1 new development that could pit Bitcoin against credit card companies

Clover, a leading enterprise payment solutions company, recently announced that it will pilot a 90-day trial with the Lightning Network for customers to pay for goods and services using Bitcoin (BTC -1.37%).

The Lightning Network addresses some of Bitcoin’s key pitfalls that have limited the cryptocurrency’s ability to become a viable form of payment for everyday purchases. Unlike some of the newer blockchains that boast blazing speeds and low fees, Bitcoin is relatively slow and expensive to use for smaller transactions. But with the Lightning Network, Bitcoin can become as fast and cheap to use as these other blockchains, and can even compete with credit cards.

The mechanics are a bit complicated, but essentially the Lightning network acts as a second blockchain where transactions can be processed faster and cheaper, and later added to the main Bitcoin blockchain. By using the Lightning Network, Bitcoin effectively becomes a viable form of payment. And even better, to the delight of businesses, they don’t have to pay the exorbitant credit card fees that take away from the bottom line.

If the trial with Clover is deemed successful, it could lead to direct integration with all Clover merchants and pit Bitcoin against the likes of Visa and MasterCard.

You are probably wondering at this point, why would a business want to accept Bitcoin?

Image source: Getty Images.

Clumsy, expensive and a bit confusing

Credit card companies make money by charging a costly fee to both the cardholder and the business that accepts the card. To use a credit card company’s network, businesses must pay a fee for each transaction.

Additionally, while a credit card purchase appears to be instant, there are several hurdles and checkpoints that the payment must pass before it is officially settled. Payments originate from the card user, then pass through the network and finally reach the merchant’s bank. After this, the payments are sent back for verification to ensure that the transaction is attributed to the correct cardholder so that the issuer can bill the customer.

An alluring alternative

With the Lightning Network, this obstacle is streamlined. Instead of having to be processed by the credit card network, the merchant’s bank, and even the cardholder’s bank, payments on the Lightning Network are direct and settled virtually in real time. Not to mention the fees are often just fractions of a penny.

By using the Lightning Network, businesses can eliminate credit card fees (which can especially hinder small businesses), process transactions in real time, and receive compensation in the form of an asset that potentially increases in purchasing power (as opposed to the US dollar).

For these reasons, it is no wonder that the Lightning Network is growing rapidly. Since its inception in 2018, the Lightning Network has blossomed into an expansive payment solution for Bitcoin that now boasts near-record capacity, even in the midst of a brutal bear market.

If current trends continue, not only is Bitcoin in a position to remain one of the premier stores of value, but it could also become a viable form of payment. Should this future unfold, legitimization of Bitcoin will evolve and thus increase its adoption. Because Bitcoin has a limited supply, increased demand can add significant buying pressure and lead to price increases.

This process probably won’t follow a direct path, but it makes buying today, while prices are still low, that much more attractive.