How Credit Card Competition Act Accelerates Lightning Network
Bitcoin's potential as an investment is ever-increasing. Delve into how the Lightning Network could amplify this opportunity.
Let me take you back to 2017, when I first ventured into the Bitcoin landscape. Its price was around $1,200, and though I felt late to the game, I invested, considering Bitcoin to make some quick money as it was going to the moon at the time.
However, as time rolled on, my view of Bitcoin evolved. I began to appreciate its inherent value, innovative potential, and potential world impact, rather than just its price.
Over the years, my connection with Bitcoin only deepened. I continued purchasing Bitcoin, not merely as an investment but as a step towards a better future.
Regardless of market fluctuations, I held onto my Bitcoin, learning to understand the essence of money and Bitcoin's place as a premier form of it. Driven by the conviction that Bitcoin can lift people from poverty, I started this blog, committed to shedding light on the transformative power of Bitcoin.
Today, we're going to delve into a topic that intertwines the worlds of traditional finance and cryptocurrency: The Credit Card Competition Act of 2023.
We'll explore how this piece of legislation could accelerate the adoption of the Lightning Network, a pivotal innovation in the Bitcoin space. But more importantly, we'll dissect why this could significantly impact Bitcoin's long-term value.
So, I encourage you to pay close attention. Understanding the technology behind Bitcoin is key to appreciating its value as an asset. As we peel back the layers of this topic, I hope to provide you with the knowledge you need to confidently navigate the world of Bitcoin. Let's embark on this journey together.
How Do Credit Card Companies Make Money?
Every time a credit card is swiped, around 2-3% of the transaction amount is deducted before it reaches the merchant. Therefore, from a $100 sale, a merchant might only receive $97-$98. In 2022, Visa, Mastercard, and their card-issuing banks took in an eye-watering $93 billion in credit card fees.
These fees don't just evaporate - they're typically passed on to consumers in the form of higher prices on everyday items, from fuel to food. The trend, unfortunately, is for these fees to continue rising, as seen in April 2022.
So, how do credit card companies make their money?
There are three primary sources: interest, fees charged to cardholders, and transaction fees from businesses that accept their cards.
The term "credit card companies" refers to two kinds of entities: issuers (banks and credit unions like Chase, Citi, Synchrony, or PenFed Credit Union that issue the cards) and networks (companies like Visa, Mastercard, American Express, and Discover that process the transactions).
When you use your credit card, you're technically borrowing money from the issuer. The network ensures the transaction is processed correctly, with the money moving electronically from the issuer, through the network, to the merchant’s bank.
The revenue of credit card companies is largely derived from interest payments, especially for mass-market issuers. However, many also earn substantial amounts from fees - annual fees, cash advance fees, balance transfer fees, and late fees.
Lastly, there's "interchange" - the part of the processing fee that the merchant pays, which goes to the issuer via the payment network. These fees, set by payment networks, usually amount to about 1% to 3% of the transaction.
Learning how to use credit cards wisely can help you minimize how much money these companies make from you. However, the web of transactions behind each card swipe underscores a system that many see as ripe for disruption and improvement. And this is where innovative technologies like Bitcoin's Lightning Network can come into play, but more on that later.
Melissa Lambarena
Who Pays for Credit Card Rewards?
Rewards and cash-back credit cards can be a great way to earn money while you spend. But have you ever wondered who actually pays for these rewards? The Federal Reserve Board conducted an in-depth study into this issue in 2022, which revealed some intriguing findings.
The findings showed that, regardless of income, sophisticated individuals are more likely to profit from rewards credit cards, often at the expense of less knowledgeable consumers.
This study also found that rewards cards encourage higher spending, leaving less informed consumers with higher unpaid balances. These consumers also tend to follow a sub-optimal balance-matching heuristic when repaying their credit cards, thus incurring higher costs.
Meanwhile, banks incentivize the use of rewards cards by offering lower interest rates than those on comparable cards without rewards. The study estimated an aggregate annual redistribution of $15 billion from less educated to more educated, poorer to richer, and high minority to low minority areas, thereby exacerbating existing disparities.
Digging deeper into the study, we find that for both reward and classic cards, average net rewards increase with FICO scores (your credit scores). This suggests that consumers with lower credit scores pay more for credit card usage.
For cardholders with superprime scores (above 780), net rewards are generally positive for reward cards and slightly negative for classic cards. These consumers actually earn money from using reward cards, as the benefits outweigh the costs.
Conversely, for consumers at the lower end of the FICO distribution (below 660 for sub-prime and below 720 for near-prime), net rewards are negative for both types of cards. These cardholders lose money by using reward cards, both in absolute terms and relative to classic cards.
In economic terms, the impact is significant. Cardholders with negative net rewards collectively pay $4.1 billion for the use of reward cards, while those with positive net rewards earn $1.3 billion. This translates into an annualized redistribution of $15.1 billion induced by reward credit cards.
High credit score consumers don't only earn more money in rewards but also incur lower interest charges. Conversely, for sub-prime and near-prime cardholders, interest charges are higher on reward cards than on similar classic cards. In contrast, fee charges don't differ substantially between reward and classic cards across the FICO score distribution.
In summary, the study highlights a troubling trend. While sub-prime and near-prime cardholders are the largest source of funding for credit card rewards, prime and super-prime cardholders are the biggest beneficiaries. This raises questions about the fairness of the current credit card reward systems and prompts further exploration of more equitable alternatives.
Breaking Down the Credit Card Competition Act of 2023
The Credit Card Competition Act of 2023 is a piece of legislation designed to enhance competition and choice in the credit card industry, with the ultimate goal of reducing excessive credit card fees.
The law mandates that the largest credit card issuing financial institutions in the country provide their customers with the option of at least two credit card networks on their cards. Additionally, one of those networks must be a network outside of the Visa/Mastercard duopoly.
In simpler terms, the big banks that issue the majority of Visa and Mastercard credit cards would need to choose an additional competitive network for each card after a transition period. Subsequently, a merchant could select which of those networks to use to process a transaction.
The ultimate aim is to encourage competition, which could incentivize better service and lower costs.
Impact on the Credit Card Market and Everyday Consumers
The Credit Card Competition Act of 2023 could substantially reshape the credit card market. This increased competition and choice between networks could lead to better services and potentially lower costs.
This law mirrors a federal requirement for debit cards, which are required to carry at least two debit networks. This has fostered increased competition and innovation in the debit network market and has helped to keep fees in check.
By requiring a second network on credit cards, there's a possibility that network fees may decrease to incentivize merchants to choose their network for transaction processing. This type of market competition is currently absent from the credit card system dominated by Visa and Mastercard, and the act aims to remedy this.
For everyday consumers, the impact could potentially be very positive. If competition drives down merchant fees, the savings could be passed along to consumers in the form of lower prices for goods and services. Also, the competition could potentially lead to innovative new services, security enhancements, and customer perks as networks compete for merchants' and consumers' business.
Several organizations and associations have shown their support for this act, including various national retail and convenience store associations, the Armed Forces Marketing Council, and many regional business associations. They anticipate that increased competition in the credit card market will benefit not only their businesses but also their customers.
Congress Blog
Enter: The Bitcoin Lightning Network
The Bitcoin Lightning Network is an innovative solution designed to make bitcoin transactions quicker, cheaper, and more scalable. In simpler terms, it's a system that allows people to send and receive bitcoin more efficiently than the traditional method.
Here's how it works:
Instant Payments
Bitcoin transactions typically take about an hour to become irreversible, because these transactions need to be included in a block, and a new block is added to the blockchain every ten minutes.
Six blocks (approximately an hour) is considered a safe number of confirmations that a transaction is secure.
However, with the Lightning Network, payments are instant and don't need to be confirmed in a block, making it a great option for quick, small transactions like buying a coffee or paying for parking.
Micropayments
The Bitcoin Lightning Network allows for very small payments (down to one hundred millionth of a bitcoin) that are not feasible on the traditional bitcoin network due to high transaction fees.
This opens up new possibilities for using bitcoin in day-to-day transactions.
Scalability
The Bitcoin network is limited in the number of transactions it can handle per second, which can lead to delays and higher fees when the network is busy.
The Lightning Network solves this issue by allowing transactions to take place off the blockchain, meaning they don't have to wait for block confirmations.
This allows for more transactions to happen simultaneously, increasing the overall capacity of the network.
How Bitcoin Lightning Network Works
Transactions on the Lightning Network happen within "channels" between two parties. Both parties put funds into a "multisignature" bitcoin address, which requires agreement from both parties to spend.
To make a payment, both parties agree on the new balance and sign a transaction that reflects it. This agreement can happen privately and instantly, without needing to be confirmed on the bitcoin blockchain.
This makes transactions quick and low-cost. Furthermore, even if the parties decide to end their channel, the transaction can still be settled on the blockchain at any time.
In essence, the Bitcoin Lightning Network is a network of these channels, allowing any user to pay any other user through a path of connected channels. It means you don't have to open a direct channel with someone to pay them, as long as there's a path through other channels to get to them. The network finds the shortest, cheapest route for the transaction.
This makes the Bitcoin Lightning Network a compelling alternative for transactions, particularly for micropayments, instant payments, and increased scalability.
Why Bitcoin Lightning Network Could Become The "Second Network of Choice"
The Bitcoin Lightning Network could become a viable "second network of choice" for financial institutions due to several key advantages it holds over traditional payment networks like Visa and Mastercard.
Here are six compelling reasons:
1) Transaction Speed
Unlike Visa and Mastercard, which can take several seconds or even minutes to process transactions, the Lightning Network enables near-instant transactions. This speed could provide a significant competitive advantage in an increasingly fast-paced financial landscape.
2) 1000 Times Cheaper
The median fee rate for sending value across the Lightning Network is remarkably low, around 0.0029%. This is about 1,000 times cheaper than transaction costs associated with Mastercard or Visa payment processors, making it a highly cost-effective solution.
Joe Hall
3) Transactions Per Second
The Lightning Network can handle more than 250,000 transactions per second, a significant increase from the 7 transactions per second that Bitcoin can process on-chain. This vast capability to handle transaction volume surpasses even that of Visa, which claims to process 65,000 transaction messages a second.
4) Channels
The Lightning Network introduces the concept of payment channels. These allow two users to make an unlimited number of transactions without needing to wait for each transaction to be confirmed on the blockchain. This feature is not present in traditional payment networks and increases the efficiency of transactions.
5) Growth
The Lightning Network has shown impressive growth, registering a 410% increase each year, according to Arcane Research. This rapid adoption indicates the potential of the network to disrupt the current financial system.
Tom Mitchelhill
6) Industry Recognition
Morgan Stanley, a prominent US banking institution, has even acknowledged the Lightning Network's superiority over Visa. This recognition from established financial institutions speaks volumes about its potential for widespread use.
Taken together, these advantages make the Lightning Network an attractive alternative to traditional payment processors. If the Credit Card Competition Act of 2023 were to pass, major financial institutions could consider adding the Lightning Network as a second payment network to their cards.
This could potentially bring about significant benefits in terms of cost, speed, and efficiency, and could also drive further innovation and competition in the credit card market.
Spotlight on Pioneers: Companies Advancing the Lightning Network Forward in Our Lives
In the emerging landscape of the Bitcoin Lightning Network, there are a number of pioneering companies exploring the capabilities and applications of this revolutionary technology.
These companies represent a diverse range of industries and are adopting Lightning Network technology in creative and innovative ways.
Here are the highlights of what these pioneers are doing and the potential impact for consumers:
Lightning Labs
As the creators of the Lightning Network, Lightning Labs is developing the Lightning software infrastructure along with financial products that make it easier to send and receive funds on the network.
This company is essentially creating a "credit card network for Bitcoin," allowing for instant, high-volume transactions with minimal fees.
For consumers, this could mean quicker, more efficient, and cheaper Bitcoin transactions.
TBD's C=
A subsidiary of Block (formerly Square), led by Jack Dorsey, TBD's new Bitcoin Lightning Service Provider, C=, is set to improve the reliability and usability of the Lightning Network.
By providing liquidity and infrastructure to the network, C= aims to ensure transactions are reliable and dependable.
For consumers, this means a more reliable, user-friendly experience when transacting with Bitcoin on the Lightning Network.
Strike
Strike is leveraging the Lightning Network to create a global remittance network. It allows for faster, cheaper, global, cash-final payments for both businesses and consumers.
The integration of Strike's services with the Lightning Network could enable consumers to send money internationally with fewer fees and in a more timely manner, particularly important in countries heavily reliant on remittances.
Microstrategy
Microstrategy is revolutionizing digital engagement through Bitcoin-based rewards systems powered by the Lightning Network. Their Lightning Rewards program offers instant Satoshi (fractions of Bitcoin) redemption to incentivize a range of behaviors.
This could revolutionize customer and employee engagement for businesses, offering immediate gratification and fostering a sense of achievement.
Cash App
As the first major company to integrate Lightning Network payments within the USA, Cash App now allows its 51 million users to send and receive Bitcoin Lightning payments.
This opens up a new level of accessibility for Bitcoin transactions, enabling users to quickly and cheaply send or receive Bitcoin.
In essence, each of these pioneering companies is leveraging the Lightning Network in unique ways: Lightning Labs in creating the network, C= in fueling it, Strike in facilitating global remittances, Microstrategy in revolutionizing rewards, and Cash App in democratizing access.
These developments paint a compelling picture of a future where Bitcoin transactions are faster, cheaper, and more accessible than ever, greatly enhancing the potential applications and impacts of Bitcoin.
Ripple Effect: The Implications of Lightning Network Adoption on Bitcoin
The adoption of the Lightning Network could have profound implications for Bitcoin. With this second-layer solution, Bitcoin can dramatically scale its transaction capacity, speed, and efficiency, addressing some of the main criticisms of the cryptocurrency and making it more practical for everyday use.
As more businesses and individuals adopt the Lightning Network, the demand for Bitcoin could increase because the Lightning Network relies on Bitcoin for transactions.
The potential long-term value of Bitcoin is closely tied to its network effects — as more people use Bitcoin, it becomes more valuable.
The Lightning Network dramatically expands the potential user base of Bitcoin by making it feasible for micro-transactions, instant payments, and other use cases that were previously not practical.
This could further reinforce Bitcoin's position as the leading cryptocurrency and increase its long-term value and price.
Investing in Bitcoin: Your Ticket to Long-term Wealth
Investing in Bitcoin is akin to an oceanic voyage, navigating through storms and calm, but with potential treasures that lie ahead. Be it for a car, a house, a trip, retirement, or a wedding, Bitcoin could be your vehicle of choice.
An intriguing aspect of Bitcoin is its 200-week moving average that never dips, only rises. Don't believe us? Take a look for yourself here:
With this insight, consider Bitcoin not as a quick route to wealth, but as a long-term investment. Remember, its short-term volatility is not a risk but the entry cost to potentially substantial long-term gains.
Why not establish a new savings goal today and incorporate Bitcoin into your plan? It's about more than just adding to your savings; it's a potential pathway to financial stability and empowerment.
This is your chance to be part of a future-defining venture. It all begins with one step - investing in Bitcoin. So, take that step, weather the volatility, and look towards the promise of a potentially prosperous future.