But they’re huge multinational enterprises. What about a typical Kiwi business? Currently only 2% of Kiwis use cryptocurrency to shop online, but it’s on the rise (Payments NZ Consumer Study 2020).
Today we’ll discuss what cryptocurrency is, the pros and cons of accepting crypto as a payment type, and whether it’s worth it for your e-commerce store.
What is cryptocurrency?
Cryptocurrency is a type of investment asset (a crypto asset). It uses encryption technology, also known as blockchain, to control the amount of currency issued and to record ownership and payments. There are over 14,500 different cryptocurrencies publicly traded, including popular ones like Bitcoin, Ethereum, Binance Coin, and Tether to name a few.
It is a form of payment that can be exchanged online for goods and services. However, in most countries, cryptos are not legal tender and do not physically exist. As highlighted by the Financial Markets Authority, cryptocurrencies are not viewed as financial products and so aren’t regulated in New Zealand.
How does cryptocurrency work?
When you purchase cryptocurrency, it’s held in a digital wallet. Cryptocurrency trading platforms allow you to buy and sell cryptocurrency like any other traded asset, and convert it back into New Zealand dollars – if there’s a buyer.
In this way, the value of cryptocurrencies changes over time, ebbing with demand and supply.
Cryptocurrency for e-commerce
How e-commerce stores accept cryptocurrency
To begin with, you need to understand how to accept cryptocurrency payments as a business.
One method is to accept payments through a personal digital wallet – an online app that can hold your currency, which is stored on a computer, smartphone or hard drive. Some businesses have two digital wallets, one for operational accounts and one that’s used to store the cryptocurrencies.
Alternatively, you can accept payments through third-party processors. This method works well if you’re using cryptocurrency to facilitate payments and aren’t introducing it on the balance sheet. This is typically the fastest and easiest way to start using cryptoassets.
A growing number of e-commerce platforms such as Shopify, Magento, WooCommerce and BigCommerce are beginning to integrate with third-party services like BitPay to accept cryptocurrencies.
Pros of cryptocurrency payments for an e-commerce store
- Offer a potentially more valuable payment option
Online shoppers are no strangers to digital payment types and Kiwi buyers tend to want a variety of options, so allowing cryptocurrency payments becomes another payment option.
More importantly, though, accepting cryptocurrency may be a good way to attract a new target market. A recent study showed 40% of customers that pay with crypto were new to the merchant, and they purchased twice that of credit card users (Forrester).
- Minimise transactions fees
Every time a customer uses a credit card or debit card to make a payment, you have to pay a merchant service fee to your bank. Then there’s payment app charges, transaction fees, and potentially more costs depending on the service provider.
Due to its lack of a central intermediary, cryptocurrency transactions don’t typically incur high transaction fees. But keep in mind that if you convert cryptocurrency into a fiat currency, like New Zealand dollars, you will incur a conversion fee.
- Fast transactions
No more waiting for funds to become available in your bank account.
Cryptocurrency doesn’t go through an intermediary before it’s credited to your wallet, unlike credit card payments. It’s processed in real-time, meaning the funds are instantly available in your digital wallet. This is a bonus for merchants who sell to international customers, as cryptocurrencies can make international transactions faster.
- Reduce fraud and chargebacks
Refund fraud is a big risk for e-commerce businesses, and crypto assets could help here.
The nature of cryptocurrency means that payments cannot be reversed or incur chargebacks. Payments from customers go from their wallet straight into yours so it’s harder to lose money due to illegible refunds, theft and scams.
- Learn more: “Refund fraud is on the rise” (Westpac)
Cons of cryptocurrency payments for an e-commerce store
- Cryptocurrency is volatile
Price volatility is one of the major arguments against cryptocurrency. Unlike fiat currency where the value of a dollar typically remains the same overnight, the value of each cryptocurrency can fluctuate drastically.
- For instance: On 30 April, 2021, one bitcoin was worth NZ$80,779 but one month later, it dropped to $47,695.
This volatility poses a challenge for processes like refunds or repayments – if a product was sold for 1 bitcoin and the value has since gone up, should the merchant refund the buyer the new value or the value at the time it was purchased? The cryptoasset community still isn’t in agreement.
- Lack of regulation
Since there is no central authority governing cryptos, no one can guarantee its minimum valuation. If you are going to accept cryptocurrency as payment, you’ll need to keep on top of the market.
- Tax implications
The IRD treats cryptoassets as a form of property, for tax purposes. So, existing tax rules apply to cryptoasset transactions the same as they would with other business income.
This means New Zealand’s income tax system can deal with crypto but it may be confusing to work out which set of rules apply. The IRD has put together a guide to help with this.
- Learn more: “Cryptoassets for businesses” (IRD)
- Risk of permanent loss
Cryptocurrencies are decentralised, unlike commercial banks. If you forget the password to your digital wallet, lose the hard drive containing your wallet or your data gets corrupted, any cryptocurrency you have is probably gone – forever.
Unlike cash or online banking, no one can verify you are the owner.
Still not sure? Ask these questions:
- What are your customers doing? Evaluate your current customers and the segments you want to attract. Are they adopting cryptocurrency? Is it on their radar?
- What are your competitors doing? Regularly review your competitors to see what types of payment methods they provide so you don’t lag behind
- What is your business model? E-commerce businesses can easily adopt cryptocurrency, but it’s less suited for companies that also have a traditional retail setting. How does cryptocurrency fit with your business objectives?
- Do you have the resources and the right systems? Adopting cryptocurrency will involve a lot of new expertise. From understanding the tax implications, to the software set up, strong security, and general upskilling on how to accept crypto and monitor the trading market. Do you have the resources to dedicate to that learning process?
So, should your e-commerce business accept cryptocurrency payments?
This will be a personal decision. While it can attract higher-value customers, you’d be trading with volatile and loosely regulated currency, meaning you run the risk of losing your assets.
The impact of cryptocurrency on e-commerce is not yet well widely understood, but as long as you keep up to date with its latest developments, you’ll be well placed to adapt a new strategy if or when it becomes relevant to you.