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PayPal v Cryptocurrency: Imminent but not present danger

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Charging fees to move money isn't a viable business model in the long run, but it still works today.

PayPal's relationship with digital currencies is running hot and cold. The company is understandably interested in the technology, as are many of its employees. But PayPal's ousted founder recently published a somewhat shallow scree against cryptocurrency on Recode, conflating cryptocurrencies and bitcoin, and dismissing the entire area as a scam. This is the polar opposite of current PayPal CEO Peter Thiel's take on bitcoin, as a kind of one true money.

"Cryptocurrency is best-suited for one use: Criminal activity," said PayPal founder Bill Harris. His sentiments echo that of Visa CFO Vasant Prabhu, who described cryptocurrency as money for crooks. Not unlike anonymous prepaid Visa debit cards, which Visa has successfully lobbied to have exempt from anti-money laundering regulations.

And just like Visa, PayPal has plenty of reasons to see cryptocurrency as business competition, standing to disrupt PayPal's current reign as champion of Internet payments.

A misstep?

It must be that time of year because online retailers are once again bracing for another set of PayPal fee hikes. Now US-based sellers are giving PayPal a flat $0.30 plus 2.9% of the amount earned, while international customers will also have varying fees on their end.

Australian-based buyers will be paying a flat $5.99 for payments to the US, plus a set percentage for the portion of any transaction funded by credit card. The exchange rates are a real killer too, with PayPal charging 3.5% to 4% above market rates for conversions, plus potential additional fees to either the sender or receiver.

These fees make a fairly extreme difference to an online retailer's bottom line, and it's safe to say that plenty of retailers would prefer to use alternatives. This is probably why PayPal terms and conditions require US-based merchants to present PayPal equally to other payment methods, and prohibit sellers from encouraging their customers to use other payment methods over PayPal.

With PayPal potentially charging 10% of a total purchase amount in fees to both parties, or even more depending on the total value of the transaction, cryptocurrency volatility suddenly doesn't seem so bad.

And so despite all the complications and downsides, there are still plenty of online retailers driven to early adoption by the downsides of established payment gateways.

"We've dealt with PayPal, Stripe and Amazon Payments for years. If you've spent time with those payment gateways, I'm sure you'll understand our motivation [for accepting cryptocurrency]," said one seller. "It's a no-brainer."

How PayPal does it

The main advantage of cryptocurrencies is that they can be an extremely effective payment system.

Even bitcoin, which is the slowest and highest-fee cryptocurrency by a very large margin is cheaper than international PayPal transfers. Bitcoin's average transaction fees are currently about US$4, but Ripple XRP transaction fees average under $0.005, less than half a cent. A handful of the more technically complex coins, such as Nano, are even able to perform near-instant zero fee transactions.

Yet, even as disruptors are emerging, PayPal is going the opposite direction and raising fees.

"Paypal is moving in exactly the wrong direction with its recent fee hike for payments sent from the US to most countries," reckons Eiland Glover, CEO of the Kowala digital currency project.

PayPal's latest fee hikes might simply be because it can. It's relatively safe for it to disproportionately shift the fee burden onto sellers, because there's enough demand for PayPal from buyers. It might take a huge bite out of their bottom line, but for many sellers, it's better than nothing. There's a reason PayPal insists that sellers present it equally to other payment methods. Glover also cites PayPal's slick design, stability and infrastructure as the keys to its success.

"Even though bitcoin proponents point out that Bitcoin transaction fees are currently lower than those on PayPal, there are still many reasons that PayPal is able to extract higher fees from the pockets of its patrons," he says. "PayPal offers a relatively clean user experience, connects to customers' bank accounts, features non-volatile currencies (fiat), allows users to price their transactions in the appropriate national currency, provides guarantees in case anything should go wrong with the transaction, and boasts deals with thousands of merchants where users can spend their money while remaining in the Paypal ecosystem. Bitcoin simply lacks the stability and other benefits of PayPal transactions."

The tipping point

PayPal's ability to keep raising fees, with little concern over losing business, highlights the strong position given by its competitive advantages, as well as the necessary steps for a digital currency to become a more widely effective and widely accepted payment system.

The benefits PayPal enjoys, like a clean interface and wide merchant network, have so far escaped cryptocurrency. And it certainly doesn't help that bitcoin is the most widely accepted but least transferable coin. Despite that, developments in wallet design and cryptocurrency payment systems are moving quickly and becoming more widely available.

Volatility and user confidence are tougher problems to solve, but professionally-backed stablecoins, such as Kowala and others, are also developing quickly.

"We are on the verge of a major pendulum swing in the direction of cryptocurrencies," Glover predicts. "Soon, price-stabilised cryptocurrencies will be available on lightning-fast networks featuring minuscule fees, more personal control over one's money, intuitive methods for recovering passwords, and user interfaces that meet or exceed the intuitiveness of PayPal, Venmo, and other dominant platforms."

PayPal's recent fee increase might be a misstep that prompts quicker uptake of competitors. It highlights PayPal's strong position in the current world of money transfers, but also its long-term weakness.

In the long run charging fees for transferring money simply isn't a viable business model. Negligible-fee global transfers are already possible, and people will keep pushing towards its wide adoption until it happens. The cat's out of the bag, and for the foreseeable future people will always have the option of sending money directly to the recipient with near-nonexistent fees. The sheer usefulness of the technology, and its rapid ongoing developments, makes further uptake inevitable.

In the future, PayPal will need to start offering much, much more to justify its current costs. But perhaps it already knows this, and has made peace with it. Maybe the ongoing fee hikes are an effort to extract as much money as possible before the paid money transfer business is stowed away with all the other industries that new technology has made obsolete. Until then, remember to budget for the fees. They can be expensive if you're not careful.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, NANO

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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