Banks, Visa and Mastercard are driving cryptocurrency services toward processors such as Wirecard. For ForkLog, Aximetria co-founder and CEO Alex Axelrod explained why this approach should be abandoned.
Crypto cards have become a must-have for many crypto services. Aiming to reduce the risk of transactions being blocked, companies seek ways to issue ‘plastic’. But a crypto card is a placebo that does not solve problems for users or fintech. Its sole purpose is to generate profits for payment systems and intermediaries.
Crypto cards are not needed any more than specialized financial instruments for buying gold, oil, precious metals, or any other resource. The word ‘cryptocurrency’—as with the dollar or euro—points to the currency with which the card can be used, and does not in any way make the banking product innovative.
As long as banks and payment systems do not acknowledge this, we will be forced to address the consequences of partnerships with Wirecard, Wavecrest and other not-so-scrupulous processors who sought to profit by taking on risks but could not manage them.
Visa and Mastercard must go on a diet
The technologies behind bank cards have evolved rapidly over a short span of time. They are a fundamental linking element for all retail relationships. According to Nielsen data, there are more than 22 billion payment cards — debit, credit and prepaid — in circulation worldwide. Given that 1.7 billion people do not use banking services at all, there are on average 3.6 cards per person among the remaining six billion people on Earth.
All cards are serviced by payment networks, whose operations are built around a closed-consumption ecosystem. Here is how it works:
- banks and processing companies pay Visa, Mastercard, UnionPay, American Express and other international payment schemes for the ability to issue cards;
- cardholders pay banks an annual fee of $10 as a one-off payment or as part of transaction fees;
- merchants remit to banks, on average, 1-4% of the transaction amount for acquiring;
- their own fees are also taken by various intermediaries, aggregators, API providers, etc.
But the key point is that in every fee paid among all participants there is a share for Visa, Mastercard or another payment system. In crypto-related transactions, the payment networks’ fees will invariably be higher, because the traditional financial industry regards these operations as high-risk.
And yet bank cards remain virtually indispensable for transactions up to $5,000. This is the fastest and most convenient way to purchase cryptocurrency in numerous wallets and/or on exchanges. Therefore it was naïve to think fintech could quickly rid itself of intermediation by payment networks and stop paying them for every blip.
Where Wirecard and the like originate
Today, as the volume of cashless payments in many countries has surpassed cash payments, any company that wants to issue bank cards under its own brand theoretically has three options:
Become a direct participant in the international system.
To do this, one must meet a set of mandatory criteria: have the necessary technology platform and skilled personnel, comply with information-security requirements, provide collateral and so on.
For example, last year a direct Visa participant would have had to hold capital of at least $56 million. A direct participant must settle directly with the Visa payment system, so it is necessary to have an account in US dollars or euros in the eurozone.
Even the licensing procedure can cost more than $1 million, not counting funds required for the security deposit and direct licensing payments. This is an unrealistic option for small and mid-sized fintechs.
Become an affiliated participant of the payment system via a sponsor bank.
In this case, the sponsoring bank takes on the task of meeting the payment system’s requirements. The licensing payment ranges from $50k-$300k plus a multi-million-dollar deposit. However, even on these terms, financial institutions do not want to work directly with crypto companies, since crypto transactions are classified by payment systems as high-risk due to the lack of a unified regulatory approach. This leads to higher fees and chargebacks on transactions that were disputed by the cardholder.
Turn to processing companies.
Unlike banks, the function of issuing payment cards is core to processors. It is among them that crypto services typically find high-risk-tolerant partners who are willing to cooperate. These companies are prepared to employ various tricks to ensure payments passing through them are not blocked by the card network. For example:
- they conceal or distort the company’s main line of business from the card network for which the issuance is being carried out;
- they use incorrect MCC codes;
- they issue crypto cards on their own BINs, whereas card network rules require a separate BIN for each product;
- they issue co-brand crypto cards (in practice these are bank cards “with an individual design”, which are then sold through crypto services);
- they expand card transaction limits regardless of card networks’ and/or regulator requirements, etc.
All these — often unjustified — risks undertaken by processors like Wirecard raise the cost of issuing and maintaining crypto cards for both crypto services and end users. At the same time, the value of crypto cards themselves falls.
Not long ago, people were forced to pay for a fourth or fifth payment card merely for the “crypto” badge, to shield their money from being blocked when dealing in cryptocurrency. But today regulated crypto services have learned to address this problem differently — by operating strictly within compliance requirements and by building ties with traditional financial institutions. For example, for a time we at Aximetria also offered subscribers a branded crypto card. But after collecting feedback, we realised people did not need another piece of plastic if the service can be provided in conjunction with already existing banking products.
Banks should take cryptocurrencies into their own hands
High-risk processors such as Wirecard or Wavecrest can be likened to microfinance organisations that lend at high interest. People typically turn to MFIs after numerous — and not always objective — refusals by banks to grant a loan. Sometimes money is needed urgently, and a bank’s decision-making drags; sometimes the bank’s scoring system dislikes a person’s place of work, family status or gender. There can be many reasons, but the result is the same: banks do not want to take risks, and people go to less discerning financial intermediaries. Crypto services are forced to follow the same path.
A cryptocurrency card is a misguided, temporary and compelled need, because banks and payment systems do not want to manage risk themselves. But traditional financial institutions should recognise that the crypto industry has matured.
All the risks that Wirecard once bore when dealing with crypto firms are now easily mitigated. Licensing crypto activity, implementing KYC/AML procedures, obtaining PCI DSS certification for data-security standards and other measures enable crypto services to operate successfully within the traditional financial system.
Banks should summon the courage to begin earning from cooperation with regulated crypto services. And to that end, they must first develop internal compliance expertise. Until bank staff have an incentive to understand the peculiarities of high-risk transactions, it is easier to refuse to serve potential clients or to halt transactions.
But if a bank’s compliance function regularly and systematically monitors and clears high-risk transactions, this would generate additional transaction volumes from which banks could also earn commissions. I am convinced that users’ right to dispose of legitimately acquired assets should be safeguarded by a completely transparent, lawful mechanism, and not by grey schemes. Any card can be cryptocurrency-enabled.
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