a few people.

Footnote:

1. Another costly thing about chargebacks is people can use them to defraud merchants. They can ask for a chargeback even when the merchant did deliver the thing they promised.  This is another cost the merchant bears when accepting credit cards.  A cost that, surprise, gets passed back to you as a customer.


4 comments:

Anonymous said...

I maintain that credit cards provide a better model for online payments than bitcoin. The key issue is a matter of trust.

With credit cards, I have to trust my bank to reverse any fraudulent transactions. (Actually, with consumer protection laws, this is not a matter of trust but law, but that's icing on the cake). Having trusted my bank, I can use my credit card with impunity with the luxury of not having to trust anyone else. If something goes wrong, my bank will fix it.

With bitcoin, transactions are irreversible. Therefore, when I pay someone, I have to trust them to hold their end of the bargain. So I need to trust someone every time I make a transaction. Thus, paying with bitcoin requires more trust contrary to their slogans.

Of course, the luxury of the reversal of fraudulent charges comes at a cost to the merchand and hence indirectly to me. However, this is a classic prisoner's dilemma situation. I have a disincentive to change my behavior if others continue to behave as they do.

Bryan said...

Have you read Liars and Outliers by Bruce Schneier?

https://www.schneier.com/book-lo.html

Saying that you only have to trust your bank sounds nice, but the fact is, you (we all) place a lot of trust in those around us all the time. Society wouldn't function without all that trust. Banks and credit card companies couldn't offer you the assurances they do if most businesses were not trustworthy. Of course they have to convince you otherwise so you will continue to pay them for protection :-)

Think about it. Do you really not trust large well known retailers like Amazon? Another way to look at it is, do you trust your bank *more* than you trust Amazon? Couldn't we all save on a lot of costs by admitting that we do trust the Amazons and Neweggs and other reputable online retailers?

Anonymous said...

> Do you trust your bank *more* than you trust Amazon?

Of course I do. I know where they are, I have talked to the people there, and I have used their protection more than once. Furthermore, I know for a fact that they *must* refund me for fraudulent transaction.

With Amazon, who knows what's in their fine print? For me, they are a faceless company. Furthermore, there are lots of retailers on Amazon. Who knows what protections I have when buying from"EZSeller1999"?

Furthermore, the genius of the credit cards is that I *don't* pay. Everyone pays a little (in terms of possibly increased prices). It's like a universal insurance for theft. The theft protection is amortized over everyone.

Bryan said...

"Everyone pays a little (in terms of possibly increased prices)."

It's only possible that prices have increased due to credit cards? I'm also quite surprised to hear that you have personally met the people who will be administering the chargebacks you request. I haven't met anyone personally from Visa or Mastercard.

I guess different personal experiences make for different preferences. I'd just reiterate that I'm not calling for credit cards to be abolished or anything. I would just like the personal choice to use bitcoin instead of a credit card in the case of small transactions or transactions where I trust who I'm dealing with.