The EMV Trigger for Mainstream Merchant Adoption of Bitcoin

Warning: Speculative futurology alert (aka trying to see where the puck is headed).

The most important metric for bitcoin is merchant adoption.

If mainstream merchants accept bitcoin, it will thrive. If not, anybody owning bitcoin will need to first transfer bitcoin into Fiat currency and the regulatory off ramp problem will kill it as an alternative currency. Without mainstream merchant acceptance, bitcoin the currency will live on only in the shadow economy and become a footnote in history. Forget the headlines about bitcoin price fluctuations or the latest VC deal; these are “noise on the line” compared to merchant acceptance.

Merchant adoption is going through 4 phases:

Phase 1. Illegal online transactions (made famous by Silk Road). This got some media attention and confirms the old saying that, “there is no such thing as bad press”. In Phase 1, both merchants and consumers are niche and illegal.

Phase 2. Attracting rich Bitcorati for legal products. The merchant logic here is very simple. If a rich person wants to pay me in some unusual currency, I am motivated to accept that currency. Enough people got rich speculating in bitcoin or mining bitcoin in the early days for this to be a real niche market. These Bitcorati are bitcoin enthusiasts, so if they see two objects that they desire equally and one says “we accept bitcoin” then that rich Bitcorati will choose the merchant who accepts bitcoin. This is fundamentally different from phase 1 because a) it is legal and b) we are starting to see merchant success stories akin to the merchants who were early adopters on the Internet. In Phase 2, both merchants and consumers are niche – but at least now both merchants and consumers are legal.

Phase 3. Micro-multinational e-merchants. Big businesses already have the systems to do business globally. Small businesses don’t have very good solutions that are a) easy to implement b) inexpensive. Getting international payments via credit cards is easy but expensive; you pay a lot for the currency transfer back to your home currency. You could accept payment in foreign currencies but that gets complex. First, you have to decide which foreign currencies to offer and Murphy’s Law says that the one currency that you omitted is the one that your ideal customer wants to use (an American merchant may enable EUR and GBP and miss the Swiss customer who really wanted that high margin upmarket product as long as she can pay in CHF). Then you will have the hassle of getting your bank to accept multiple deposits in foreign currencies and when they do that you will find that you lose a lot when your bank converts it back to your home currency. The mainstream customer has no interest in Bitcoin. For this to work, Bitcoin has to become invisible to the consumer (like TCP/IP is invisible to consumers). This phase requires some work, but it is entirely feasible and does not require any infrastructure change (which is what the next phase is about) and there are already ventures actively offering this. In Phase 3, merchants are niche but consumers are mainstream.

Phase 4. Mainstream merchants and mainstream consumers. This is when bitcoin becomes just another option alongside cash and Cards in physical shops.

To look at how bitcoin could cross the chasm from early adopters (Bitcorati and Micro-multinationals) to a universal payment option, we need to move into some speculative futurology and understand the switchover to EMV Chip cards in America. This switchover happened in Europe before merchants had any interest in bitcoin, but will be happening in America just as the bitcoin story gets more mainstream attention.

This will also be happening at the same time as Apple Pay accustoms consumers to paying via a tap on their phone.

In Europe, consumers need to dip their cards into the card readers (which “reads” the chip). There are places that accept NFC, but it is not everywhere.

This FAQ for merchants and consumers about the switchover has this to say about NFC:

“3. Is card dipping the only option?

Not necessarily. EMV cards can also support contactless card reading, also known as near field communication.

Instead of dipping or swiping, NFC-equipped cards are tapped against a terminal scanner that can pick up the card data from the embedded computer chip.

“Contactless transactions are more consumer-friendly because you just have to tap,” Ferenczi says. “Around the world, there is a move to make EMV cards dual-interface, which means contact and contactless. However, in the U.S., most financial instructions are issuing contact cards.”

Dual-interface cards and the equipment needed to scan them are expensive. Right now, the first step is to successfully integrate EMV cards into the U.S. shopping scene. Dual interface will arrive later, according to Ferenczi.”

 

So, a consumer with mobile phone with NFC holding bitcoin could just tap and pay in bitcoin. The merchant could use something like Bitpay or Coinbase to convert the bitcoin immediately to their local currency, so that the merchant does not take bitcoin price volatility risk.

The switchover to EMV Chip cards will happen in America for the simple reason that merchants will become liable for fraud from October 2015. Magnetic stripe cards are terribly insecure, particularly if merchants don’t even check the signature.

When the POS terminal vendor comes calling about the dreaded switchover, a few merchants will ask them:

“can I accept Bitcoin with this new POS device?”

It is a logical question. Merchants don’t know if bitcoin will take off, but they would feel annoyed their neighboring store was taking orders from their bitcoin-enabled POS terminal while they were stuck in the past. Merchants will love a bitcoin carrying customer like they love a cash customer – no fees and no charge-backs.

All the merchant would be asking is an option to take bitcoin. If they are going to deal with the hassle of the switchover, why not ask the question?

So it is likely that some POS terminal vendors will add bitcoin to their functional checklist. If this happens we will cross the chasm, go past the tipping point or whatever other analogy we use for bitcoin changing the world.

There is a lot of money at stake in this switchover and the established payment companies will be torn between lowering their fees in response to the bitcoin threat, fighting it at the regulatory level or co-opting bitcoin and making it part of their core offering – or some mix of all of those.