How optimizing fiat payment journeys can help cryptocurrency exchanges thrive

When the first Bitcoin was mined in 2008 by a still-unidentified figure calling themselves Satoshi Nakamoto, few predicted the scale to which this innovative form of currency would grow.

Today, the cryptocurrency market, comprising Bitcoin, Ethereum, Litecoin, XRP, and more than 4,000 others, is worth around $1.7 trillion, with more than $120 billion traded daily worldwide. Some believe that decentralized currencies will change the world, while others see them as just valuable assets, but either way, cryptocurrency is here to stay.

Number of cryptocurrency types, 2013 to 2021

Cryptocurrencies can be acquired through peer to peer transfer, generated through cryptocurrency mining, and purchased and sold via an exchange. Some of these exchanges have grown to enormous size. In this article, I will look at the pain points that these businesses face and suggest some ways that they can overcome them.

A roaring trade

The cryptocurrency market is very attractive to traders due to its relative volatility – the price of a given digital currency can swing by multiple percentage points on a daily basis, creating opportunities for dramatic profits. Institutional traders were originally skeptical of this market, with many famous figures even arguing that it was a dangerous bubble, but by now many large financial institutions are heavily involved in trading digital currencies too.3

In 2020, the value of the cryptocurrency market grew by around 200 percent, surpassing the market cap of 2017, which was at the time considered the breakout year for Bitcoin and its fellow coins.

Market capitalization of cryptocurrency market, 2013-2020

As a result, cryptocurrency exchanges are doing a thriving business, with many scaling internationally and processing billions of dollars’ worth of trading volumes daily.

However, while crypto exchanges are cashing in on the popularity of their unique product, they share with other kinds of eCommerce merchants the potential pitfalls of an inefficient payment strategy. When dealing with the amounts of revenue that they are, a minor inefficiency can equal a huge amount of money lost, while optimization can bring significant rewards.

So what are these pain points, and how can they be overcome?

Settlement delays

Speed of settlement is extremely important for a cryptocurrency exchange, because when a customer purchases cryptocurrency with their fiat money, the exchange is giving them assets from its own pocket.

In addition to this, cryptocurrency transmission is immediate while fiat settlement can take days. As a result, exchanges can find themselves with in the minus while they wait for their funds to be settled.

Descoping payments to a payment technology specialist can accelerate settlement speed. For example, Nuvei provides its partners with same-day settlement, decreasing the liquidity of cryptocurrency exchanges by bridging the gap between transmission of cryptocurrency and receipt of fiat.

Transaction code not approved

Despite the fact that cryptocurrency has been adopted by the mainstream, it is still the case that some issuers in some places will block cryptocurrency-related transactions. This could be because of regulatory confusion as to the classification of cryptocurrency (is it a currency, a share, a financial asset?), it could be because that the issuer considers cryptocurrency to be too volatile, or it could be because the transaction comes from abroad.

One way to bypass this possible issue is by integrating with alternative payment methods such as eWallets and local payment cards. These methods allow transfer of fiat money without the worry of a transaction code being flagged. In addition, alternative payment methods extend an exchange’s reach by allowing it to offer customers the payment methods that they know and trust, which is particularly important when courting new customers to a novel product like cryptocurrency. Exchanges are advised to seek a payment partner that offers these options, the more extensive the better – for example, Nuvei offers more than 450 APMs worldwide through one API connection.

Declined transactions

Transaction approval rates are a vital KPI for any eCommerce business, but especially important to cryptocurrency exchanges, for the reasons stated above. A declined transaction can mean a lost sale, an exchange out of pocket, or at the very least, a delay leading to a missed trading opportunity.

One of the most effective ways of optimizing approval rates is by having a relationship with local acquiring partners. Acquirers are more likely to approve a domestic transaction, so by having a payment partner with local connections to your target market, you can process customer transactions locally no matter where they originate from. Nuvei, for example, has connections with more than 200 local acquiring partners worldwide as well as its own acquiring license, creating an extensive net covering all major regulatory jurisdictions.

Know your customer

The cryptocurrency industry is well known to the world’s regulatory agencies. When the value of Bitcoin began rising dramatically back in 2017, governments scrambled to make laws covering this new financial asset. Even today, the legal definition of cryptocurrency differs from region to region.

Eager to maintain compliance, many cryptocurrency exchanges enacted eKYC protocols. While it can be argued that customer identification is contrary to the philosophy behind decentralized currencies, it is also true that it’s the most effective way of both reducing fraud and maintaining good relationships with regulators.

In addition, eKYC processes have a direct effect on transaction approval rates. For example, transactions related to Europe are required to be PSD2-compliant, which in some cases requires enacting the Strong Customer Authentication challenge flow. Failure to comply with this means that transactions simply won’t be approved.

Cryptocurrency exchanges are advised to partner with a payment provider that can descope this compliance. For example, Nuvei’s Identity Manager provides fully automated customer identification checks, fraud protection, and connections to a range of identity management service providers worldwide.

Into the mainstream

Bitcoin has come a long way from its beginnings as an open-source project published by an unknown developer. As a holder of crypto myself, I’ve found it really exciting watching the development of this thriving ecosystem, and it’s a privilege to be serving companies like Binance, MoonPay, Instacoins, Coinmama, and Bitoasis.

I recommend that all merchants involved with this industry pay close attention to their digital payment strategy so as to ensure they are not losing conversions or missing out on new potential revenue streams. For a free consultation about how Nuvei can optimize all aspects of your payment strategy through a single API connection, please don’t hesitate to contact me via my LinkedIn profile.

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