Currency, payment systems, and Bitcoin

Traditional payment systems

Bitcoin for Business

Traditional payment systems

Common Types of Payment Methods
The Complexity Behind a Simple Card Payment
Comparison Payment Methods
Limitations of existing solutions

Payment systems are methods and infrastructures that enable the transfer of funds between two parties—typically between a payer (such as a consumer) and a payee (such as a business). These transactions can occur in various settings, such as when a consumer pays a local merchant, a business settles invoices with a supplier, or individuals transfer money to one another. Understanding payment systems involves examining the various types of payment methods, their characteristics, and their applications in both Business-to-Consumer (B2C) and Business-to-Business (B2B) contexts.

Common Types of Payment Methods

Cash: Physical currency exchanged directly between two parties.
Checks: Paper documents instructing a bank to pay a specified amount from the payer’s account to the payee.
Wire Transfers: Electronic transfer of funds between banks, often used for larger sums and cross-border payments.
Payment Cards (Credit/Debit): Plastic or digital cards connected to a card network, allowing funds to be transferred from a cardholder’s bank account (or credit line) to a merchant.
Digital Wallets & Mobile Payments: Applications or devices storing payment information (e.g., Apple Pay, WeChatPay, AliPay, PayPal), enabling quick and often contactless transfers.

Usage in B2C and B2B:

B2C (Business-to-Consumer):
- Consumers frequently use cash, cards, and digital wallets for everyday purchases—such as groceries, online shopping, or services like ride-hailing.
- Speed, convenience, and low fees (for the consumer) are often key priorities.
- Contactless and mobile payments are increasingly popular in this space due to their ease of use.
B2B (Business-to-Business):
- Businesses commonly rely on wire transfers, checks, and invoicing systems for paying suppliers, settling large bills, or handling recurring payments.
- The focus is often on traceability, documentation, and the ability to handle larger transaction values.
- Card usage exists but tends to be less common due to higher fees and transaction limits. Digital solutions, such as integrated payment platforms, are emerging to streamline and automate accounts receivable/payable processes.

Graphic: Global Trends in Point-of-Sale (POS) Payment Methods (2023-2027), The Global Payments Report 2024, Worldpay.

The Complexity Behind a Simple Card Payment

When a customer uses a credit card at a shop, the card is read by the POS terminal, which securely transmits the transaction data to the merchant’s acquiring bank. The acquirer forwards this information to the relevant card network (e.g., Visa or Mastercard), which then routes the request to the issuer—the bank that provided the customer’s card. The issuer checks the customer’s account or credit line and sends an authorization back through the network and acquirer, allowing the merchant to accept the payment.

This seemingly simple transaction actually involves over 15 steps, 7 intermediaries, and takes on average between 48 hours and 5 days for the merchant to receive the funds. Over the following days, a clearing and settlement process occurs. The card network aggregates the day’s transactions and coordinates the interchange of funds between the acquirer and issuer. A central bank ensures the accuracy and stability of these interbank settlements. Eventually, the merchant’s bank account receives the net amount (minus fees) credited from the acquirer, thus completing the transaction lifecycle.

Overall, this process is intricate, time-consuming, and costly for what should be the simple act of moving value from one party to another.

Comparison Payment Methods

Payment Method	Authorization Needed?	Transaction Approval Time (Merchant View)	Settlement Speed (Funds Fully Settled)	Finality (Ease of Reversal)	Number of Intermediaries	Typical Fees (to Payee)
Cash	No	Immediate (Physical Exchange)	Immediate (No Settlement Delay)	High (Irreversible Once Paid)	None	None
Checks	Yes (Bank Clearing)	Acceptance at Deposit (Not Guaranteed)	Several Days (Check Clearing Process)	Medium (Can Bounce/Stop Before Clearing)	Bank	Low to Medium (Bank Fees)
Wire Transfers	Yes (Bank/Network)	Confirmation Within Hours	Same-Day or Next-Day (Domestic)	High (Usually Irreversible Once Sent)	Banks, Payment Networks	Medium(Fixed/Percentage)
Payment Cards	Yes (Card Issuer Authorization)	Seconds to Minutes (Authorization Code)	A Few Days (Interbank Settlement)	Medium (Chargebacks Possible)	Issuer, Acquirer, Card Network	Variable (1-3% of Transaction)
Digital Wallets/Mobile Pay	Yes (Wallet Provider/Bank)	Seconds (Instant Confirmation)	Typically 1-2 Days (Depends on Funding Source)	Medium (Refund/Dispute Possible)	Banks, Wallet Operators	Low to Medium (Varies)

Limitations of existing solutions

The traditional payments industry represents an annual economy of approximately $2.2 trillion, roughly one-tenth of the United States' GDP, or equivalent to the GDP of France. Because currencies function as permissioned networks, there is limited competition, making this "service" more akin to a tax imposed on the productive economy. In addition to the cost burdens it creates, there are several other limitations, as outlined below.

Limitation	Explanation	Impact
High Card Fees	Interchange fees (~0.3%), network fees (fixed or 0.3%-1%), terminal/PSP subscriptions, and bank margins (0.5%-1.7%) collectively add up to a substantial cost—akin to a global “tax” on productive sectors, amounting to trillions of dollars.	Raises merchant costs, reducing margins and potentially driving up consumer prices.
Very Slow Final Settlement	Settlement of funds can take up to 5 days, slowing the flow of money and overall economic activity.	Delays liquidity for merchants and reduces the speed of economic circulation.
Fraud	E-commerce channels are heavily targeted by fraud, contributing to significant losses (e.g., $28 billion). Chargebacks could reach ~$174 billion globally by 2024. Managing these disputes consumes time and causes mental strain.	Increased operational costs, complex fraud prevention measures, and diminished customer trust.
Cart Abandonment	Additional security steps (one-time codes, two-factor authentication under PSD2) introduce friction at checkout.	Higher checkout complexity leads to increased cart abandonment and lost sales.
High Minimum Transaction Amounts	Minimum spend thresholds on cards can force merchants and consumers into inconvenient pricing or purchase conditions, discouraging small-value transactions.	Reduced customer satisfaction and flexibility, potentially limiting impulse or low-value purchases.
Slow Pre-Authorization	Current systems cannot handle transactions at millisecond speeds or support continuous, real-time payment flows.	Limits use cases that require instant or streaming payments, restricting innovation and scalability.
Need for a Bank/Card Account	Access to these payment methods requires a linked bank or card account, automatically excluding those without such accounts.	Limits financial inclusion, reducing access for unbanked or underbanked populations.
Repeated Online Account Creation	Users often must create multiple online accounts, leading to fatigue, reduced convenience, and increased exposure of personal data.	Deteriorates user experience, raises privacy concerns, and increases risk of data breaches.
Foreign Exchange (FX) Fees	Lack of a universal unit of account forces costly currency conversions for cross-border transactions.	Adds extra costs for international commerce, making global transactions less affordable.

Just as we moved from paying by the minute for voice calls to using nearly free IP-based communication, the emergence of more open and efficient networks can redefine payments, reducing costs and intermediaries, and fostering new business models.

Quiz

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1/5

Payment rails built on top of traditional currency systems are?