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How Bitcoin Cuts Down On Payment Fees

One of the big reasons why merchants are pushed towards accepting Bitcoin for payments (other crypto currencies are looped in this as well since they are all essentially the same) is because they have lower fees (in the case of merchants, there are no fees for accepting Bitcoin transactions). When credit cards are charging some hefty fees, these can add up over time. When you are running a large business, the savings by accepting crypto currencies instead of credit cards are substantial. But why is this? What makes credit cards so expensive to accept in the first place? Is that really a necessity? Well, you might be amazed to find that there is a lot more to it than just them wanting to earn more money. Sure, they are profitable (or they would cease to exist), but understanding the big picture is important too.

Employees

The first and most obvious thing that a credit card company's funds go to is the hiring of their employees. Bitcoin and other currencies are run by volunteer developers, meaning that the cost is minimal. Developing new features is done by crowd sourcing ideas and updates and fixes to the code, so instead of needing to hire a lot of programmers, Bitcoin just asks for help and it is done. Pretty simple.

Credit card companies need tons of employees. They need support to answer phones, they need people that can evaluate purchases to ensure that they should go through, they need people to help deal with stolen and lost credit cards, they need janitors, and people to fill in tons of other jobs. Without all of these employees, the credit card company simply goes under. There really is no alternative. These costs are there and they are unavoidable. So they have to get their money from somewhere, right? Well, that is part of what the transaction fees go to.

We can compare this to Bitcoin by saying that Bitcoin is a trusted, autonomous network. Once a payment is sent, we let the code itself handle the rest. We do not need to worry about any infrastructure anymore or anything; simply set it and forget it. Nobody needs to watch each transfer to see if it is real and is legal, since the software itself will handle that with its verification of blocks. When it really comes down to it, sending payments through the Bitcoin and other related networks is just easy. As such, the cost is minimal. If we were to have a centralized system that had to handle all of this, you can be positive that the cost of transacting would be large. The only reason that it is as low as it is, even though it is autonomous, is because everything that is done is handled by a massive slew of computers. We are all essentially sharing in the costs of dealing with the transactions.

Regulation

Our government has a lot of regulations that businesses have to follow, and credit card companies are no different. This involves a lot of research in to where funds are coming from, where they are coming from, and likely many things that we as the general public are not even aware of. So why does this part matter? Because each of these rules and regulations comes along with its very own costs. For example, having to pay certain fees to the government to keep a money transmitting business open. This money has to come from somewhere, and where else can they get the money other than to have us pay for it? An easier way to understand this is to realize that there are many fees that the credit companies are required to pay and while the funds are going through them, they are coming from us. So it is really us, as the customers, who are paying for these different things.

Bitcoin avoids all of this regulation by allowing people to send Bitcoins from one person to another without having to deal with any third party. It is really a lot like cash; if I want to hand you $1500, I can do it without having to go around telling everyone that I am handing you that money, and with no guidelines I have to follow in order to do it. Bitcoins work exactly the same; as long as we are dealing only in the crypto currencies, we can trade them from one person to another without having to get anyone else involved. If we start to get fiat involved things do change, but as long as we are avoiding that there are no problems. So compared to the high cost that credit card companies are paying, us as Bitcoin users are paying absolutely nothing.

Lines of Credit and Losses

When we are transacting with Bitcoins and other crypto currencies, we do so from our wallets. These wallets are again just like cash; if I have $500, I can spend up to $500. If I decide that I want to spend more than this, I need to add more money to my wallet. It is pretty simple like that; if I do not have it, there is no way to spend it. This also means that there is no risk to anyone when I am spending the money or transferring it. They know that anything I send I actually have and they do not need to consult with a third party to accept it.

Credit card companies, on the other hand, get a lot of money by allowing people to borrow. The amount one can borrow is dependent upon their credit limit, which lets them spend above and beyond their current means. I may only have $10 today, but I could still spend $5000 on something if I wanted. And then instead of owing the store that money, I would owe it to the credit card company. In turn, the credit card company would pay the merchant and we would be good to go.

There are some people that are attempting to implement similar systems in Bitcoin, but I just do not see them working when it comes to the current economics behind the currency. The price of Bitcoins is very volatile right now and so if you borrowed some money today, tomorrow that amount could increase or decrease depending on the market. Attempting to create a system that normalizes these amounts so that people can borrow money like a credit card could be detrimental. Either the borrowers are going to end up with problems finding enough money to pay back what they borrowed or the lenders are going to end up losing money by having people pay back less than was borrowed. In either case, one party is going to lose depending on if the price goes up or down. Until problems like this are resolved and we can know from day to day what our Bitcoin is going to be worth, there is just no way to handle the situation in a fair manner.

Being For Profit

Bitcoin is a completely non profit system. There is nobody that created it that is earning money by keeping it going, other than those who were early adopters (and in this case they are just earning based on what they made on their own, anyways, not constant income as a result of keeping the system up and running). We are all part of the business, so to speak, and we all share in its effects (with the prices going up or down). So it can be equated to a true non profit organization, where nobody is really profiting from the system itself; just by the work that they are doing. And the Bitcoin network itself has absolutely no value. It is the coins that contain value, and their value is only there because we, as miners and traders, gave them that value.

Credit card companies have to be for profit businesses. For example, if you look at Visa, you know that they are for profit. Therefore, their bottom line has to deal with them earning more money than they are putting out, and generally also consists of pulling in more profit this year or this month than the previous. As this happens, the value of the company continues to rise and those who own stock in it are also gaining value. This is the point of a business; if I was not going to be making money by risking everything I have, I would not do it. It is only when I run in to a situation where I feel that my money is going to come back to me with more money that I deem a business idea as being worth pursuing.

In the credit card vs Bitcoin way, this means that even if there were no other fees that the credit card processors had to pay, they would still be adding new costs so that they can make more money. On the other hand, the only costs involved with Bitcoin are those that we, as the community, create. And when it comes to this, the only fees we have added are the miner fees, and those are only there because there has to be some incentive for miners to continue running. While it will be a long time before there are no more coins being mined, the theory is that the miner fees themselves will help keep the network alive and healthy. Whether this is what is going to happen or not is anyone's guess at this point. And sadly most of us will never see the day when this does end, since it is expected to be over a hundred years from now.

Other Free Benefits

Most credit card companies offer benefits that go above and beyond allowing you to use your cards for purchases. They may offer free discounts at different stores or concierge service. Some even offer up different warranties for items you purchase, and other types of guarantees. Each of these extra services costs the company some money, and they have to get it from somewhere so it comes from us as their customers. While we love to see what we are getting for “free,” the simple truth is that none of it is free and in some way or another we are paying for it. If the credit card company can not get it for free and they are giving it away, they would be run out of business. So it makes sense that we are paying for it.

Bitcoin, on the other hand, has no added benefits. If it does ever come up with new benefits, it will be due to a consensus of its users, and the cost will be spread out among all of us. While it may not lead to a cost that is translated in to a fiat value, it could be something like electricity or something. To better understand how it would work, take a look at the Proof of Work model. We package up some transactions in to a block. After this, the different coin holders work to verify that the transactions are legitimate. While this does not cost us money in the traditional sense, it does use electricity. This electricity costs money, so this in essence costs us.

A big difference between the Bitcoin protocol and the credit card companies and what they offer is that we decide what we do with Bitcoin. The credit card companies make their own decisions and they are not related to what the customers necessarily want. With Bitcoin, if we do not want changes we can keep them from happening. This is one of the best protection aspects of the Bitcoin protocol; to make big changes that would affect us, we pretty much have to agree and work together to make the changes work out. We generally use the 51% rule for this, saying that if 51% of the miners agree to a change then theoretically we can make it go through. It is also somewhat related to the attack (where 51% of the miners can affect the network in more negative ways as well), but at this point the network is so secure with hash rate that it would be very hard for anyone to get that much power going, and so it is a very minimal risk, if one at all.

Charge Backs

Charge backs cost credit card companies a lot of money. When one is filed by a buyer, the company has to start doing some research in to whether or not it was justified and then try to determine what to do about the situation. To get someone to deal with all of this research and paperwork costs money, which again, we have to pay. This is partially passed back off to the merchant that has the charge back against them, being that there are major fees for them, but when a merchant wins a charge back it is everyone else who has to pay for it. And the worst part about this? People do charge backs all the time, whether their reason was warranted or not. For whatever reason, people would rather try and destroy a business than to explain their problem and attempt to work things out. All too often people jump straight in to the charge backs, and it boosts the fees we all pay as a result. Sadly, though, even while knowing about this there is nothing we can do to keep it from happening.

Bitcoin and other crypto currencies have no method of charge backs, nor any forced returns of funds. If someone wants to send your money back to you, they have to do it by crafting a new transaction of the same amount and then send that off. There is no refund system built in to the protocol. There are some coins that are attempting to resolve this problem and allow reversible transactions, but it is unclear how that would work. Even with credit card charges that are disputed, we deal with third parties. But who would be the third party when it comes to Bitcoin? Really, we all are. I just do not see any way that it could work out and still be fair to everyone on both sides.

Conclusion

There are multiple reasons why we pay so much money in fees when we decide to use credit cards. Some of them are because the processor themselves need to recoup funds, and others are solely due to their for profit nature. As long as these things still exist, there will always be fees, and those fees need to be paid by someone, which just happens to be the rest of us.

Bitcoin cuts down on almost all of that by removing the overhead, removing the employees, and spreading out the rest of the costs among everyone at the lowest rate possible. It is small, efficient and does what it should. Without all of the bloating we experience elsewhere. But at the same time, it has the issue in that there is no real mediation process. Aside from using an escrow for protection on purchases or sales, there is no secure way to send money out without risking the occurrence of a scam.

Luckily, even though Bitcoin is still pretty young, I think that if people come up with great ideas on how to further optimize the Bitcoin protocol we can make some great changes. We just have to be extremely careful to ensure that we are not alienating anyone with the new changes and that everyone can agree in one way or another to what we want to alter. Without this happening, no hard forks will be successful and we will get nowhere.

Bitcoin


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