The adoption of cryptocurrencies has seen a remarkable rise in recent years. This can be caused by the fact that several popular brands and conglomerates are now providing their customers with the option of making payments through cryptocurrencies. A pivotal technology that facilitates these payments is a crypto payment gateway.
This article intends to discuss the working principles and the advantages and disadvantages of these payment gateways.
Definition
A cryptocurrency payment gateway functions as a payment processor for digital currencies, much like traditional payment processors, gateways, and bank credit and debit cards. These gateways allow you to accept digital payments and receive fiat currency in exchange, thereby reducing uncertainties and enabling you to provide more payment options for your clients.
While using a personal wallet to accept cryptocurrency payments is possible, digital currency payment gateways eliminate the additional effort of exchanging cryptocurrency and managing a wallet on your own. It is important to note that these gateways are not mandatory but offer added convenience.
Crypto processing generally operates under two models: crypto-fiat and crypto-crypto. The former involves the conversion of cryptocurrencies into fiat money, which is deposited into the merchant’s account. This approach may incur certain risks, such as exchange, banking, and regulatory risks, along with additional counterparty risks. The latter approach involves making and receiving payments in cryptocurrency purely.
Pros & Cons
Cryptocurrency is inherently decentralized and anonymous, which enables easy exchanges between two parties securely. Nevertheless, specific merchants may not be open to receiving digital currency payments, possibly due to a lack of understanding or skepticism about the system. It’s essential to weigh the pros and cons of payment processing to make an informed decision about whether to accept digital currency payments.
Benefits:
- Independent: Crypto payments are decentralized, meaning they are not controlled by any central authority or institution, making them faster, cheaper, and more secure.
- Cost-efficient: Transaction fees for crypto payments are often lower than those for standard payment methods such as credit cards or bank transfers due to the lack of intermediaries engaged
- Anonymous: Specific cryptocurrencies provide a high level of anonymity, which might be helpful for people who value their privacy and security.
- Internationally available: Crypto payments can be made anywhere globally, and no one is barred from making or receiving payments. This makes it an excellent choice for firms that operate on a worldwide scale.
- Quick and safe: Crypto transactions are executed swiftly, and blockchain technology makes the process highly secure.
- No chargebacks: Chargebacks are impossible with crypto payments since blockchain does not allow such a capability. This means that businesses will not lose money as a result of chargebacks.
Drawbacks:
- Volatility: Volatility is a critical component of cryptocurrencies. It is nearly difficult to sell and acquire Ethereum or Bitcoin cryptocurrencies at the same price. As a result, merchants who accept Bitcoin payments risk receiving less than they expected.
- Scalability: Cryptocurrency systems are slower than their fiat counterparts. The Bitcoin network is capable of processing 4-5 transactions per second. The Ethereum network can handle up to 30 transactions per second. The Ripple system can handle up to 1,500 transactions per second, while EOS can handle up to 4,000. Visa can process up to 24,000 transactions per second at the same time.
- Regulations: Since cryptocurrency is not legal in most jurisdictions, accepting such payments might present legal issues for merchants in some cases. Issues also occur when it comes to paying taxes on cryptocurrency-derived income or profits.
Understanding Fees for Cryptocurrency Transfers
Cryptocurrency transfers are facilitated through a digital wallet provided by the service, so the payment gateway companies may charge fees for facilitating transactions. Also, verification of transactions in the blockchain requires significant energy use and computational power, and miners and validators receive a fee for their work. This fee is usually paid in the form of a small amount of currency from the sender.
These fees are passed on to the users by the service providers. This enables the providers to continue operating and offering their services to users.
Bottom Line
Cryptocurrency aims to eliminate third parties from financial transactions, but this innovative concept may take time to grasp for some. While it is still a bit of uncharted territory, the potential for cryptocurrency to revolutionize the way people exchange money is immense.
Cryptocurrency payment gateways are available to remove confusion and misinformation, ease skepticism, and promote trust in this new system. If you understand cryptocurrency, you may not need gateway services at all. However, for the vast majority of small business owners who may not be familiar with this technology, intermediaries can provide a viable solution to make the process smoother.