The year is 2020 and subscription payments are everywhere. The volume of subscription payments in the world today is estimated to be $7.38 trillion according to the 2019 State of the Subscription Commerce Economy annual report. In fact, the subscription payments market has boomed 403 percent, six times faster than the S&P 500. Consumers want to set their payments up and forget about it so they can focus on what matters in their lives.
Simultaneously, we've seen the rise of cryptocurrency in the last decade with the genesis of Bitcoin in 2008. Digital currency transactions are verified and maintained on a decentralized system, rather than one centralized source like a bank.
Now, it’s become increasingly evident that the world is ready to adopt crypto as a form of payment. Companies like Square and PayPal have begun to allow crypto payments through their platforms. Most recently, Visa announced that they're connecting their platform with the US Dollar Coin (USDC), enabling 60 million merchants to be able to use cryptocurrency for business transactions. Every day, it’s becoming easier for buyers and merchants to be able to buy and sell their goods and services and accept crypto as payment.
With the rapid growth of both the subscription economy and crypto payment—is the world is ready for the next stage of development: crypto subscription payments?
Here's what you need to know about crypto subscription payments. While crypto subscriptions are not yet widely available, there are some projects working on it and we want you to be aware of them. But first, you'll need to understand how subscription payments came about and where we are today.
History of subscription payments
It may seem like subscription payments are a new phenomenon of the digital age, but this couldn't be further from the truth. As far back as the 17th century, periodicals, newspapers, and books monetized their audience from consistent recurring payments.
Perhaps one of the most famous examples of subscriptions is how Charles Dickens wrote and monetized his books. Beginning with his first full-length novel in 1836, The Pickwick Papers appeared in 20 parts over a period of 19 months. This model benefitted Dickens immensely because he did not have to wait until he finished a full book to receive full payment for his work.
Where we are now
Fast forward nearly 200 years to the subscription boom of today. With the invention of the credit card in the 1950s and eventually the internet in the 1990s, people have been able to establish recurring payments through their credit card. Now, we have subscriptions for everything imaginable: monthly meal plans, eye glasses, razors, meditation apps, and much more. Companies such as Stripe and Zuora (more on these industry participants below) have made subscription payments easier for merchants and opened up the world to more easily charge recurring payments.
The emergence of cryptocurrency
In October 2008, Satoshi Nakamoto (whose true identity is unknown) published their Bitcoin white paper describing a tamper-proof, decentralized peer-to-peer protocol that could track and verify digital transactions, prevent double-spending and generate a transparent record for anyone to inspect in nearly real-time.
Based on a proof-of-work protocol, bitcoin is mined on individual nodes in a network and then verified by other nodes in this decentralized network. Bitcoin has flipped the financial world on its head, eliminating the need for intermediaries such as banks and financial institutions and proving the worth of a decentralized financial system.
Since the advent of Bitcoin, we have also seen the rise of Ethereum, an open-sourced blockchain-based software platform. With the use of smart contracts and distributed applications, anyone is able to build third-party decentralized applications on top of the Ethereum protocol. This has led to the emergence of Decentralized Finance (DeFi) applications erupting in the past couple of years. Furthermore, dozens of different stablecoins such as Tether (USDC) and Dai (DAI) have emerged as cryptocurrencies that are less volatile and make financial activities such as lending, borrowing, and paying a more viable activity in the world of crypto.
People and companies want to make online payments, especially faced with a global pandemic that has caused us to spend a majority of our time in the house. With cryptocurrency, making digital payments is now cheaper, faster, and more secure than ever before.
Everything You Need to Know About Crypto Subscription Payments
Now that we understand the basics of subscriptions and cryptocurrency, we can put it all together and explain the intricacies of crypto subscription payments. You might be thinking: how exactly can crypto be used for subscription payments if a crypto payment must be initiated by the crypto holder (we'll get that in a bit)?
There are inherent advantages as well as challenges to think about when considering accepting crypto for subscription payments. It’s critical to understand both the benefits and shortcomings.
6 Advantages Crypto Subscription Payments
One of the central properties of cryptocurrency is decentralization. Because a large number of stakeholders are incentivized to make the network successful, powerful communities are formed. Many cryptocurrency communities have rabid fan bases contributing to a level of engagement rarely seen in other types of communities. This community-first mantra can be used to create incentives for customers to participate in communities formed by the merchants to whom they subscribe.
2. Lower Fees
Typical credit card processing fees are in the range of 2.9% + $0.30 per transaction. This is due to the large number of middlemen required to process credit card transactions. Cryptocurrency removes many if not all of the middlemen, and that makes payments significantly more affordable.
3. Instant Settlement
Credit card payments can take days to settle in a merchant's bank account. Cryptocurrency enables near-instant settlement, giving merchants access to rapid cash flow.
Anyone with access to a credit card number and expiration date can process transactions, regardless of whether they are an authorized user of the card. Banks employ sophisticated anti-fraud measures, but credit card fraud is still a billion-dollar industry. To protect consumers, credit card issuers enable "chargebacks" that enable consumers to report fraudulent transactions and reverse payments. Chargebacks significantly increase credit card fees and risks, and often lead to material losses for legitimate merchants who fail to win dispute resolutions.
5. Global Reach
Today's payment processors introduce many hidden costs when foreign currency conversion is required. Cryptocurrency makes it possible for merchants and customers to transact in the same currency, no matter where they are in the world. In the event that currency conversion is required, cryptocurrency's liquid trading markets ensures that fees are dramatically lower than those offered by traditional processors.
Banks and payment processors frequently turn away legitimate businesses operating in industries deemed too risky. Cryptocurrency offers a measure of censorship resistance, enabling legitimate businesses to maintain their customer relationships despite being turned away by risk-averse banks.
Challenges of Crypto Subscription Payments
1. Pushing vs. Pulling
Cryptocurrencies such as Bitcoin and Ethereum enable a one-way payment flow. Transactions can be sent, or pushed, from the sender to the recipient. This design philosophy enforces the self-sovereign ethos of crypto natives.
Unfortunately, this completely blocks the typical subscription workflow, where payments are pulled by the recipient from the sender's account on a specific interval. This limitation is one of the primary factors why crypto subscriptions have not thrived despite billions of dollars in crypto payment processing activity.
2. Network Congestion
According to a survey of 2,500 Americans, the average person has a total of $237 in monthly subscription payments split among many services. Subscriptions are often in the range of $10-40 per month.
With transaction amounts so low, the variable rate of gas prices on the Ethereum blockchain can severely impact the relative cost of transaction fees. The example below from September 2020 demonstrates a 25% transaction fee for a $10 stablecoin payment.
This fee is more than 800% greater than an equivalent credit card payment. With the potential for fees to be so high, Ethereum today is simply not suited for small commercial payments. Bitcoin's network fees are also unsuitably high for small transactions.
3. High Switching Costs
In many ways, credit cards are ideally suited to process subscription payments. Consumers can "set it and forget it", often while earning reward points in the process. For any new subscription payment protocol to see widespread adoption, it must offer a 10x improvement on credit card payments. While cryptocurrency offers many benefits, they are weighed by issues such as high fees and lack of pulling functionality.
Cryptocurrencies such as Bitcoin and Ether are unsuitable for subscription payments due to their highly volatile nature. Previous crypto subscription implementations struggled due to the lack of stable asset options. The incredible rise of stablecoins in 2020, with a market cap of $10 billion as of September 2020, has now completely eliminated this technical challenge.
Previous Crypto Subscription Attempts
While we believe crypto subscription payments are indeed possible, it hasn't come full circle yet (big emphasis on yet). Here are some of projects that have tried to address the market:
In 2018, a group of Ethereum developers recognized the need for a solution to the technical limitations of crypto subscription payments. A discussion formed in ERC-948, eventually leading to the forming of a coalition. Several months later, EIP-1337 was published as a pending standard for recurring payments on the Ethereum blockchain.
However, as of September 2020 (two years from the publishing of EIP-1337), the draft has not made substantial progress toward completion. Multiple projects emerged from the 1337 working group, including ones from Gitcoin, Blockcrushr (also known as Groundhog), and 8x Protocol. These projects either failed to launch, or achieved extremely limited commercial adoption. After researching each product, our conclusion is that the EIP-1337 working group experienced the following challenges:
- A standard was never finalized due to competing strategies and product visions
- 2018 was "crypto winter" and the height of the post-2017 bear market, a time when enthusiasm for the industry (and in particular crypto payments) had waned
- No incentives were offered for merchants or (especially) consumers to adopt the protocol
- DAI was the only stablecoin in existence, and its adoption was in its infancy
- There were very few crypto on-ramps to purchase DAI or other stable assets for use in subscription payments
With Groundhog, you can enable recurring payments on Ethereum. With fiat on and off ramps, you can convert to cash automatically. You can also avoid volatility by locking in transactions with stablecoins. The Groundhog developers were co-authors of EIP-1337. They also used multi-signature smart wallet technology.
They sold it as a reliable revenue stream for your business. You could use stablecoins like DAI or USDC to easily make crypto subscription payments. Since stablecoins don’t fluctuate in value, you could more confidently make crypto payments or accept crypto payments. Groundhog was initially launched in 2018 and is currently in early access release.
In June 2019, Sablier introduced a novel approach dubbed "streaming payments" based on EIP-1620. With Sablier, there is a fixed subscription term without periodic billing periods. A payment for the entire subscription term (for example, 1 year) is locked into the Sablier contract and continuously streamed to the recipient. The recipient may call the Sablier contract to withdraw funds at any time based on the total amount streamed so far. The sender may cancel the stream and withdraw funds that were not yet streamed.
While innovative, the Sablier protocol does not meet the demand for a subscription payments solution comparable to credit cards, due to the requirement that the entire subscription term be pre-funded. The creator of Sablier has indicated that it could indeed act as a compliment to a subscription payments protocol in scenarios where the subscription term cannot be pre-funded and multiple billing periods are desired.
Daisy Payments is a software solution by Consensys CodeFi that enables businesses to accept cryptocurrency for purchases, subscriptions, usage fees and other payments. You can manage all of your payments, products, and customers in one dashboard. They have a very simple subscription payment setup. However, it has not been widely adopted.
The Future of Crypto Subscription Payments
There haven't been any successful full-featured crypto subscription payment projects yet. While the previous attempts offer some promising features, the innovation is not quite there.
There's an incredible market opportunity for blockchain payments companies to move forward on crypto subscriptions. It's clear that subscription payments aren't going away, so there's a need for a solution that extends the benefits of cryptocurrency to businesses with a subscription based revenue model.
Automate your subscription billing with recurring invoices
Since you can't "pull" a payment with a crypto transaction like you would with a credit card, there's no "set it and forget it" option for crypto subscription payments today. Still, the process doesn't have to be entirely manual. In the mean time, programmable recurring invoices are a serviceable option for companies that wish to accept crypto payments for subscription services.
Gilded's recurring invoice feature allows you to program daily, weekly, monthly, and annual billing in a few clicks. The caveat is that the customer must complete the payment process for each billing period.
Gilded's recurring invoice feature marks our first step towards a complete crypto subscriptions solution. We're working with several SaaS companies to offer additional features such as hosted payment pages and webhook notifications.
Interested in accepting crypto payments for your SaaS product? Let's talk.
If you're searching for crypto billing support, Gilded can help automate this process from invoicing—to bill pay—to accounting.
What would you like to know about crypto subscription payments that we haven't covered? Schedule a demo with one of our crypto payment experts to learn more about recurring invoices and Gilded's other back office features.