How Crypto Creates Oligopoly Among Payment System Providers

Data & Research / 24.06.2021

A cryptocurrency is a digital currency stored in a public ledger known as a blockchain. The public ledger stays distributed among nodes that make it difficult to alter. As a result, the digital asset can get transferred securely and trustfully. The distributed ledger technology is decentralized. 

Users can transact peer to peer without having to go through tedious bank processes. Well, that can make an excellent payment method for merchants, right? So it’s no surprise that crypto payment systems are slowly taking shape and could soon rule the business world.

The Rise of Crypto Payment Systems

Despite being in its infancy, the crypto space has faced its fair share of criticism and rejection. China was among the first countries that tried to clamp down on the burgeoning industry. Authorities restrained their financial institutions and payment service providers from providing any related crypto services. Regardless, digital currencies have evolved, and it’s now a whole new industry.  

Developing countries, including China, the USA, Germany, and the UK, began allowing digital currency and crypto payment systems. Payment system providers such as The OLB Group, HUPAYX, PayPal,  Marathon Patent Group, and GreenBox POS integrated digital currencies as merchants also started to accept crypto as payment methods. Different terms describe virtual assets in other countries. 

The Swiss population refers to it as a payment token, the Germans’ crypto token, and electronic money in Lebanon and Columbia. However, it’s still hard to predict what the future holds for the crypto industry. The pace of Bitcoin’s growth in its first decade of existence may be promising. Still, one sure thing about the industry is that crypto payment system providers create an oligopolistic market structure.

Understanding Oligopoly

An oligopoly is a state where a small number of firms dominate the market. There could be several other entities in the industry, but the larger market share is under the control of a select few. Generally, such a market structure does not take prices from the forces of demand and supply. 

Instead, the few firms benefit from setting prices collectively, price-fixing, or adjusting under the direction of a leading firm. The firms maintain their dominant position in the market through the natural and artificial barriers of entry. For instance, the cryptocurrency and blockchain space is complex. 

Setting up a crypto payment system is associated with high setup and research and development costs. Therefore, the high cost is a natural barrier that prevents new entrants from providing the service. On the other hand, incumbent crypto payment service providers like PayPal have superior knowledge of payment services from their experience in the industry. 

Over the years, such payment service providers have created a strong brand and have a locked pool of loyal customers. As a result, they can invest in heavy advertising and maneuver predatory acquisitions by acquiring smaller and new entrant firms to remain dominant.

Crypto Payment Service Oligopoly

Before businesses can accept decentralized crypto payments, they need to set up the proper infrastructure. Although it is possible to set up its infrastructure, it’s pretty complex. The ideal option is signing up with a crypto payment service provider that gets all the hard work done. 

A complete payment service includes the conversion of crypto coins to the fiat currency preferred by the merchant. The hardest part is usually programming all these processes, including creating wallet addresses to support crypto transfers, security, and interfaces to facilitate the payments.

Renowned crypto payment service providers avail different mediums for merchants to accept crypto payments. They provide solutions such as integration with e-Commerce platforms to support payments via in-store point-of-sale systems. Some also offer solutions for accepting donations in cryptocurrencies through integration with various donor services. 

App development capabilities allow ready-made functions in iOS, Android, and programming languages to support crypto payments through portals and applications. As a result, any entity that signs up for crypto merchant services can start receiving payment in select cryptocurrencies via different transaction mediums. However, this capability is what creates an oligopolistic market state among payment system providers. 

The complex nature of setting up crypto payment systems that guarantees a smooth and secure functionality makes existing providers remain predominant in the industry. These firms further enjoy the natural barriers to entry in the financial technology space, plus other artificial barriers such as limit pricing, where they set transaction costs low.

Conclusion 

In general, venturing into technology is not an easy feat. It requires extensive R&D, which is quite costly. It even gets more complex when you get to the financial technology sector. For example, investors in money transfer systems must develop efficient and secure systems that merchants can accept as their payment system. 

Therefore, the rise of cryptocurrencies leaves only a few fintech experts like PayPal with the capacity to level up and provide efficient payment systems. These firms continue to enjoy an oligopolistic market structure, more so due to the natural barriers of entry. Artificial barriers are also profound due to a lack of regulation in the crypto space. 

Governments sometimes respond to artificial entry barriers through laws against collusions, although this is impossible in the decentralized and unregulated crypto industry. Crypto payment system providers could thus continue to dominate the industry until the governments devise appropriate regulations.

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.