Transactions Costs: Comparing Bitcoin Transactions with Credit Card Transactions

Bitcoin has numerous virtues including security, unregulated global reach and affordable transactions fees. But once you determine the real-time value of your bitcoin using a bitcoin calculator, how much more will you pay to facilitate a transaction and how does it compare to credit card fees?

Bitcoin transactions are similar to cash transfers or wire transfers, whereby payment is made directly from one party to another, without the need to go through a financial institution. Payment processing is carried out through a network of private computers, with each transaction getting recorded in a public blockchain. Thus, bitcoin transactions are based on peer-to-peer technology that relies on blockchain and cryptography for security, without the need for third-party oversight.

Credit Card Fees

Credit cards charge a base fee on all transactions that are primarily made up of interchange fee (paid to banks that issued the branded card) and assessment fee (paid to the credit card company). For example, currently, the interchange fee on Visa cards is 1.51% plus $0.10 charge for all swiped transactions, while 0.13% plus $0.0195 are credited as the assessment fee per each transaction, thus making a total of about 1.65% + $0.12.

Additionally, credit card processing companies charge merchants a markup fee on top of the base fee. While merchants can negotiate the markup fee, it typically runs between 1.5% – 3.0% for each transaction, plus $0.10.

Ultimately, the ordinary credit card user ends up incurring a 3.15% + $0.22 per each transaction.

Bitcoin Fees

A Bitcoin transaction does not include banks and processors but instead uses a distributed network of bitcoin miners who validate each transaction. Typically, a bitcoin transaction fee is about 0.0001 BTC.

How Bitcoin Transactions Compare with Credit Card Transactions

By contrast, credit card transactions involve the buyer effectively approving the seller to “pull” the agreed payment from their account, going through some financial intermediaries in the process. To put it into perspective, a Visa transaction, for example, typically involves four parties, that is; the merchant (who requests payments), the acquirer (the financial institution which facilitates payment to the merchant), the issuer (the credit card holder’s bank), and finally the individual cardholder.

When paying with bitcoins, you’re not necessarily required to provide personal identification information like your name and address. All bitcoin transactions use an anonymous alphanumeric address and a private key which changes sporadically with each purchase. Payments can also be conveniently made on mobile devices through QR codes.

While credit cards are physically stored in a wallet, bitcoins are stored in electronic wallets and is accessible on the cloud, computer or smartphones.

The cardholder can cancel credit card transactions. This means merchants have to cover expenses (charge-backs) for refunding payments on disputed or fraudulent transactions. Contrastingly, bitcoin transactions are irreversible and can only be reimbursed by the receiving party. Therefore, merchants do not incur charge-backs when receiving payments via bitcoins.

Merchants that accept bitcoins also save on inconvenient credit card fees. Bitcoin transactions fees are based on the amount of data used to complete the transaction; therefore each payment is made at meager costs or no cost at all if you have a fast connection.

There are apparent advantages shoppers also stand to gain when making payments with bitcoins include the simplicity of making payments, user anonymity, small transactional fees and no interruptions from financial intermediaries – for example accounts getting frozen due to a fraud alert.

Credit card transaction, on the other hand, has their advantages over bitcoins. First is the ability to borrow money, collecting and redeeming reward points, protection against fraud and vastly a broader acceptance among merchants all over the world compared to limited bitcoin-accepted stores. While merchants have started embracing and accepting bitcoin payments, most merchants are yet to make it a payment option.

That said, however, credit cards still have the risk of incurring late fees, costly foreign transaction fees, and interest charges and can potentially hurt your credit score.

Conclusion

Ultimately, Bitcoin transactions resemble cash transactions as much as it does credit card transactions. The cryptocurrency aims to combine the perks of direct cash transfers with the power of digital technology to provide a more convenient, secure and affordable transaction.