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Apr. 17, 2014

As Bitcoin Grows, E-Commerce Retailers Consider Potential Benefits

The biggest advantage e-commerce has had over traditional brick-and-mortar stores has been the simplification of point-of-sales systems with solutions like PayPal and Google Checkout, which offer convenient and secure credit payments and lower start-up costs.

But now, Bitcoin is mixing things up. More retailers are taking the unstable digital currency as a legitimate payment for goods and services, leaving some retailers worried about keeping up. E-commerce experts say Bitcoin is already stable enough for most sites to use but warn that online retailers should research their options before diving in.

Bitcoin engenders fear because problematic, even illegal, activities have arisen from its open model. For example, Bitcoin was used to launder illegal money in the Silk Road marketplace scandal and has shown up in Ponzi schemes and tax violations.

But the idea that Bitcoin is a magnet for illegal activity is a misconception, says Jeffrey Neuburger, a partner at Proskauer and a professor at Fordham University. Neuburger points out that all currencies can be used illegally.

“In reality, there is a steady increasing adoption of Bitcoin by legitimate businesses — particularly in the retail world,” Neuburger says.

Bitcoin Gets Love from Big Names in Online Retail

While Bitcoin is still very much in its infancy, large companies are already latching onto the digital currency as a differentiator for their businesses. Overstock.com started accepting Bitcoin last year and immediately made a splash, receiving $124,000 in sales the first day. OKCupid, Etsy, Ebay, Tesla and Zynga all accept Bitcoin, and more companies are preparing to do so.

Even more significant, investment analysts at major banks, including Bank of America, have backed up the currency with positive, long-range value estimates.

In a recent report, Bank of America’s leading analyst, David Woo, said Bitcoin could become a major means of payment for e-commerce and “may emerge as a serious competitor to traditional money transfer providers.”

The Use of Bitcoin in SMBs

For small to medium-sized businesses thinking of using Bitcoin, the path to success is not fully clear, though being cautious seems prudent. A report from Entrepreneur noted that Overstock.com only accepts Bitcoin from orders inside the U.S. and from desktop terminals, which helps the online retailer limit its threat landscape.

E-commerce expert Emma Kane said that in order for sites to use Bitcoin, they need to be moving toward standard federal regulation and basic currency stability. Stability, in particular, is something that’s going to take time, because the hype is leading large amounts of Bitcoin to be exchanged in short periods of time.

“A stable market, fewer scare stories and a proven track record are all going to help,” Kane says. “I think Bitcoin is too new for most [average companies].”

Even though Bitcoin was created as a complex protocol that many people don’t understand, the biggest challenge is economic, not technical. The difficulty in using Bitcoin as a currency is in defining the value it holds in relation to regular currency. Fixing Bitcoin to a traditional currency is hard to do when the digital currency is under constant threat of heavy fluctuations.

“No one wants to lose money, and repricing each SKU daily is near impossible on some e-commerce platforms,” Kane says.

Although Bitcoin exchange groups have enforced web applications that give users full protections against deep fluctuations (even if they happen within 24 hours of a purchase), it’s not a comfortable situation for most e-retailers.

Small and medium-sized businesses might be interested in the small- or no-fee benefit of using Bitcoin. While there’s a minimum fee for exchanges of Bitcoin from one address to another, many more transactions have no fee at all.

Charise Flynn, CEO at Dwolla, told BizReport that the transaction fees most e-businesses face from credit card manufacturers and newer processors, such as Square, affect the businesses to such an extent that they are forced into tight financial margins.

"Small businesses have low and/or tight margins and are more risk and complexity averse. The money they pay in credit card fees makes a big impact on their bottom lines," Flynn said.

Any relief from this fee, then, is very attractive. If you’re not convinced, check out the fee structure for Visa transactions. Every time a customer uses a card on a retailer’s site, Visa takes out a huge chunk — the fees usually end up being 3 to 4 percent of the purchase price. Multiplied over hundreds of transactions, the figures start to add up.

For Those Who Like Taking Risks

There are other benefits to using Bitcoin, too. One is that international consumers can use Bitcoin without fearing a site will reject their country’s native currency. If the retailer is prepared to serve customers all over the world, accepting Bitcoin is a potential opportunity for huge growth.

Kane says that, for the moment, it’s probably not worth it for most e-retailers to invest their time in Bitcoin functionality unless their sites cater to the “techie/geekie” crowd. She says people who are heavily invested in Bitcoin are most likely to be consumers on those niche sites.

Smart small and medium-sized retailers should not be intimidated by competition from businesses using Bitcoin; they already deal with the nearly insurmountable advantages presented by big retailers just fine. Clever marketing and quality customer service and IT can earn business from consumers anywhere.

The steps needed to build Bitcoin into e-commerce sites aren’t too technically difficult. The most critical component is establishing dual pricing throughout the site and creating a functional and secure Bitcoin account.

For now, Kane and other e-commerce experts believe Bitcoin is best left to online retailers that embrace both an early-adopter status and the inherent risks that come with using emerging technology.

[image: Dorottya_Mathe/iStock Editorial/ThinkStockPhotos ]

ABOUT THIS CONTRIBUTOR
Jose is a technology expert with experience in covering cloud computing, startups and enterprise IT.
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