It is high time for traditional financial institutions to see that the crypto industry has matured enough and does not possess high risks.
Crypto cards have become a must-have for many crypto services. Hoping to reduce the risk of blocking transactions, companies have been looking again and again for reason why their customers should use “plastic.” But a crypto card is a placebo that does not solve the problems of either users or fintech companies — its only goal is to bring profit to payment systems and intermediaries.
Crypto cards are not needed in the same way that special financial instruments are not needed to buy gold, oil, precious metals or any other resource. The word “cryptocurrency” — like “dollar” or “euro” — indicates only the currency for transactions with which the card can be used and does not make the banking product any more innovative. However, until banks and payment systems recognize this, we will be forced to eliminate the consequences of cooperation with Wirecard, WaveCrest and other processors that aren’t the most conscientious, wanting to make money by taking risks but without being able to manage them.
Do Visa and Mastercard deserve a cut of every transaction?
Bank card technologies have gone through a rapid evolutionary path in a very short period of time. They are the fundamental and connecting element for all retail trade relationships. According to Nilson Report, there are currently more than 22 billion payment cards in circulation around the world — debit, credit and prepaid. Taking into account that 1.7 billion people do not use banking services at all, for each of the remaining 6 billion people, there are on average 3.6 cards.
All cards are serviced by payment systems that create a closed consumption ecosystem. Here’s what happens:
Banks and processor companies pay Visa, Mastercard, UnionPay, American Express and other international payment systems for the possibility of issuing cards.
Cardholders pay banks an annual fee or transaction fees.
Sellers transfer to banks on average 1%–4% of the transaction amount for acquiring servicing.
Various intermediaries, aggregators, API providers, etc. also collect a commission.
The main thing is that in each commission payment between all participants, a share of Visa, Mastercard or another payment system is included. If we are talking about cryptocurrency transactions, then the commission of payment systems will be higher, since the traditional financial industry regards these transactions as high-risk.
And yet, bank cards are almost indispensable for transactions worth up to $5,000. This is the fastest and most convenient way to buy crypto from numerous wallets and/or exchanges. Therefore, it would be naive to think that fintech companies could quickly get rid of the intermediation of payment systems and stop paying them for every transaction.
Nevertheless, Visa and Mastercard can do a lot to make their native cards much friendlier to crypto and become a part of the solution, not part of the problem, which Wirecard has been trying to get around, making this kind of change seem inevitable.
Where does Wirecard come from?
Today, when the volume of non-cash payments in many countries has surpassed cash payments, any company wanting to issue bank cards under its own brand, in theory, has three options.
1. Become a principal (direct) participant in the international system. To do this, you need to meet a number of mandatory criteria: have the necessary technological platform and qualified personnel, meet information security requirements, provide security funds, etc.
For example, last year, a principal Visa participant had to have capital of at least $56 million directly with the Visa payment system. Therefore, you need to have an account in United States dollars in the U.S. or in euro in the European Union. The licensing procedure itself can cost about $1 million, excluding the funds required for the security deposit and direct royalties. This is not a realistic option for small and medium fintech companies.
2. Become an associated member of the payment system through the sponsoring bank. In this case, it is the bank that takes care of the compliance with the payment system requirements. The license fee is $200,000–$300,000, plus a deposit of several million dollars.
However, even under such conditions, financial organizations do not want to directly cooperate with crypto companies since transactions with cryptocurrency are classified by payment systems as high-risk due to the lack of a unified approach to regulating this area. This results in higher fees and chargebacks for transactions that have been challenged by the cardholder.
3. Contact a processing company. Unlike banks, processors are responsible for issuing payment cards. Among such processors, crypto services usually find partners with a high-risk appetite that are willing to cooperate. Such companies are ready to use various tricks so that payments passing through them are not blocked by the payment system. For example:
Conceal or falsify before the payment system the main activity of the company for which the issue occurs.
Use incorrect Merchant Category Codes.
Issue crypto cards on their own Bank Identification Number, while according to the rules of payment systems, a separate BIN must be allocated for each individual product.
Issue co-branded cryptocurrency cards, which are, in fact, bank cards “with an individual design” and are then sold through a crypto service.
Expand the limits of card transactions, regardless of the requirements of payment systems and/or the regulator, etc.
All of these are often unjustified risks that processors like Wirecard take on, increasing the cost of issuing and maintaining crypto cards for both crypto services and end-users. Meanwhile, the value of these crypto cards continues to depreciate.
Until recently, people were forced to buy a fourth or even fifth payment card, only for the sake of the “crypto” prefix in order to save their money from being blocked during operations with cryptocurrency. However, regulated crypto services have already learned to tackle this problem differently — by acting strictly within the framework of compliance requirements and forging links with traditional financial institutions.
Banks should take crypto into their own hands
High-risk processors like Wirecard or Wavecrest can be compared to microfinance institutions, or MFIs, that lend out at huge interest rates. Usually, people turn to MFIs after numerous — and not always objective — refusals by banks to issue a loan. Sometimes, the money is needed urgently, and the consideration of the application in the bank is delayed; sometimes the bank’s scoring system does not like the place of work, marital status or the gender of a person. There may be many reasons, but the result is the same: The bank does not want to take risks and people go to less discerning financial intermediaries. Crypto services are forced to do this, too.
A cryptocurrency card is a ridiculous, temporary and forced necessity because banks and payment systems do not want to manage risks on their own. All the risks that Wirecard once assumed when working with crypto companies are now easily eliminated.
Licensing of activities in the field of cryptocurrencies, the implementation of KYC/AML procedures, obtaining a compliance certificate of the payment card industry data security standards and other measures allow crypto services to successfully work with the traditional financial system.
Banks should have the courage to start making money by partnering with regulated crypto services. And for this, above all else, it is necessary to develop internal expertise in the field of compliance. As bank employees have had little motivation to deal with the peculiarities of high-risk transactions, it is easier for them to refuse service to potential clients and/or stop transactions.
However, if a bank’s compliance service monitors and skips high-risk transactions on a regular and systematic basis, this will create additional cash flow, from which banks could also receive commissions. I am sure that cryptocurrency users’ right to dispose of honestly received assets should be ensured in an absolutely transparent, legal way, and not by gray schemes. Any card can be crypto, and this is the reality we should all be living in — sooner rather than later.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Alex Axelrod is the founder and CEO of Aximetria and Pay Reverse. He is also a serial entrepreneur with over a decade of experience in leading world-class technological roles within a large, number-one national mobile operator and leading financial organizations. Prior to these roles, he was the director of big data at the research and development center of JSFC AFK Systems.