Discount For Cash - Advantage: Bitcoin
For a merchant, Bitcoin has properties that are advantageous over other payment networks. These advantages make it so that it costs the merchant less to accept payment in Bitcoin than it costs to accept payment using other payment networks.
Some gas stations in the U.S., for instance, are cash or debit card (ATM) only. Others will have signage displaying two separate prices, a cash price that includes a discount, and a higher price for those paying with Visa, Mastercard, American Express, etc.
This is because for every $100 worth of credit card transactions, the merchant gets only an amount in the range of $97. The difference is withheld from the merchant and becomes fees paid to the payment processor.
For customers, this discounted price difference is enough to cause them to patronize the merchant offering the discount. As a result, retailers can use a cheaper payment system to gain an advantage over their competitors.
With Bitcoin, transaction fees are paid by the customer sending payment. This is in contrast to traditional payment systems where fees are subtracted from the amount delivered to the merchant. Because Bitcoin transaction fees are ridiculously low (usually under a penny, regardless of the amount being sent) customers don’t even factor transaction fees in when considering payment alternatives.
Additional savings to the merchant comes from the fact that with Bitcoin, there is no concept of a chargeback.
The BItcoin payment network protocol simply does not support any mechanism that would allow the customer to dispute a payment where the transaction could later be reversed. If the customer is due a refund, then the merchant simply creates a new transaction to return funds to the customer.
For businesses without access to credit or whose cost of capital is expensive, Bitcoin payments have another big advantage — fast settlement.
Bitcoin payments received by a merchant can be used for spending within minutes. Compare this to payment networks where funds don’t settle for several days, or worse — systems like PayPal and Stripe which employ multi-day holds on funds as a fraud prevention measure.
Some of the critique of Bitcoin from economists is based on Gresham’s law. They may argue that if bitcoin is expected to rise in value, a consumer will consider bitcoins to be “good money” and will instead choose to pay with another form of payment. If the cash discount is considered in the equation however, bitcoins become the preferred payment method for the consumer.
Consumers can easily replenish funds in their Bitcoin wallets thanks to the links between banks and bitcoin exchanges. Therefore there is no hesitation in choosing to pay using bitcoin for the short period of time before the funds are replenished.
Merchants who accept bitcoins should be able to offer enough of a discount to make the payment alternative attractive enough for the customer to choose it yet at the same time keep the discount no deeper than necessary causing sales where bitcoins were used to be more profitable than any others.
While there are hundreds of merchants that accept bitcoin payments, few have offered a discount, particularly for those in low margin businesses.
The first merchants to start offering discounts for bitcoin payments are starting to arrive, however.
Tangible Cryptography has begun offering prepaid wireless refills at a discount. With a list of two dozen mobile carriers including T-Mobile, Verizon, AT&T and more (mostly just U.S.-based carriers though, for now) nearly every subscriber for prepaid wireless service can save by paying for the next refill with bitcoins.
Tangible Cryptography is now the second source for prepaid wireless, as BTCBuy.info started offering wireless refills weeks ago, though not at a discount.
Until there is a first wave of merchants successfully converting Bitcoin’s cost difference into market share gains, top tier eCommerce such as Amazon, NewEgg, and eBay will probably not consider accepting bitcoins directly. Fortunately, there are options for these now with SpendBitcoins (Amazon, eBay, Costco, Kroger/Ralphs/etc.) and BTCBuy.info (NewEgg) such that when these e-Code sales volumes rise to sufficient levels the companies might realize there is profit to be made when accepting bitcoins directly.
Other intermediaries such as GiftCoin.net (Starbucks, Quiznos, Chevron, Target and dozens more) are able to charge a premium even for converting bitcoins to cash (prepaid gift cards). To these retailers, that’s money they could be earning themselves if they only took bitcoin as payment directly. It may be just a matter of time before they come to the same conclusion.