Introduction: 5 minute Bitcoin
- This is a series of articles called Five Minute Bitcoin, with each short anrticle explaining one aspect of Bitcoin in Five Minutes. This article is about an important property of Bitcoin called Immediate Settlement.
Topic: Immediate Settlement and have you heard of the Diners Club?
- Bitcoin has many innovative characteristics and one is immediate settlement.
- But sometimes to understand an innovation, you need something to compare it to, which you already understand.
- So in order for you to understand why Bitcoins Immediate Settlement is important you need to understand settlement in the traditional retail payment system.
- But instead of a boring definition, I will tell you a story, which explains the concept of settlement using the real world as the example.
The story: The Dinners Club
- Long ago and far away in about 1950, a group of people called Diners, who were people who liked eating at the best restaurants, but they didn’t like going to the bank on Friday and withdrawing large amounts of cash to pay for their great Dining experience at restaurants.
- So they created a club, called the Diners Club.
- The Founder of the Diners Club made an agreement with the owners of the best restaurants in the city, that whoever was a member of this Club could eat and drink on Friday, and then the Restaraunt could send them a bill on Monday, which they would pay with funds from their bank account.
- Each member of the club had a very large amount of money in the bank, so they could easily pay their bill.
- Each member carried around a card called the Diners Club Card.
- Each member showed the card to the restaurant owner when they got their bill.
- This card allowed them to go home without paying for their meal.
- This card created an arrangement where they would pay for their meal later.
- This meant that instead of paying for their food or Settling their debt immediately, they could pay later. And this is called delayed settlement.
The Diners Club Story teaches us two things.
- First, Delayed Settlement the Diners who used their Club Card were allowed to pay what they owe in a delayed fashion or delayed settlement. This originally was 1-3 days, but now is 10-30 days, or more.
- Second, this is the opposite of what you achieve with cash and Bitcoin, which is immediate settlement, as in you pay for your meal, at the Restaraunt, when the bill is presented to you. And that is called Immediate Settlement.
Next, the Diners Club became our current credit card system.
- The creation of the Diners Club was followed by the creation of other Clubs, which allowed people to avoid paying immediately and pay in a delayed fashion.
- These Clubs later became known as Visa, Mastercard, and American Express.
- This use of delayed settlement soon extended to many other types of purchases like groceries, clothes, furniture and soon almost everything was purchased using these Clubs and their special cards.
- This also meant that paying your bill the same day, or immediate settlement became uncommon.
- This is called Delayed payment or Delayed Settlement.
Problems with this Delayed Settlement System.
- Now as wonderful as this new system was, it was not without problems.
- First, People used the cards and gave their Promise to Pay, but then refused to pay.
- Second, Others couldn’t pay off their debt in a delayed fashion of 3 days, and took several months to pay off their debt.
- Third, the restaurant owner would now lose money for providing goods and services for which they were not paid.
- Fourth, people stole these cards and used them for goods and services and the real card owner would get the bill and refuse to pay.
- Fifth , the convenience of using this delayed payment made people buy more goods and services, but the restaurant owner and other businesses which accepted these cards had to pay a portion of their profits to the card issuers. So this cost reduced profits and sometimes increased the price.
- Sixth, the cost of unpaid goods and services was also passed on to consumers as increased prices.
Invasion of privacy and identity theft.
- First, in an attempt to reduce losses from unauthorized use of these cards restaurants and other businesses had to implement security measures which made them collect lots of personal information on their customers and store it at their business.
- Second, this private information about their customers was stolen or sold by employees, and misused to apply for cards in someone else’s name, thus creating more unauthorized purchases and more losses. This crime earned it’s own name: Identity Theft.
- Third, consumers had to give up a lot of private information, not only to get these cards, but also share it every time they used these cards, so their private financial information was know everywhere they used these cards.
Businesses have to balance expenses, cash flow, bills and delayed settlement
- First, the restaurant owner originally got paid for the dinners on Friday and Saturday on Monday, just a few days later. But as time passed and this waiting period could be as long as 30 days.
- Second, So now the Restaraunt was selling wine and food, but not getting paid every day, even though they had to buy wine and food everyday to feed its customers.
- Third, Delayed settlement interrupted the normal cycle of buy goods, sell goods, pay suppliers, pay employees, set aside your profits.
- Fourth, The restaurants and businesses sometimes couldn’t pay their bills because they were waiting to get paid.
Immediate or Instant Settlement with Bitcoin
- So to bring this story back to Bitcoin.
- First, Delayed settlement is the norm or normal method of paying for most goods and services in our financial system.
- Second, The only way, before Bitcoin, to perform immediate settlement was with cash.
- Third, Carrying cash can be a security risk, and inconvenient.
- Fourth, Bitcoin solves the problem of carrying cash to pay for items.
- Fifth, You simply pay for your meal or other purchases with Bitcoin.
- Six, You don’t carry the bitcoin around with you, but you carry around the ability to pay your bill immediately with Bitcoin.
- Seven, If you pay with Bitcoin you are not giving the restaurant or other business a promise to pay later. You are paying in full now. You are paying your debt immediately, something which is also called immediate settlement.
- Eight, it is possible to convert your bitcoin to dollars, euros or your national currency so that if the merchant doesn’t want Bitcoin, you still pay in bitcoin, but the payment application converts it to dollars at the point of payment.
This means many positive things:
- First, the restaurant or other business gets paid immediately, so they don’t have to wait 10 to 30 days to pay their employees and their bills.
- Second, And the restaurant or other business makes more money on every sale because they don’t pay 3% of all sales to the Diners Club.
- Third, Plus the restaurants or business no longer needs to collect all your private financial information and store it, so there is less paperwork for the Restaurant.
- Fourth, and less risk for you for the theft of your private financial information, because you didn’t give them any, and they don’t need it—because you pay immediately.
This is the meaning and power of immediate settlementwith Bitcoin. Any questions? Comment below.
Questions?
Put them in the comments below.
If you are not a member of this commuity you can't ask questions, but you can get a free account at this link. And ask questions and comment anywhere on Hive.