Should banks let people buy bitcoin with credit cards?
The fintech startup Abra's decision to let customers use credit cards to buy cryptocurrency — a move at odds with recent actions by Bank of America, JPMorgan Chase, Citigroup, Capital One and Discover — is again raising the question of whether the practice is too risky for financial institutions to allow.
The big banks made their move in February after a precipitous drop in the value of bitcoin, Ethereum, Ripple and Bitcoin Cash, worried that crypto buyers, some of them highly leveraged, would buy high and balk when the credit card bill came due and their currency was worth far less than its purchase price.
While Abra acknowledges that is an issue, the firm's chief executive said the fault lies with banks' systems.
“That is definitely a concern," said Bill Barhydt, Abra's CEO. “A lot of U.S. banks that haven’t rolled out 3-D Secure" — a security protocol for card transactions — "and other technologies have different chargeback rules because they’re still behind in the technology curve. So they’ve been reluctant to process crypto transactions.”
But while Abra supports the use of credit cards for crypto purchases, large banks remain averse to the idea. USAA was one of the few big institutions to allow crypto purchases with credit cards, but it joined the ban on June 15.
"After careful thought, USAA has decided not to allow cryptocurrency transactions on USAA credit cards," a spokeswoman said. "This change helps prevent fraud or losses and protects USAA and our members’ financial security. Members that would like to continue to purchase cryptocurrency may purchase the currency by using their own funds through the use of a debit card."
JPMorgan says its decision stands for the moment. “Due to the volatility and risk involved, we are not processing cryptocurrency purchases using credit cards at this time," a spokeswoman said.
Bank of America and Capital One did not respond to requests for interviews.
For their part, Mastercard and Visa appear to be neutral on the issue.
“We allow purchases of cryptocurrencies on card-based products where permitted by law,” a Mastercard spokesman said. “These transactions are subject to our customers’ decision to accept these on their programs.”
For some, however, the decision by big banks to single out crypto purchases is a dangerous precedent that needs to be revisited.
"If they are policing digital currency transactions by de-risking the activity on the basis of protecting customers from market changes, they are going to be on the hook for market changes where their financial products are used where they did not intervene and de-risk to protect consumers," said attorney Christine Duhaime, founder of the Digital Finance Institute, which studies fintech issues.
"For instance," she said, "buying stocks and bonds, buying a new car, or even online gambling. I don’t think you can, as a financial institution, decide to de-risk on the basis on market volatility of an investment or other product and say that it is based on chargeback risk unless you are prepared to be liable for similar situations where there is market volatility associated with other investments and products."
If cardholders are of legal age and digital currencies are legal to purchase, Duhaime says financial institutions should not be “Big Brothering” their customers' decisions to use their credit cards to buy digital currencies.
"It’s not their role and legally; I think it exposes them to more liability," she said. "Moreover, how are they then going to change their position when the time comes to accept digital currencies? Then what? They will be on the hook for market changes and charge backs because in 2018, they publicly said they believe they have a responsibility legally, to Big Brother the sector."
Banks have other ways to mitigate the risks of cryptocurrency purchases by working with credible and reliable digital currency exchanges that have competent anti-money-laundering solutions in place, she said.
But other observers are sympathetic to the banks’ position.
“I completely understand the fear that this is a very speculative market still with extreme volatility,” Grainne McNamara, U.S. blockchain leader at PwC, said in a March podcast. “Individuals are coming into the market who perhaps don’t understand that and are accessing credit card debt in order to invest in assets they think will only go up. Of course, we know that’s not true and we’ve seen some rather spectacular drops in the prices of some of these cryptocurrencies.”
McNamara said banks are trying to understand which cryptocurrency players are willing to submit to regulation before they support digital currencies, with the aim of protecting their customers as well as the bank’s ability to collect on credit card debt.
Abra’s customers typically use ACH or bank wire to buy digital currency, according to Barhydt. When they do use credit cards, the technology Abra uses helps mitigate the risks, he said.
“For most people using Abra at checkout, there are no chargebacks because of the way we validate the user and use 3-D Secure technology,” Barhydt said. “3-D Secure makes it almost impossible to charge back a transaction you’ve already completed because you’ve had to validate who you are, that you understand the transaction, the terms of service. It’s different than checking out on a last-generation U.S. website.” A vendor, Simplex, handles the validations for Abra.
Barhydt is not aware of any chargebacks that have occurred on digital currency transactions made with cards. Consultant Richard Crone agrees that technology makes a difference.
Using their legacy card-based systems, banks have good reason to not allow crypto purchases, Crone said. “They need to think outside the old core processing box and think like a fintech,” he said.
Square and Circle Financial are two examples of fintechs also allowing cryptocurrency purchases, he noted.
“They are using cryptocurrency trading as an investment feature to accumulate balances and stimulate active use of their mobile wallet and P2P payment service,” Crone said. “Cryptocurrency investment and trading capabilities will build prepaid balances for Square and Circle because the mobile wallet itself is the sole mechanism for managing cryptocurrency, acting as a safety deposit box for bitcoin and other cryptocurrency holdings.”
Square does include a disclaimer in its terms of service, Crone pointed out: “Square may not always support bitcoin withdrawals to an external wallet in an immediate fashion. This is a security feature.”
Another concern banks sometimes raise in relation to supporting digital currency — the fact that money can be laundered through digital currency channels — is not a real issue, in Barhydt’s view.
“The reality is money laundering is not happening through crypto, it’s happening through banks,” he said.
Banks do need to be appropriately concerned about compliance with regulation such as anti-laundering and know-your-customer rules, he said.
Abra plans to become a full-fledged financial services provider
Barhydt first came on banks' radar when he was CEO of m-Via, a provider of mobile payments and mobile banking services for the underbanked. The company was named one of American Banker's Top Fintechs to Watch.
The company later changed its name to Boom Financial, and in 2012 it was sold to the wireless carrier Digicel. In 2014, Barhydt founded Abra, whose investors include American Express Ventures, First Round Capital, Foxconn Technology Group, Arbor Ventures, Lerer Hippeau, RRE Ventures and Silver8 Capital.
“What I’m doing now is the next-generation version of [m-Via], taking a lot of lessons learned,” Barhydt said. “It was a long, 10-year lesson for me in how to operate in this ecosystem legally.”
Today Abra has a cryptocurrency wallet and aspirations of offering payment, money transfer and credit services.
“Our goal is to democratize access to banking by offering all these services both in the rich world as well as the developing world,” Barhydt said. “We already have hundreds of thousands of users — we have poor farmers in the Philippines using our app and we have rich people in New York using our app.”
What draws people to Abra, Barhydt said, is its simple user interface.
“All this stuff is scary to a lot of people,” he said. “A lot of people don’t understand what a private key is or think they’re going to lose their money. Abra has gone to incredible lengths to simplify this so the 75-year-old retiree can do this. In fact, we have retirees using our app.”
Abra charges an 8% fee for bitcoin purchases. To open an account, the user must provide all sorts of personal information, including date of birth twice, scan the front and back of a driver’s license or key pages of a passport, then type in a lot of the information on the identification document.
But Abra can't always be used to buy crypto if the underlying card will not allow it. For example, I tried to buy bitcoin through Abra using my credit card. But my card, whose issuer had not previously said publicly it would forbid the purchase of bitcoins, was rejected.
The bank's public affairs group said the rejection was purposeful.
“We continually evaluate our policies and security measures, with a focus on how best to serve and protect our customers, as well as the bank,” a spokesman for the bank said. “With this in mind, we made the decision in late February to pause the processing of cryptocurrency purchases using our credit cards, and will continue to evaluate our policy as the market evolves.”
Barhydt said he would be interested in partnering with a bank to help it let people buy crypto with a card.
“We have not focused on that just because the compliance overhead for us of going through the bank partnering process would be very cumbersome, so it would have to be a very large bank to justify the effort,” Barhydt said. “But that’s something we would love to do when the banking world is ready. I think they’ll realize in short order that there’s very interesting implications of this technology for money transfer, for investing, for credit, that they can take advantage of.”
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