Yesterday, Overstock announced that it would now accept Bitcoin in over 100 countries worldwide. This is a pretty big deal in validating a potentially compelling use case of bitcoin — international payments.
Before covering Financial Technology, I was an analyst focused on the Bitcoin space. It was an exciting time to cover the cyrptocurrency at that time — a top tier venture capital firm had just invested in a bitcoin company and prices had exceeded $1,000. Every major news outlet was talking about bitcoin, while bitcoin enthusiasts were talking about how bitcoin would disrupt the financial system. The Bitcoin sector saw major investments in infrastructure-related companies (e.g. wallets, miners, exchanges), which was natural for such an early industry. Another area that received significant funding was in payments. I previously wrote about how I had doubts around bitcoin’s usefulness in consumer payments. In general, bitcoin appeared to benefit merchants more than consumers. I was still looking for a strong use case for bitcoin. Within payments, specifically micro-payments and international payments.
I remember an ad-hoc scan I was doing for an investor as part of their due diligence efforts. They were looking at an ecommerce fraud detection company which was using machine learning algorithms to help merchants detect fraud. Online merchants often bear the financial cost of fraudulent credit card charges (standard practice for online fraud is to hold merchants liable — as compared to offline, where banks often cover fraud instead). In addition to chargebacks, merchants may also have to pay fees and interest to financial institutions, and pay to replace and redistribute lost or stolen merchandise. Excessive chargebacks could cause the merchant to lose its merchant account in the long-run. According to CyberSource, merchants lost an estimated $3.5 billion to online fraud in 2012, up $100 million from the year before.
Given the high cost of fraud, online merchants try to detect fraudulent transactions by using rules-based filters based on a set of criteria (e.g. geography). Transactions suspected to be fraudulent are rejected, many of whom are from outside the US — the rejection rate of international orders was 7.5%, compared to 2.9% for US/Canada orders in 2012. With the US adopting EMV standard going forward, online fraud is expected to increase even more as fraudsters migrate to the world of e-commerce to make use of their stolen credit cards.
The use of Bitcoin avoids the fraud issue entirely given how the cryptocurrency works like cash — once you give it to someone, it is gone (of course, bitcoin users would need to keep their bitcoin safe in their wallets). With Bitcoin, online merchants would not need to worry about chargebacks; international customers would not have to worry that their transaction may be wrongly rejected. Overstock’s decision to accept international payments in Bitcoin is a step in that direction. Would other merchants follow suit? Could this be a key use case of bitcoin (i.e. secure international transactions), paving the way for wider adoption? This is definitely something worth watching.