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Roboblog

Forget anonymity, realize what your real problem is

April 2013

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U: Why do you offer so huge discount only for customers paying with Bitcoin? I don't need my payment to be anonymous and I prefer to use credit card.

SKrobot: Anonymity is not the most important benefit of paying with Bitcoin. It is a nice addition but there is a more measurable advantage of Bitcoin payment - we don't have to pay processing fees.

U: That's OK, but I guess the processing fee is only a small percent of the payment and it is your cost so why should I care?

SKrobot: You are wrong about two things. For small merchants credit card online payment processing cost is often bigger than 20% of the gross price. Secondly this money must come from somewhere and it's ultimately the customer who pays that processing fee.

U: Why is the fee so high and where does this money go?

SKrobot: Common knowledge is that the fee splits:

In reality both positions represent the fee to Banks for "handling the payment". The real cost of fraud is represented by the product loss by merchant. Let me illustrate this point:

Consider three entities: Merchant, Banks and Fraudster. Fraud happens when Fraudster is using a stolen credit card to order goods from Merchant. Although payments go through Banks, for fraud cost calculations Banks are out of the equation. Fraudster is getting the goods and Merchant is losing them. This represents the cost of fraud to Merchant. It means that the entire processing fee goes to Banks to cover their expenses. Additionally Merchant is penalized by Banks with ~ $15 chargeback fee for every transaction originating from the stolen card number.

U: I agree that it's outrageous and I'm worried that the money I pay to you are being eaten by Banks. But I also think it's OK that online merchants are incentivized to be careful and not to be too greedy in charging customers. Certainly merchants can avoid fraudulent transactions by being cautious in accepting payments.

SKrobot: Merchants are motivated to keep the fraud rate low but in most cases they have no influence on the sequence of events. Often even if the purchase is legitimate and authorized by the customer, the merchant is penalized for the fraud which happened somewhere else. For example:

Eibhleann (yes, it's a real Irish name) is buying a PlayStation game on Monday. On the same day the Sony PlayStation database gets compromised and customer data gets leaked including credit card details. On Tuesday fraudulent transactions authorized by Eibhleann's stolen card number appear on her account but she is not aware of it and on Wednesday she is buying a lot of other things including SecurityKISS VPN service subscription. After a few days she checks her statement and realizes that something is wrong. She calls her Bank explaining that starting from Tuesday there are purchases on her account that she didn't authorize. The Bank is reverting all transactions starting from Tuesday and is issueing chargeback requests to the system. Banks have no incentive to analyze every transaction individually because they receive part of the chargeback fee paid by merchants who were unfortunate enough to have Eibhleann as a customer.

U: If the transaction is legitimate can't you contact your Bank to review it or to submit the complaint?

SKrobot: Small merchants are helpless when dealing with big financial institutions. Usually contacting merchant Banks to review individual transaction is a waste of time because their customer support is designed to consume supplicant time, patience and energy. It is an unfair battle: The Bank's low paid support staff against the underresourced merchant whose time can be better spent on building products and providing value to society. It's often more rational choice to keep developing products instead of fighthing for every stolen payment where outcome is uncertain and the process is exhausting small business resources.

U: So where is the problem with "normal" payments? I like using my credit cards and they seem to work well. What can Bitcoin add to it?

SKrobot: Bitcoin works in the way, most people think other payment methods work. Bitcoin is simple. Customer pays and merchant receives the payment.

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