Uncommon commerce

Promises of improved speed, transparency and efficiency lead blockchain’s potential for disruption

This article was published in the October 2016 issue of STORES Magazine.

While it started as a mysterious form of payment from the nether regions of the Internet, Bitcoin is slowly starting to command retailers’ attention. The digital currency is driven by a distributed database called the “blockchain,” a virtually tamper-proof record of transactions collected into “blocks,” linked in chronological order and distributed across multiple servers.

Such a system of direct payments could eliminate processors and middlemen and bring together multiple currencies in a single system that increases convenience and reduces cost. Adoption might not come quickly; the technology is already here, though, and its implementation could take off markedly if even one large retailer starts using it.

Prakash Santhana, fraud and risk leader at Deloitte Advisory, says blockchain allows computers connected to the Internet to join and send “value” to each other without the need for a central authority. Because there is no physical currency involved, Bitcoin is dependent upon a ledger of every single transaction ever made to upload and verify all new transactions.

Blockchain could cause tremendous disruption in the financial industry, especially if central banks move to digitize currency.

Information security expert Cassio Goldschmidt says blockchain could benefit retailers because Bitcoin is “programmable” and can be controlled with scripts. For instance, a company could write a script to automate dividend payments or suppliers invoicing. Such a system of automatic payments could eliminate some back-office work and lower transaction costs.

In a recent report about distributed ledgers, consulting firm Bain and Company said they have the potential to make “dramatic change” in payments by improving speed, transparency and efficiency. Blockchain could cause tremendous disruption, especially if central banks move to digitize currency, and Bain says the financial industry will likely fight off any advancement of digital currency and “change will not come easily.”

“The idea of programmable money is very powerful,” Goldschmidt says. “There are some things that people are looking into, and it could cut out the middleman [in the transactions] if you could do that.”

Early stages

Adoption of blockchain has been slow. Ken Seiff, managing partner of venture capital firm Beanstalk Ventures, says retailers currently “don’t care much” about blockchain — in the same way they didn’t care much about the Internet in the mid-’90s. However, things could change quickly.

“In my view, there will eventually be hundreds of thousands of businesses built on top of blockchain,” Seiff says, “in the same way there are billions of businesses built on the Internet.”

Seiff believes most applications in retail will be on the payments end as retailers seek ways to increase profits by reducing transaction costs. While the systems to support blockchain payments are already here, it’s going to take a catalyst to drive adoption. “One big retailer will have to use it and optimize it to focus on that 3 to 5 percent in profit that gets eaten by transaction costs,” he says.

According to Bitcoinfees.21.co, transaction fees for the digital coins are typically calculated in satoshis/byte, with the median transaction size of 226 bytes currently producing a fee of 7 cents. This comes out to less than 1 percent of total transaction costs.

Bain and Company says the adoption of blockchain will likely be driven in two waves. The first will be financial institutions developing systems for the transfer of international payments, which could be beneficial for paying global suppliers and moving product across currencies.

Companies like Starbucks are already serving as a bank as they use mobile wallets to conduct transactions.

Santhana says there’s already a production-grade application which allows for rapid bank-to-bank transfers via blockchain. “Currencies can all be converted in as little as 10 minutes and it facilitates money transfer at a much lower price,” he says.

The second wave of adoption will be the “broader disruption of domestic payments” as businesses and consumers start using “cryptocurrencies.” Companies like Starbucks are already serving as a bank as they use mobile wallets to conduct transactions, and online retailers such as Overstock, Dell, Newegg and TigerDirect now accept digital currency payments.

Security and skepticism

Joshua Pollack, pricing expert and merchandising leader with Parker Avery Group, says there are many issues with Bitcoin, calling it a “tentative, mysterious currency with an anonymous founder” and says there is no basis for value because it isn’t backed up by anything.

He also says it’s hard to compare the evolution of digital coins to that of the Internet, because the Internet was developed in a legitimate, institutional setting. “I don’t see any particular benefit of virtual currency over” traditional currency, he says, “but I suppose it could happen in the future. I question whether it would be Bitcoin, considering the background.”

Few large retailers currently accept the digital currency or express interest in doing so. It also has little value for consumers because it is cumbersome and inconvenient to spend. That could change: Accenture’s 2015 “Next Generation of Commerce” report saw 40 percent of respondents willing to “shift their loyalties” to retailers for at least one reason; of that 40 percent, 3 percent would shift if a retailer accepts bitcoins or another digital currency.

There are also questions about blockchain’s security standards. Santhana says that since the blockchain framework is distributed and sealed using cryptography, it has extra security measures against hacking. “There is no way any hacker can get in and change the transactions,” he says, “unless the hacker network can overtake 51 percent of the computers connected to the network.”

Blockchain is still vulnerable to password theft or misuse; Santhana says while malware can’t move money out of an account, someone who obtains access to a password can. Seiff says not to think of blockchain simply as an infrastructure for the digital coins, but as something that can support endless applications.

“There are going to be thousands of different things that you’ll be able to do that will be more secure and cost-effective,” he says. “Fifteen years from now, I think you’ll see blockchain transforming the global economy.”