Veteran ‘Payments Guys’ Create Bitnet to Ease Bitcoin Acceptance for Large Merchants

Bitcoin may remain volatile and controversial, but the digital currency holds enough potential that it is starting to attract seasoned payments professionals, particularly in the business of merchant acceptance.

Witness Bitnet, founded in January by a pair of former executives with payments processor CyberSource Corp. to make it easier for large merchants to take customers’ Bitcoin and convert it into their local currency. With a head count of about 20 distributed in offices in San Francisco, London, and Belfast, the startup has concluded an affiliation deal with authentication-platform provider CardinalCommerce Corp. and plans to cut similar agreements with other third parties that serve small and mid-size merchants. Meanwhile, it is marketing its acquiring service directly to top-tier merchants.

John McDonnell, chief executive, and Stephen Mc Namara, chief technology officer, left CyberSource in December when they realized that Bitcoin had the potential to become that most elusive of products in electronic payments: a universal currency for the Internet. “The Bitcoin protocol has turned the Internet into a secure transaction network,” McDonnell tells Digital Transactions News in an interview that also included Mc Namara.

It didn’t hurt that, while other companies had already formed to offer Bitcoin acceptance to merchants, Bitnet was modeled after a payments platform, CyberSource, that had proven itself sufficiently that Visa Inc. paid $2 billion in cash in 2010 to buy the company. “We’re payments guys,” says Mc Namara. “We’ve been doing this for 15-odd years.”

Merchants that adopt Bitnet’s service also integrate its application programming interface. When a U.S. customer, for example, checks out and selects Bitcoin as his payment option, an API call flows out to Bitnet, which calculates a conversion into dollars. At this point, the customer has, typically, five or 10 minutes to open his Bitcoin wallet and check exchange prices for himself (a time clock appears on screen to count down the time). If he wants to proceed, he enters his wallet details and Bitnet deducts the Bitcoin, or fractional Bitcoin, crediting the merchant with the dollar equivalent.

Merchants receive their funds in up to five days. Those that elect to receive Bitcoin get the currency immediately.

For its service, Bitnet charges a fee that tops out at 0.9% and goes down from there with volume, roughly a third of credit card discount rates. “We absorb the volatility risk,” says McDonnell. “It’s a simple API integration between your e-commerce system to us. Interchange goes away. There’s no acquiring bank, no issuing bank.”

While Bitcoin transactions are irrevocable, on high-risk transactions Bitnet’s system can invoke a third party, a so-called escrow agent, to sign the transaction along with buyer and seller and reimburse buyers who don’t receive their goods. This procedure, indeed, was provided for in the original white paper setting out the Bitcoin protocol, the Bitnet executives say. “This is part of our risk model,” says Mc Namara.

Large e-commerce retailers like Overstock.com and Tiger Direct have already rewired their shopping carts to accept Bitcoin. Bitnet hopes more will follow. “The fact is, most big retailers are looking at this,” says McDonnell. “What MCX is talking about is pushing stored value over a network. That’s Bitcoin.” MCX, or Merchant Customer Exchange, is a system being built by Wal-Mart Stores Inc., Best Buy Co. Inc., and other major retailers to process mobile payments; it has not yet launched.

McDonnell and Mc Namara, indeed, are betting merchants fed up with the interchange and fraud costs imposed by credit cards are likely to turn to Bitcoin in time. So is William McKiernan, the former CyberSource chief executive who serves as Bitnet’s chairman. While banks are inclined to say that cards work just fine, the fact is, says McDonnell, “Cards don’t work fine. They create a lot of dead-weight loss that we pay for.”

With Bitcoin now available as a commercial alternative, there’s little chance the currency’s tide can be turned away, the Bitnet founders say. “The genie is out of the bottle,” says Mc Namara.