Can blockchain improve restaurants' thin margins?

A reverse auction service for restaurants is trying to ease the industry's costs through a decentralized payments system.

"Restaurants already operate on thin margins, and then they're paying 3% to 3.5% interchange to the credit card companies," said Tim Keough, founder of WythMe.

The Arlington, Va.-based WythMe operates an auction app. Consumers enter for a date, time, number of people, area they would like to go and other descriptors. The company's platform analyses the request in real time and routes it to its network of about 3,000 restaurants across the U.S. The restaurant then responds to the customer, who can make a reservation.

The company hopes to turn that collection of restaurants into a distributed ledger network, or blockchain, to take costs out of payment processing via a service it plans to launch this year based on Ethereum.

WythMe plans to undercut the card networks because the restaurants will act as nodes in a larger distributed network. "The restaurants enable the transactions and thereby can reduce their cost," Keough said.

As part of this process, WythMe will issue a cryptocurrency and perform an Initial Coin Offering early this year in an effort to rapidly expand the payments network. The restaurants will still accept traditional payment formats, and WythMe will be the merchant of record, similar to how mobile point of sale companies handle payments for thousands of micro merchants at scale.

"The consumers will be paying the transactions in fiat currency, but we will process transactions as a group," Keough said.

Using blockchain to dilute processing costs has caught on with small merchants that sell online to customers in foreign countries.

By removing middle parties such as correspondent banks, blockchain has cut expenses enough to allow these smaller companies to process more frequent, lower-value payments than is traditional for wire transfers. For cross-border payments, the idea has been successful enough to draw larger companies such as banks and IBM.

But using blockchain to provide scale among restaurants is a relatively new use case without a large track record. WythMe has a challenging job of its own ahead of it, since the restaurant network's success is dependent on both consumer and restaurant buy-in to a new way to pay.

"One of the biggest things that is keeping cryptocurrency from ubiquity or mainstream use in the retail payments arena is you average customer doesn't understand it and doesn't really have the motivation to change existing payment behavior," said Julie Conroy, a research director at Aite Group.

Small merchants like restaurant owners are similar in this regard,;their primary concern is running their business, and payments is not something that most restaurants manage strategically, Conroy said. "While the promise of reducing cost of acceptance is always attractive to merchants, there are many ways outside of blockchain that are readily available and more easily understandable to merchants to today."

At launch, the WythMe site will handle only debit and other non-credit payments, though Keough said WythMe and the restaurants will develop a credit option.

There's an existing base of merchants and consumers who are used to engaging via WythMe, Keough said, noting its existing auction business totals about 9 million transactions and $200 million in sales each month. The restaurants have also asked WythMe for a cheaper payments network, Keough said.

"This will take time to evolve," Keough said, adding WythMe is also building a customer experience that allows consumers to find a restaurant, make a reservation, order and pay through the same app, a model that also ensures security since the user and restaurant can only use each tab once for a specific meal. "It's like Uber; you open a tab, walk into the restaurant, and that tab closes automatically."