While startups working on bitcoin 2.0 products and tools aimed at financial institutions have garnered tremendous attention (and venture capital) in recent months, micropayments and remittances have steadily emerged as two of the most compelling use cases for bitcoin. Neither is new, but the advantages of using bitcoin to make extremely small transactions or send value overseas have been apparent for years.
However, companies working in these two areas have gained significant momentum in the last twelve months. Micropayments are difficult for legacy payment systems to handle. Many merchants are unwilling to accept credit cards for transactions under $10 due to fees that make it uneconomical to process a small amount of money in any manner other than cash.
Meanwhile, content consumption models based on per-article or per-video pricing, while increasingly popular with customers, have become difficult in practice for the same reasons—a credit card company would much rather process one $500 charge than 500 $1 charges. As a result, the small end of the transaction spectrum has been essentially shut out of electronic payments, especially for truly minor amounts.
Bitcoin’s advantages, including higher speed, greater security and exponentially lower cost, make true micropayments possible. Accordingly, there has been an explosion of interest in developing applications designed to facilitate them. Fast, efficient processing and fees of a fraction of a cent, instead of a flat percentage and/or minimum ticket charges, mean a high frequency of tiny transactions can quickly and economically be incorporated into any online business model.
This is leading to a revolution in the online content world. For example, the popularity of social tipping is exploding. ChangeTip, which just raised $3.5M in Series A funding, has developed a simple and intuitive peer-to-peer interface that works with 35 social media sites, including Reddit and Twitter, that lets users reward posters with tips as low as one Satoshi, or 0.00000001 BTC.
Meanwhile, leading processor Coinbase has introduced a tipping button designed for content providers to place next to their content, enabling single-click user appreciation and micropayments for pay-as-you-go transactions. A number of other companies, such as Xapo, Tippercoin and Cryptiv, are developing similar apps, all of which will make it easier and faster to quickly garner small amounts of money from large numbers of people. Ultimately, these platforms will dramatically alter a number of industries, including not only the consumption of online content but also online advertising, music distribution, non-profit fundraising and even campaign finance.
International remittances are particularly well-suited to bitcoin. Worth upwards of $500B per year, global remittances are a major method of economic transfer from developed to emerging markets. Unsurprisingly, current payment systems are slow, inefficient and fraught with staggeringly high costs, all of which are easily addressed by Bitcoin. Transfer of value from a worker in one nation to family members in another, without the need for any cost- and risk-inducing intermediary, is obviously a compelling use case promising to save billions of dollars annually.
In practice, however, entrepreneurs have discovered some of the costs embedded in legacy remittance systems are understandable. Regulation is the primary culprit. The same global banking system plumbed to interdict money laundering is not well suited to also sending high volumes of small amounts to frontier markets quickly and cheaply.
While companies in developing nations, like BitPesa in Kenya and MeXBT in Mexico, are actively developing independent bitcoin-based remittance solutions, a number of others are working on combining the benefits of bitcoin with the existing correspondent and remittance industry. Ripple, for instance, has recently inked a deal with global payments firm Earthport which will combine Earthport’s strong relationships with major banks and local clearing arrangements in 65 nations with Ripple’s technology to bring real-time processing to cross-border transactions. Whether in conjunction with, or in lieu of, correspondent banks, the business of sending money overseas just got easier.