The crypto conundrum

Why are we still so slow to use cryptocurrencies for payments? Part of the issue is security. Even though crypto is designed to be safe, secure and traceable, it also abandons much of what makes our payments system so reliable today. Christiaan Brand from Google and Cathy Beardsley from Segpay sit down with American Banker's Daniel Wolfe to explore these questions and more.


Transcription:

Daniel Wolfe: (00:12) Hello, and welcome to this special edition of Leaders. I'm Daniel Wolfe, an editor at American Banker. And I'm here at Payments Forum in Arizona with two executives who are ready to talk about just what it will take to get merchants accepting crypto as consumer demand rises. So my guests today are Cathy Beardsley, the CEO of Segpay and Christiaan Brand, a security product head at Google. So what we are here to discuss is the current state of crypto as a payments mechanism. Now, at the time that we're recording this Leaders session, the state of the crypto industry is, is just like it's well, not the industry, but of crypto itself is kind of like chaotic. There was a big crash last week, with Bitcoin prices, with the Terra stablecoin. And it's got people thinking, okay, what's going to happen next because crypto has always been seen as volatile.

And there's always been this thought, well, the people who got in early, they're making a lot of profit on what their investments were. And so they have to, you know, they now are sitting on all this cash that they can just cash out. They need to spend it somehow. But you know, the question is how easy is it even to do that? Even if by the time we're watching this video everything's recovered, everything's great, everybody's pouring all their money into Bitcoin again: What is the actual, what hurdles do we need to cross to actually turn it into a viable payment mechanism? Cathy, what are you hearing?

Cathy Beardsley: (01:39) So we're constantly asked by our merchants, when are you gonna add crypto in? And the question is, I usually cut it off short. You know, it's not happening anytime soon. And that's primarily driven by compliance concerns. Our merchants want it because it's an anonymous form of payment, makes it easy for the consumer. It's cheaper than card processing and there's people with a lot of crypto funds sitting out there. Where the concerns come in from our compliance team is really the AML [anti money laundering]. We don't know; it's anonymous. We don't know who that user is. How do we make sure it's a good transaction? They get worried about, there's no recourse for the consumer. So if I buy something in crypto, I can't charge it back. I can't even ask for a refund; it's gone. There's also no mechanism to say, if I'm buying something for a thousand dollars, if crypto is my choice of payment, I can send 900 the equivalent of 900, and there's no recourse there. The money's gone, the good is shipped, and so on.

Daniel Wolfe: (02:53) You mean, I'm sorry. Do you mean because the crypto dropped in value or because...?

Cathy Beardsley: (02:56) No, there's no mechanism to say that. Wow Cathy really there's, there's an equivalent thousand dollars of crypto. So it can be shortchanged and that's just kind of a write off for the merchant. So those are the main ones, I guess the other really fourth one is crypto has a stigma being used for not such good things, how to make transactions through the dark web and so on. So there's just a stigma to it. So that tends to kind of put the compliance brakes on hold from us, moving it forward.

Daniel Wolfe: (03:29) And Christiaan, what's your take on the hurdles that we still need to overcome to get merchants to accept crypto for payments?

Christiaan Brand: (03:35) I think there's really three things for me around this particular issue, right? The first one is the same thing that we're just talking about. Chargebacks are no recourse. Like, I think that's a big thing for users today of this particular payment instrument. Not only when going to a merchant and procuring a product, but even just buying coin, right? I might buy something today. I actually was at dinner last night and I had this conversation with someone from a bank where you have users investing. It's really investing, right? Investing in, you know, let's say a hundred dollars worth of cryptocurrency, and by that evening the cryptocurrency it's worth 60 bucks, right? What does the user do? Right. They pick up the phone, they call the bank, they say, Hey, isn't this FDIC insured? And then be honest, there is, well no? Users don't understand that.

So I think there is an education component. There is the recourse angle. Not only in terms of like actually, you know, buying something from a merchant, because I think that can be rectified, but it's like seeing this as an — it's not cash. It's not a cash equivalent, isn't an investment. Right. I think that's, that's, you know, the mentality change there. The second thing for me is around the volatility. And I think the issue that we just mentioned, which is, I want to buy, you know, a pair of pants for 20 bucks, right. I give you the equivalent in coin — Bitcoin, whatever it might be — by the time that transaction settles, like that's not 20 bucks anymore. Maybe it's 30, maybe it's 15, who knows, right? So volatility is an issue here. And then the last thing, which is what I'm more responsible for, is around the authentication of this, right?

How do you prove you actually own that cryptocurrency? That is the largest challenge right now. And I think one of the big issues that we're, that we're seeing is that the mechanism and the thing that makes this really, you know, anonymous and it makes it kind of like appealing to, I guess, folks on both sides of the spectrum is the fact that you own it, you control it, right? You don't have to put it in like some bank account or in some system, or even on some, you know, cryptocurrency exchange. You can keep that coin. You can have it, you have a private key that basically shows that you own it. Problem is if you lose that private key, it's literally like losing cash, like losing your wallet. You'll never get that back. And I think that's one of the biggest challenges that we've been seeing is, you know, recourse, like it's back to the recourse angle, not only in terms of buying something, but also in terms of, if you lose $150,000 worth in currency, you will never see that again. And I just don't think the world is quite ready for that yet.

Daniel Wolfe: (05:56) So from the merchant's perspective, you mentioned there are security issues. Do you know that the person who's paying in that, in that currency has that currency so that they can complete the transaction? Is there a way to actually balance that out address that security need without invalidating, whatever the consumer, the merchant sees as the benefit of using crypto?

Christiaan Brand: (06:16) That's a hard one, right? And it depends also what the consumer sees in terms of the benefit, right? It's easy money movement, cross border. Like there is a lot of benefits that users will perceive benefits from this. Really the only way that you fix this is by having an exchange. That's the way that we've solved this for other types of securities, right? You need an exchange, and the moment you have an exchange, regulation ... [anonymity] disappears. Right? It's no longer anonymous. And I think that is, that is kind of like you have this balancing act right on the one side, you have all these perceived benefits, but they come with a lot of downsides as well. And on the other side, you know, if you want this to be more stable, if you want this to be, you know, easier to recover, if you want the chargebacks and want to have recourse, you have to give up some of these benefits on the other side. And I don't think we have quite figured out yet where that balancing, where that scales need to settle.

Daniel Wolfe: (07:09) Okay. So Cathy question for you, you had said a lot of that demand is coming from the merchants, but also we discuss a lot of drawbacks to crypto acceptance with merchants in terms of it just doesn't work the way the cash and cards do. So how do you address that when somebody comes to you and says, 'We want crypto?'

Cathy Beardsley: (07:25) So the first way we address it is through education. So we'll explain all the risks, what are the concerns? But from a merchant's perspective — and we play in a digital space — so there's not products being shipped, it's digital goods. And for them, they're just trying to expand their reach, right? So I would say a normal card, our normal card decline rate is anywhere from 50% of transactions are being declined, you know, in a, in a good merchant, it's up to eight, you know, they have an 80% approval rate. But there's maybe 30, 40% of the consumers that are getting declined out from the card system. Does coin offer them an opportunity to go ahead and deal with those risks and then still consider, continue to expand their services where someone normally wouldn't be able to participate? So that's how I think they're balancing the risk.

Daniel Wolfe: (08:22) Okay. Is there a point where the demand from consumers and merchants become so much that it just becomes a part of doing business? You have to accept crypto?

Cathy Beardsley: (08:31) In the foreseeable future? No. But maybe down the road, it will. And that's why we gotta keep looking at it, debating it, figuring out the best way to, to implement it.

Daniel Wolfe: (08:44) Okay. Christiaan, how do you see that happening? Is there a way to balance this whole thing so that the merchants get what they want without giving up what they're accustomed to?

Christiaan Brand: (08:52) That's a great question. And as we're talking here, I was thinking like, wouldn't it be great if like, I don't know, maybe it wouldn't, but just kind of like thinking whose perspective, but banks already know how to deal with credit cards. They know how to deal with cash. There is a bunch of different kind of like payment instruments that's already defined. The rails are set up, the chargebacks, everything is in place. Rather than having a user perhaps even pay with coin directly, what if the bank could intermediate that? Like, what if my wallet could be my bank? Like, I mean, would users accept that? I'm not quite sure, but let's say I bank with ABC bank. Could I take my private key, which I have, which is my wallet, which has, I don't know, $10,000 worth of crypto in it. Should I be uploading that to my bank?

And essentially at that point in time, my bank becomes the vehicle for me to transfer that to cash wherever. So when we're paying a merchant, we're paying that merchant in dollars or in euros or whatever. And the bank is facilitating that, that essentially the transfer or the transaction on behalf of me. At that point in time, the transaction to the merchant stays exactly as is. Everything is there, the chargebacks work, everything, everything kind of stays in place, but the user still pays from a balance that they keep in crypto. And maybe at that point, it's not like, you know, every single bank needs it. Maybe there is a clearing house. I'm not quite sure how that, you know, will end up working. But I think you'll have to have that type of system in place.

Today it's too federated. And that's one of the reasons I think, why folks go for this. It's like, no single entity controls it. The money is kind of like everywhere and we can move it around as we see fit or whatever. So I don't think there will be a problem getting this funds into the system necessarily how you get it out, like what the delays are. I think there is a lot of things that we want to have to think through. But for me having some kind of like a clearing system in place, and almost like, you know, not only like a national, but maybe an international type of clearing system, I think is where we really need to look, if we want to solve some of these longer poll issues.

Daniel Wolfe: (10:51) So in this scenario, we're not like reinventing ... everything that banks and bank regulation has to offer?

Christiaan Brand: (10:59) For that. Exactly. And I think that that should be seen as a positive and not negative, right. We have 40, 50 years worth of data and risk models and fraud scoring and infrastructure, right, that underpins these mechanisms for payments. We should be leveraging that. Like, I don't think we should be throwing that baby out with the bath water ... I think we should, we should be leveraging that. And we should find a way for crypto to enter the system in a way, which makes sense where we balance these trade offs. But once it's in the system ride the rails we've got and not try and reinvent, I think, a brand new payment system if we'll already have all of this infrastructure that that's sitting there essentially unused.

Daniel Wolfe: (11:38) So in your mind, how is this different from systems today where if I have like a crypto payment card that converts it into traditional money at the point of sale so the merchant doesn't know anything different is happening?

Christiaan Brand: (11:50) I think all of these systems do it in a bit of a different way, right? There is no guarantees by the card associations or anything that goes together with it. Like what we would have if I paid with a Visa or a Mastercard or an Amex, right? I know if I pay someone on some shady site for a service and I don't get it, I can call up my bank and I can get my money back, right? With crypto that's impossible. And it's because like, just thinking, having to reinvent and re you know, like build that system up from scratch with all of the risk modeling and everything that goes together with it is like a monumental task. If there was a way to plug this into the existing systems that we have, and not in a way where, of course, as you mentioned, like there is already mechanisms there today that allows me to in a one-off like transact with some merchant and it converts it into dollars and whatever, but the rest of the system is not energized.

It's not engaged, right? All of the rest of the risk scoring and fraud and analysis and everything is not there. What if we could figure out a way to easily engage that system and use it to our advantage here? Yes we'd be giving up some things that makes crypto appealing to some, in terms of the, you know, anonymous nature and other things. But I think overall we'd have a much more robust system where users can feel good about using that mechanism for transacting, knowing they're gonna get the value that they want out of it where today it's very, very, okay.

Daniel Wolfe: (13:10) So if the bank is managing this, then what's the advantage to the bank?

Christiaan Brand: (13:14) Well, that's a great question. First of all, I think there is also the nature of like, is this closer to like a type of a cash, like a debit type of payment, you know? It doesn't have to be credit, so maybe it's debit, like maybe there's lower interchange fees. I think there's a lot of things that one can go and like explore here a little bit. Maybe there is more benefit to the bank on doing, I mean, we all know there is, you know, charges involved at every point in the system when doing credit card transactions or debit card transactions. I'm thinking there would be something similar. I mean, I haven't thought this whole thing completely through, but I think there would be similar places and points in the system where the issuing bank, you know, mostly issuing bank, the holding bank, the bank that holds the currency would get some benefit for like, from like holding that currency, you know, backing that up. If something were to happen, like they'd refund the customer, but of course it needs to be like a mechanism in place where value can be derived from that. But I think we have models for that already in the current payment system. We should just look for parallels.

Cathy Beardsley: (14:11) Okay. Do you think by moving it into the banking system, you take away the cachet or the mystique of...

Christiaan Brand: (14:21) That is the million-dollar question.

Cathy Beardsley: (14:22) ...that it would destroy the...

Christiaan Brand: (14:23) Yeah. I think that is, that is a great question. And that's, as I'm sitting here, I'm pondering that. Right? I do think for some, you're gonna be taking away some of that mystique around it. It's like, oh, it's just like, at this point, just like a debit or credit card. I think there are, there are still benefits to not just the speculative benefits of like having your money, like double overnight, and then of course, halve over the next night. But, you know, I think there is that piece, but the other side of this is, you know, and maybe this is as simple as doing a survey and talking to a thousand people and kind of like getting, what are their perceived benefits? What do they want out of the system, if they could have anything they want, what are the things that ranks right at the top?

I would think the number one thing is if you spend it, you wanna get value, right? If you're not, if you're not sure that you're gonna get value out of it, ignoring all the other stuff like that, that's almost like the most critical piece — and there's volatility and all the other stuff that, you know, doesn't necessarily get solved by this proposal — but I do think we need something which is a little bit more structured because right now it's kind of like all over the place and you're just not sure whether you're gonna be getting what you're paying for. And it also has this, like you said, there's this connection to like, almost like, you know, the underworld, you know, transacts in this, and we want to move away from that. We want to move to making this, like, I wanna be able to pay for my hotel here. Right. I wanna pay with whatever my favorite cryptocurrency is. How do we actually make that happen? And I think without moving that, you know, a little bit above the fold into the traditional models, that's gonna be incredibly hard to establish.

Cathy Beardsley: (15:52) Yeah. And I think to your point, I mean, it is getting regulated. It's regulated here in the U.S., there's initiatives to dig deeper into it. In the U.K., You've gotta be licensed in order to participate, and same thing in the EU with the member states. So I think the more regulated, the more controls around it will help it be more widely accepted. I mean, we've been looking at implementing a solution. And one of the concerns that came up is ... we were looking at implementing a solution that would immediately convert it to fiat so we weren't stuck with the volatility of crypto, but then it was like, oh, but maybe my bank is not gonna accept a settlement from a crypto exchange. And so we had to go out, talk to them to see if they're open to it, and now it's going through their channels. So there's just so many components that are unsure of crypto and putting up roadblocks to make it happen.

Daniel Wolfe: (16:52) It feels like the volatility is like the hot potato everyone's trying to pass off.

Christiaan Brand: (16:56) But it goes both ways, right. Because if, if the bank were to convert it immediately to fiat, right? They say we pay it to U.S. dollars. What happens if overnight, you know, suddenly Bitcoin rises by, I don't know, 300%? I want my 300% gain right? So of course the reverse of that is also true. Like if it crashes ... I'm like, that's someone else's problem. But I think that's the one piece that'll have to be figured out. Yeah, for sure.

Daniel Wolfe: (17:19) Yeah. And this system feels more like a, like a more volatile savings account where I would keep the balance in crypto and move it over to checking or whatever when I'm ready to spend it. But otherwise it's separate. And I know to treat it separate, my bank knows to treat it separate. All right. Cool. Any final thoughts either of you?

Cathy Beardsley: (17:39) Just I think it's an exciting time. And we need to pay attention to it. And you know, you don't wanna be the last one on the block. Blockchain.

Daniel Wolfe: (17:48) No, absolutely, [not] the the last one on the blockchain, you wanna be the new kid on the blockchain.

Christiaan Brand: (17:51) I just say that the security properties of this is very, very interesting and frightening at the same time. We're, we're giving users so much control. If you think about the way that these mechanisms work in the way that they're pegged and underpinned, users aren't good with managing private keys on computer. They never were. Right? We can't even manage passwords, right? I think that really remains one of the biggest issues right now, is how do we, how do we move away from that in this world where everyone is talking about moving away from passwords, you know, having two-factor authentication everywhere. How does that relate to, you know, private keys and Bitcoin? Those are the types of things that [are] really, really hot topics right now that we're trying to explore a little further.

Daniel Wolfe: (18:36) Definitely. And I was thinking, like I'd mentioned in another session, that I had purchased like a dollar's worth of Bitcoin and it rose in value, but I had already moved on to a different phone. I didn't have the app anymore, I had to dig through a drawer, charge it and everything. And, you know, God forbid that was my bank account.

Christiaan Brand: (18:52) Right, right. You were lucky that you could get that back. A lot of people aren't that lucky, right? So yeah.

Daniel Wolfe: (18:57) I mean, it was only a dollar originally, so I wouldn't have felt that bad about it. All right. Thank you both again for participating.