Crypto payment gateways are third-party payment processors that deal with digital currencies like Bitcoin and Ether. These types of service providers perform an important function in today’s crypto and blockchain landscape – they help speed up the adoption of cryptocurrencies by merchants.
The cryptocurrency space is still in its formative years, so, naturally, it’s yet to establish a strong reputation among merchants who typically rely on tried and tested methods of conducting business, especially when it comes to handling payments. Even the more novel online payment options are ultimately underpinned by a financial system that has had decades, if not centuries, to be established.
Crypto price volatility is another factor that discourages merchants from adopting crypto payments en masse. This severely limits the utility of cryptocurrencies for consumers, as even the biggest crypto aficionados have limited options when it comes to paying in crypto.
This is why, at least for the time being, crypto payment gateways are so important. A crypto payment gateway can provide an easy way for a merchant to adopt crypto, without the hassle of having to maintain a crypto wallet and convert digital currencies into fiat money. This makes it much easier for a merchant to offer crypto payment options and encourages the broader adoption of digital currencies.
How do crypto payment gateways work?
A crypto payment gateway functions as a traditional payment processor, but its purpose is to receive payments in digital currencies and convert them into fiat money on behalf of merchants that have opened accounts with that service provider. The way this works is rather simple.
A user makes a purchase, paying in crypto. The payment processor receives the digital currency and instantly converts it into fiat money, based on what the cryptocurrency’s market value is at the time. Then, the exact amount of fiat money is transferred to the merchant’s account. From there, the money can be transferred to a designated bank account.
This simple system practically ensures that every merchant can offer crypto payment options to its customers, without ever having to deal with actual digital currencies.
Pros and cons of crypto payment gateways
Considering what we discussed above, it’s easy to see why crypto payment gateways are so useful. They make the crypto payment process considerably easier for merchants, who can accept as many digital currencies as their particular service provider offers. They can connect merchants with customers around the world. Meanwhile, the instant conversion they offer mitigates, or even eliminates completely, the price volatility issue that is usually associated with digital currencies.
That said, crypto payment gateways also have some disadvantages when compared to the ‘blockchain’ way of handling crypto transactions.
First, you need to be sure that your service provider can be trusted. You see, thanks to its decentralized nature and its reliance on cryptography, blockchain technology is completely trustless, meaning that you don’t need to trust the network to know that the transactions are processed correctly. In contrast, crypto payment gateways are centralized entities, meaning that a level of trust is required. This means ensuring that the payment processor is not only legitimate, but also capable of providing quality service and secure enough to resist potential cyber attacks.
Another disadvantage is that using a crypto payment gateway comes at a higher cost as compared to directly transferring payments on the blockchain. This is because crypto payment gateways are intermediaries that charge their own fees on top of the transaction fees incurred on a blockchain network.
In short, there is nothing that necessitates the use of these service providers. However, as it is often the case, the convenience they bring is often worth the higher price.
A useful interim step
Crypto payment gateways may seem antithetical to the core principles promoted by blockchain technology, but they are a useful tool that can bridge the gap between the crypto space and the broader economy. We’ve already seen this happen before, with centralized crypto exchanges having been instrumental in helping cryptocurrency trading take off and thrive. And even though we’re now seeing the rise of DEXes like automated market makers as an increasingly prominent alternative, centralized exchanges today continue to handle the bulk of crypto trading volume.
Crypto payment gateways are set to play a similar role. They are, well, gateways to the world of digital currencies and can help keep the crypto flame alight until we are ready to fully embrace the decentralized way.