How to find a Bitcoin-friendly bank Part 3

Transaction fees of credit card companies and irreversibility of transactions on blockchain networks.

 

The problem with transactions being reversible is that the reversibility requires a third party that can make a decision to reverse a transaction. When you pay for something with a credit card, the credit card company is one of such parties. The number of the parties is actually much larger than most people realize, which among other things means that the amounts of fees that such parties collect are much larger than most people realize, too. For example, for a business to be able to accept credit card payments, the business needs to get an account with a merchant services provider and then pay the fees both to the provider and to the credit card companies. Some credit card companies charge higher fees than others.

American Express is one of such companies. Not only does American Express charge more, it also makes retailers sign contracts that prevent the sellers from encouraging buyers to use other cards, the ones that have lower fees for merchants. For example, according to the data from the Brookings Institution, a typical seller would pay MasterCard and Visa somewhere between 2% and 3.5% if the buyers use Visa or MasterCard. A typical American Express fee is in the range between 3% and 5%. With all the other fees, merchants may end up paying close to 10% of the transaction when a buyer chooses to use American Express. This makes merchants very unhappy, which is why a legal case about the issue has even reached the United States Supreme Court, yet in June of 2018 the Supreme Court has decided in favor of American Express, stating that American Express could keep doing business in the same way as before.

An obvious solution for the merchants would be to stop accepting American Express, which is what many of the smaller retailers do, but the problem with this solution is that by implementing it, businesses may lose customers who prefer to pay with American Express because of the rewards program with AmEx.

The administration of the President Barack Obama and eleven states have sued credit card companies, including American Express, Visa and MasterCard, in 2010, stating that policies by credit card companies that prevented merchants from suggesting that a customer uses a different method of payment were anti-competitive. Visa and MasterCard chose to settle with the government. American Express decided not to settle. Eventually, the case has reached the Supreme Court and AmEx has won.

Supreme Court Justice Clarence Thomas said that today Visa and MasterCard have a variety of options for consumers in part because of the innovation by American Express when it comes to rewards programs and premium card levels. Thomas also said that the actions by American Express do not prevent Visa and MasterCard from competing with Amex in a variety of other ways, including promoting and marketing their services, and offering lower fees for both merchants and consumers.

The Supreme Court has stated that American Express has a unique and attractive rewards and loyalty program, but to keep this program unique and attractive to consumers American Express charges higher fees and there is nothing wrong about that.

 

Irreversibility of transactions on blockchain networks

With Bitcoin and other cryptocurrencies, it is possible to send fund for a very low fee and sometimes no fee at all precisely because the payments are irreversible and there is no authority that mediates disputes.

When a user sends a transaction on the Bitcoin network, the network broadcasts the transaction to all members of the network. At this point, a transaction on the Bitcoin network is known as “unconfirmed.” You can see a list of the transactions as they become visible on the Bitcoin network by visiting https://www.blockchain.com/en/btc/unconfirmed-transactions As the next step, miners pick up these transactions and create blocks of the Bitcoin blockchain out of them. Then, they seal the blocks with cryptography hashes and the transactions become a part of the Bitcoin blockchain.

 

Solving the issue of double spending

Before Satoshi Nakamoto, nobody could figure out how to solve the problem of double spending on a digital financial network. The problem is very simple and familiar to every computer user: on a computer, tablet or some other mobile device you can make a number of copies of a file. With digital money, you could also make a number of copies of the files that contain data about your digital funds. What would then prevent a user on a digital financial network from sending money to several parties at the same time (hence the name of double spending).

Nakamoto has solved this problem by designing the Bitcoin network in such a way that transactions become visible to the entire network right away and then, as the miners create blocks of the blockchain, they become a part of the blockchain and become irreversible. This means that sending the same funds to multiple parties on the Bitcoin network is impossible. First, a transaction becomes visible right away and second, the transaction becomes a part of the blockchain and the blockchain keeps a record about the transaction forever.

However, this also means that on a blockchain network it is impossible to reverse a transaction and when money is gone, it is gone. People who do not understand how blockchain technology works and who are used to being able to call a bank need a lot of education and protections, which is another part of the reason why banks aren’t always open and friendly when it comes to working with a business such as a Bitcoin ATM.