Fashion and luxury sellers may be feeling some peer pressure right about now to jump on the bandwagon and start taking cryptocurrencies as payment.
In the past several weeks, businesses including Off-White, Kering’s Gucci and Balenciaga and LVMH’s Tag Heuer have said they’ll adopt crypto payments to different degrees. Majid Al-Futtaim, a retail giant that operates some of the biggest malls in the Middle East with a number of luxury tenants, recently joined the list. Last week, Farfetch became the latest addition, saying it will enable crypto payments later this year and begin offering clients of its technology platform the ability to accept crypto in 2023.
These announcements have come even amid the recent turmoil in the crypto market, where many coins have plummeted. Whether the plans were too far along to abandon or represent confidence in crypto’s future, the outcome is that crypto payments are gaining ground in fashion.
Whether to accept a digital currency with no government backing, little regulation and a potentially complicated transaction process is not a simple decision to make. There are a number of different factors businesses need to consider, as well as different benefits and drawbacks.
Brands will ultimately have to do their research and decide what works for them, but there are some key issues they should be thinking about as they determine whether to let shoppers pay using cryptocurrencies.
Is It Worth Accepting Crypto At All?
Before retailers even get into the different routes they can take to allow crypto payments, they need to decide whether it’s worth the cost.
“It’s a much bigger decision than adopting a new form of payment,” Deloitte noted in a guide to businesses considering adopting crypto.
Researching potential partners, understanding the risks and complexities involved and setting up the infrastructure can take time and money. In a survey of 2,000 senior retail executives in the US conducted in December 2021, Deloitte found more than half of retailers with revenues of $500 million and up had invested more than $1 million to enable payments with digital currencies.
And for now, the group of shoppers actually paying in cryptocurrencies is tiny. In late 2021, just 2 percent of US adults had used crypto to buy something or make a payment in the previous year, according to a survey by the US Federal Reserve Board. Most that did tend to be lower-income Americans and might not have a bank account. High-income individuals disproportionately bought crypto as an investment, it was to hold rather than suggesting use for payments.
Still, some brands may want to associate themselves with crypto as part of a longer-term web3 strategy. Allowing crypto payments can be an effective way of attracting the crypto audience, according to Tim Davis, risk and financial advisory principal at Deloitte. Plus, the group of shoppers wanting to pay with crypto does look to be expanding.
“It’s still small, but it’s growing and feels like we’re getting towards an inflexion point,” Davis said. “It’s a little bit muted right now as we’re in this crypto winter.”
Most executives in Deloitte’s retail survey said their customers had expressed “significant interest” in using digital currencies for payment. An even higher share expected the figure to grow in the next year.
That audience could be particularly valuable for some fashion businesses.
“Luxury items tend to be the bread and butter of cryptocurrency payments today,” said Merrick Theobald, vice president of marketing at BitPay, a crypto payment gateway used by Tag Heuer and Pacsun. Though he noted they see a mix of transactions, with the total number reaching more than 70,000 in May.
Should You Handle Transactions Or Pay Someone Else To?
Many big brands have turned to companies such as BitPay or CoinGate to simplify the process for them. These payment gateways can integrate into the brand’s online checkout or point-of-sale system in stores, allowing the merchant to accept any coin they’re set up for and handle transactions from start to finish. The shopper typically scans the QR code to make payment. The payment gateway accepts the cryptocurrency directly, validates it, converts it to fiat currency and deposits the funds in the merchant’s bank account.
The merchant may not have to touch a cryptocurrency if they don’t want to.
These services don’t come free. While crypto proponents like to point out that payment gateways generally charge a 1 percent fee on transactions — less than the 1.5 percent to 3.5 percent credit cards usually charge — Davis noted the fees can be tiered based on the transaction speeds you want, which can vary as a result of the way blockchains work. The fee structure is one of several topics brands will want to ask about before signing up. (Credit card fees can be higher because of the greater number of intermediaries involved in a transaction, each wanting its cut.)
Brands that are tech-savvy and want to keep the entire sale may choose to do everything themselves. In that case, they need to decide which coins to accept. Some are more volatile than others, which is why stablecoins, typically pegged to a presumably stable asset like the US dollar, are a popular option. Also worth noting is that while lawmakers have tended to treat bitcoin and ether as commodities, they’ve regarded some other coins as securities, which raises regulatory issues.
Many brands will opt to accept payments into a single crypto wallet, according to Davis, but they can set up other wallets as well for different purposes, like outgoing payments and refunds. Just be warned that for brands doing a large volume of transactions, tracking all the activity can be onerous.
Brands don’t always want to hold large amounts in a crypto wallet. Often they will use a custodian, whether a bank or a fintech firm, to store and protect their funds. In those cases, they need to look into how it’s licensed and any protections it has against issues like theft or bankruptcy.
What Are The Risks?
Unlike a credit card, a crypto wallet can be anonymous, raising the threat of illicit transactions.
Brands are still subject to reporting large and suspicious purchases, said Timothy Spangler, a partner in the financial services group at Dechert, an international law firm. Importantly, they need to ensure they’re not taking payments from sanctioned individuals or enabling money laundering.
Fears about crypto being used for illegal activity are a big point of hesitation for luxury brands interested in accepting crypto payments, according to Justas Paulius, chief executive of CoinGate, which has fashion clients in western Europe.
“They have a lot of questions about how you will make sure someone sanctioned from Russia is not purchasing all these luxury goods,” he said.
Crypto payment gateways use a number of methods to do this diligence on transactions themselves, though that doesn’t guarantee a brand can avoid liability. It’s an area where the law is still unsettled. The measures a payment gateway has in place are another area brands should look into when considering with whom to partner.
For brands that don’t work with a third-party gateway, there is cryptocurrency compliance software they can use. They may also want to require customers to register their crypto wallets in advance.
The crypto market has also been a frequent target of hackers and scammers, making security a serious matter. And because of the way blockchains work, once money is transferred the transaction can’t be reversed. Money that’s stolen can be unrecoverable.
Should You Hold Some Amount of Cryptocurrency?
Because crypto prices can be so volatile, many brands choose not to handle cryptocurrencies at all. But that’s not always the case.
“Some exposure in the 5 percent to 10 percent range is quite typical,” Davis said.
There are various reasons brands may do this. One is simply that they expect the value of the coin to rise, so they’re treating it as an investment. But they could also offer customers loyalty rewards in the form of small crypto payments, or use cryptocurrency for business-to-business transactions, which Davis said has become more common.
If a brand allows crypto payments in a country where it only has a small footprint, it may also choose not to convert those funds, according to Spangler, because compared to a country where it has a large number of expenses and needs the money for operations , it has more flexibility to hold or use them.
But for those that do hang on to the cryptocurrency they receive, there can be additional accounting involved, since there can be tax and cash-flow implications.
What Are the Tax and Regulatory Issues?
Regulators generally treat cryptocurrencies as intangible assets rather than currencies. Brands may have to make adjustments when accounting for crypto on their balance sheets. If a brand is using a payment gateway to only accept payments in a currency such as dollars, doing the books may be fairly straightforward. But if, for instance, they’re handling crypto directly, and its price rises or falls before being cashed out, the brand will need to determine the resulting profit or loss for tax purposes.
The laws governing cryptocurrencies vary by country and jurisdiction too. China banned cryptocurrency transactions last year, for instance. In many cases, laws are still being established, presenting a challenge to brands that want to accept crypto payments just in that they need to stay aware of any changes.
It presents a challenge in that the legal and accounting teams at a business need to stay informed.
What About Refunds?
Returns due to wrong sizing and other issues are rampant in fashion, so brands also need to consider what happens when refunding a crypto payment.
Generally, it’s not a major problem since brands price their products in a fiat currency like pounds or euros. To issue a refund, they would send the fiat amount to their payment gateway, which would then change it into cryptocurrency using the current exchange rate and refund it to the customer. Or if the brand handled the transaction, they would do it.
When it gets tricky is if the brand priced the product in a cryptocurrency. A swing in the coin’s value would mean the brand paying out an amount that’s more or less than the original price.
One thing to note is that cryptocurrency transactions are final. Credit card companies have to navigate chargebacks, but these aren’t an issue when dealing with cryptocurrencies.
While these are some of the key issues brands need to consider when deciding whether to let customers pay with cryptocurrencies, they aren’t the only ones. Ultimately, they’ll need to ask lots of questions of themselves and the partners they consider to decide what works for them.