For a long time now, PayPal has been the dominant international online payment system, with very few alternatives (Wirecard and Skrill – formerly Moneybookers – are the only two I can think of) if you want to send or receive money internationally for e-commerce transactions.
PayPal performs payment processing for millions of online businesses, auction sites and other commercial users and in the space of about 15 years has grown to its current situation whereby it processes somewhere between US$150billion and US$200billion worth of transactions annually. So, there’s no doubting PayPal’s credentials, but is its spot at the top of the heap about to be challenged?
A couple of days ago I was browsing through some accounting and bookkeeping websites (I know, I should get a life) when I came across www.quickfile.co.uk and noticed that they had just published a blog post stating that they were the first UK accounting platform to enable businesses to accept payment in the Bitcoin currency. This caught my attention.
I think possibly the main difference between Bitcoin and other competitors to PayPal is that Bitcoin already seems to quite well known – how many of you have heard of Wirecard or Skrill? – probably not many even though both are big, successful brands. For example, in August 2013, Skrill was bought by another company for €600m, and Wirecard ranks among the 30 largest German technology companies.
So, what is Bitcoin?
Bitcoin is a payment system that can be used for the payment of products or services, and which has seen considerable growth since its introduction in 2009. Whether it goes on to achieve the dizzy heights of a system like PayPal depends largely on whether online merchants embrace it as a method of payment for their products or services, and whether buyers of those products or services choose to use Bitcoin. (Strictly speaking, Bitcoin is the payment system/network, and bitcoins are the currency itself.)
One of the attractions of Bitcoin is that transaction fees are typically very low – typically 1% – making it very competitive when compared with other online payment methods. One of the disadvantages is that the digital currency is a lot more volatile than a hard currency such as the US dollar or £ Sterling. This volatility has been largely fueled by currency speculators though, which may well change as the currency gains more widespread commercial use.
When a transaction is made in the Bitcoin network it gets assigned to a distributed public database – the Blockchain (take a look at this website – it’s really interesting) – so there are no banks to levy charges. The Blockchain contains a sequential record of all Bitcoin transactions.
The Blockchain is maintained by minors, who are rewarded with newly created bitcoins as well as transaction fees. Payment processing work done by miners verifies each transaction as valid and adds it to the Blockchain (this all a bit confusing I know, but hopefully the videos on this page will help to clarify the situation somewhat).
Bitcoin Payment Service Providers
So, if you want to buy or sell something with bitcoins, how do you do it? Well, if you want to buy something with bitcoins you need to use a Bitcoin wallet, which allows a user to carry out a bitcoin transaction. If you want to sell something, you need to use a payment service provider such as BitPay. BitPay offers a complete checkout solution for including automatic conversion to local currencies and integration with a host of shopping cart software.
So, are Bitcoin and BitPay about to upset the PayPal apple cart? … well, it’s very early days. As of January 2014, BitPay has around 20,000 businesses and charities using its services, whereas PayPal has about 100 million active accounts (this includes people who use PayPal to buy products and services as well as those selling them).
As a merchant, it’s very easy to integrate PayPal into your website; BitPay needs to be just as easy to use if online merchants are going to use it in sufficient numbers. And, of course, there needs to be enough people with Bitcoin wallets willing to buy products and services with bitcoins. People also need to feel secure when they are buying or selling using bitcoins, and people need to understand how the whole Bitcoin thing works … which is a bit confusing at the moment.
So, yes, there’s a long way to go before Bitcoin and BitPay become a real threat to PayPal’s market dominance, but it will be an interesting story to follow.
bitcoins – digital currency.
Bitcoin – payment system/network that handles transactions in bitcoins.
Bitcoin wallet – lets you send and receive money using bitcoins as the currency. You can get one of these from the Blockchain website.
BitPay – payment service provider that lets you sell items (as an online merchant) using bitcoins as the currency.
Wikipedia – Article about Bitcoin
BitPay – Bitcoin payment service provider
Blockchain – Bitcoin block explorer
Wirecard – Online payment service provider
Skrill – Online payment service provider
PayPal – International e-commerce business
QuickFile – Free online (web-based / cloud) accounting service that claims to be the first accounting services company in the UK to accept payments using bitcoins
Want to know more about Bitcoin? – then read our Getting Started / Beginner’s Guide to Bitcoin.
Author: this article was written by technology writer Stephen Fletcher
Update: 03 Feb 2014 – Here’s a blog post that helps to explain bitcoin mining : http://startbitcoin.com/
And another site: http://www.bitcoinmining.com/