Ecommerce and how cryptocurrency can be the solution

There is no doubt that the rapid growth of e-commerce has revolutionized how we buy and sell goods and services; Amazon.com is the second largest company (by market value) in the world, while Alibaba is the sixth[1]. However, there remains several challenges facing the e-commerce industry which, we suggest, may be solved by the adoption of certain cryptocurrencies.

Customer Privacy Fears

In a 2011 article, it was noted that “Consumer fears concerning online privacy and security risks can cripple the growth of e-commerce”[2]. In a series of customer surveys over a number of years privacy emerged as a major factor in the use of online shopping platforms.

It is apparent that privacy concerns are a big problem for the e-commerce sector, but privacy is a mechanism that is built into many cryptocurrencies. While cryptocurrencies with public ledgers, such as Bitcoin, provide a level of anonymity, currencies such as Safex Cash are founded on the principle of ensuring user privacy.

Using technologies such as “stealth addresses” and “Ring Confidential Transactions” individual transactions on the Safex Cash network are unable to be tracked. Such an implementation is ideal for purchasing goods and services online where privacy is a chief concern, since the payment can be made safely, securely, and privately. So-called “privacy coins” will allow customers to purchase online with peace of mind.

Reaching the “unbanked”

As noted in a recent academic report[12], over 2 billion people live outside the formal financial sector. This “unbanked’ population represents an opportunity for e-commerce platforms to greatly expand their customer base, if only they could access a way to purchase.

In the previously referenced report is noted that “Emerging markets currently represent 75 percent of the world’s 4.8 billion mobile subscribers”, so while many people in these regions cannot access traditional banking services, they are able to access mobile wallets for various cryptocurrencies.

The report notes that  “Bitcoin has a theoretical potential to profoundly transform the ways people transfer and use money, and associate with each other and broader social institutions”, and I would argue that cryptocurrency in general has the theoretical potential to integrate the unbanked into the e-commerce sector, allowing them to shop and sell online as never before.

Scam Reviews

Customer reviews are a big deal in e-commerce, and they are also a big problem. In 2013, Yelp.com found that between 20 – 25% of its reviews were suspicious[13]. Amazon has even taken the aggressive step of suing more than 1100 creators of fake reviews[14], such is the importance of the review system to its business.

Market research has found that:

This process of leaving scam reviews to harm the reputation of a competitor (or to raise the reputation of self) is termed a Sybil attack and is a common problem on e-commerce marketplaces.

The simple reality for e-commerce vendors is that a competitor can very cheaply and very simply leave bad reviews of a store or product, usually without even having to purchase the product in the first place. This massive issue for online sellers has no simple solutions, yet steps are being taken on the upcoming Safex marketplace to reduce the number of scam reviews. More on this in part 3 of this article.

Cost of “chargeback”

As defined by Investopedia.com, a charge back “is a charge that is returned to a payment card after a customer successfully disputes an item on his account transactions report”[19].

In 2016 alone, $6.7 billion USD worth of revenue was lost to chargebacks in the e-commerce industry alone[20], and that number is expected to grow to a massive $31 billion by the year 2020[21]. Although online stores are able to dispute chargebacks, win rates are generally less than 50%[22].

In a recent survey, 23% of stores had a chargeback rate of 1% or more (i.e. at least 1 in every 100 transactions resulted in a chargeback)[23]. Clearly chargebacks are dramatically influencing how online sellers operate. In order to cover these costs sellers must increase the price of other goods and services, leading to higher prices for the consumer.

However, with cryptocurrency payments it is not possible to reverse a payment once it has been confirmed[24]. This feature of payments with cryptocurrency greatly reduces the risk of fraudulent activity at the expense of the retailer[25], reducing costs and improving profit margins. When combined with an escrow and arbitration service, cryptocurrency is the complete solution to protect merchants against chargeback fraud.

Cost of transactions

One of the main advantages of payment via cryptocurrency is fast and low fee processing. A Credit Suisse report concluded that blockchain and digital (crypto) currency had an “immense potential… to improve efficiency and reduce friction across a broad range of private and public sector administrative processes”, and that there is potential to “remove significant layers of cost from the current ‘byzantine’ UK payments architecture… [which] could deliver significant cost savings for BPO [business process outsourcing] operators”.

Transaction fees are a significant cost to both consumer and retailer. As of 2014, “55 percent of American small businesses do not accept credit cards” due to high transaction fees[26], while around 3 million businesses in the UK do not accept payment by card[27].

When purchasing using a credit card, both the merchant and customer pay a fee ranging from ~1 – 3%for the customer[28], and 2.5 – 4.5% for merchants[29].

Fees are even higher when paying remittances internationally, with 8-9% common using traditional means[30]. In a recent experiment, the cost of sending £1000 GPB within the Euro zone cost between £4 and £45 GBP, while sending £10,000 GBP cost between £50 and £397 GBP[31].

A 2015 study identified “transaction costs as an important demand side factor motivating the use of crypto-currencies[32]. Indeed, the average cost of a Bitcoin transaction has been found to be close to 1%[33], a significant reduction in transaction cost, particularly for international transfers.

Cryptocurrency is a viable and proven solution to inefficient payment transaction[34]. There is an immense potential to reduce payment fees from the 2 – 5% range to below 1% using cryptocurrencies. As noted by Jim Bursch of Dash (a popular cryptocurrency) “If you have a problem like high transaction fees or capital controls or poor banking services or poor privacy protection, then cryptocurrencies will be a solution to consider”[35].

Cost of selling on popular marketplace platforms

One of the largest costs for an online seller is the platform fees that are charged by the large e-commerce websites such as Amazon and AliExpress. Generally, there are three fees associated with selling on a popular marketplace; a subscription fee, a listing fee, and a percentage fee of the item sale price. Some platforms charge all three of the mentioned fees, while others charge a single fee.

Below are four tables which list the fees for some e-commerce, freelancing, sharing economy, and mobile app marketplaces. Often the fee is variable depending on the category of item being sold. It is apparent that fees can equate to a large portion of the sale cost. If we calculate the total cost of chargebacks, transaction fees, platform fees and tax then the merchant can often be left with high expenses which leads to them needing to charge higher fees to cover costs.

What is needed is a low fee platform where people can buy and sell. In the part 3 I will explain how Safex can keep platform fees to ~5%.

The sum of all costs

Given a potential charge back rate of 1%, average transaction fees of ~4%, and taking the 15% average platform fee on Amazon, an online store is faced with costs on the order of 20%. However, in the next section we explain how with the Safex marketplace, those costs could be reduced to around 6%, leading to around 14% decrease in costs.

Problems with cryptocurrencies

One key issue with cryptocurrency payments is market volatility[36]. Price fluctuations in the value of a cryptocurrency which is being used for payment can lead to net losses (or conversely, net gains) for e-commerce merchants[37].

Partly, this issue is caused by speculators, pump and dump groups, and the design of the emission of the cryptocurrency. The emission of most cryptos are not designed based on sound economic theory, and the net result is that most coins end up being owned by very few people.

For the case of Bitcoin, ~96% of all Bitcoins are stored in only 3.28% of addresses[38]. ~96% of all Dash coins are owned by 4.23% of addresses[39]. While for Litecoin ~97% of the currency is held by 9.77% of addresses[40].

Centralization of a currency is a big issue in the crypto industry. However, in part 3 I will explain how Safex Cash plan to tackle this issue using cutting edge economic models.

The good news is that many businesses have already started to integrate cryptocurrency as a form of payment. They report that accepting crypto has improved customer convenience and service[41], that it is generally easy to start to accept cryptocurrency[42], and that it can even be as easy as taking a credit card for payment[43].

Cryptocurrency experts “recommend e-commerce companies who are interested in innovation to explore taking cryptocurrencies as a form of payment”[44].

The future of payments is cryptocurrency.