When Bitcoin was valued at almost US$20,000 in December 2017, people took notice. Since then, opportunities to invest in cryptocurrency and even use it to pay for goods and services have been highlighted in the media. Many tech companies and subscription services, understandably, have some important questions:
- Should my business be accepting cryptocurrency as payment?
- If so, how do we do it?
- And, most importantly: What is cryptocurrency, anyway?
Cryptocurrency: A cash-free ledger
In order to comprehend its impact on recurring billing, it’s important to understand how cryptocurrency works.
Cryptocurrency like Bitcoin was created without a physical value equivalency in mind. Rather than saying a “coin” or “token” is worth a certain amount of money or gold, its value is instead determined by the parties conducting transactions.
Transactions, in fact, are a much better measure of cryptocurrency’s worth than its individual units. Here’s why:
“Currency” is a bit of a misnomer here. The coins or tokens used in these systems are digital, but they aren’t strings of data like files—they can’t be attached to emails or messages, for example, to be transacted.
Instead, cryptocurrency relies on a shared digital ledger. In this case, it’s a worldwide ledger managed by thousands of people. Instead of “sending coins” to individuals, cryptocurrency actually works by sending a message to these ledger managers along the lines of “user x sends 4 coins to user y.” The ledger is updated for all to see, and the transaction is complete.
This is a very simplified explanation, of course (below is a video with more information), but will suffice as we delve deeper into cryptocurrency and its implications for recurring billing.
Transparency and security with cryptocurrency
It is estimated that 8% of US consumers own cryptocurrency. It may not seem like much, but as a reference, that equates to the entire population of California. Why so many?
For one, as you may have noticed in the above description of the ledger system, cryptocurrency exchange is extremely transparent. Unlike a bank, an account owner has access to the public ledger and can see where their money goes, as well as where money has been.
Because of this, cryptocurrency users could, in theory, ensure that a subscription meal deliv ery service they sign up for sources their food from organic farms, by tracking transactions of the subscription business.
They can also be sure that the coins in their account are actually there, and not being secretly invested by an organized, overseeing institution.
This transparency is balanced by a high sense of security. This is where the “crypto” comes into cryptocurrency. Each user has both a private and public key to their account, making it nearly impossible for someone to fake a transaction in their name.
The design of cryptocurrency is also a push technology that puts power in the “spender’s” hands: users can only send currency from their account to another. No user can “charge” another user’s account; they can only make a request that the buyer initiates the transaction. This ensures that no one is ever unwillingly parted with their coins.
Early hurdle to using cryptocurrency in recurring billing
The fact that cryptocurrency is a push technology is at the heart of its recurring billing struggle.
Without the ability to “charge” customers on a schedule, as with credit cards, how can subscription services effectively manage payments in cryptocurrency? It’s impossible to operate a business on the assumption that customers will initiate necessary recurring payments when due.
The good news is that solutions are often generated when there is enough demand from both consumers and merchants. Most users of cryptocurrency, understandably, are tech-savvy enough to have seen the need for SaaS (Software as a Service) businesses to be able to bill on a recurring basis for revenue growth.
And many business owners, of course, are open to ideas that make payment options more flexible for potential customers.
“Wallet” apps resolving issues
A number of platforms have emerged to try to solve the cryptocurrency and recurring billing problem.
One such platform, CoinBase, describes their recurring payment method as a pull technology that customers initiate. However, this feature requires the use of a CoinBase “wallet,” and users can pause or cancel their recurring payments at any time without notifying merchants.
Indeed, every solution to this particular problem has involved the need for an additional service: cryptocurrency systems simply don’t inherently lend themselves to recurring billing. Wallet platforms such as Groundhog and 8x Protocol, for example, can help merchants create “smart contracts” which regulate recurring billing. This is, however, not something a typical merchant can build themselves or in direct partnership with a cryptocurrency service.
If a business can afford to use a wallet platform, and believes the number of cryptocurrency-using customers will cover and surpass the cost, then it is worth it. Otherwise, as many businesses are discovering, it may be safer to stick with standard currencies and payment methods until another solution is available.
Other challenges in the recurring cryptocurrency payments model
Besides the cost issues of a required wallet platform, there are other limitations to the successful implementation of recurring cryptocurrency payments.
With control in the customer’s hands, it can be difficult to track subscribers who have cancelled their payments and should no longer receive a service. On more typical subscription billing platforms which handle payments via methods like credit cards or PayPal, service interruptions can be automated.
This integration requires robust crypto bookkeeping to accurately record and reconcile crypto transactions in financial records. As of right now, this option doesn’t appear to be available from cryptocurrency wallet platforms.
Additionally, again because control is with the customer, it is impossible to raise subscription prices without their explicit permission. Rather than raising prices when necessary (and notifying customers, of course) and simply automatically charging a credit card with the new price, cryptocurrency wallets require a merchant to create a new smart contract at the new price, to be approved by the customer.
The clunky methodology unfortunately lends itself to churn, which would be easily avoided with current comprehensive recurring billing platforms and methods.
Lastly, smart contracts require customers to pay up front for products. While this model can work for many SaaS and similar businesses, it isn’t right for everyone, so could pose another issue for some.
Outside of the operational issues of using cryptocurrency in this way, there are also legal developments surrounding the currency’s use. Because of its volatile value, cryptocurrency has unfortunately become a preferred payment method by people trying to hide illegal activities. As a result, some states have begun to require a BitLicense, or license to conduct virtual currency activities.
The first BitLicense was issued in 2015. Since then, at least twelve more have been granted, mostly to businesses similar to the aforementioned CoinBase or crypto-investment apps like Robinhood.
For businesses simply looking to accept cryptocurrency payments, and not operate further in the industry, attaining the hard-to-get BitLicense may be more trouble than it’s worth.
Future of cryptocurrency in recurring billing
Wallet platforms are aware of the challenges subscription businesses face, and are working hard to solve them. 8x Protocol, for example, addresses cryptocurrency’s volatility issue by using a stable coin with a valuation tied to the US dollar.
Other solutions involve creating functions that equate to a merchant being able to take a direct debit from someone’s crypto account, as well as networking ledger managers to trigger payment on due dates, a very important part of subscription billing.
It’s complicated technology, but necessity is the mother of invention, and platforms are out there, inventing solutions every day.
As cryptocurrency becomes more usable, there is a growing chance it will emerge as a viable form of payment for many businesses. In the meantime, all of the hurdles mentioned above are easily avoided by deploying complete subscription billing platforms like Stax Bill.
