How Flexa payments work

Explaining the new technology behind in-store cryptocurrency payments on the Flexa network

Now that Blockchain Week is officially a wrap, we wanted to thank everyone who joined us at the Consensus conference and our launch events here in NYC. We’re very grateful to the growing Flexa community and to our partners at Gemini for the chance to help move cryptocurrency adoption forward in mainstream payments.

All throughout Consensus, and in the course of helping customers at the SPEDN Shop, we fielded many different questions about Flexa network mechanics. The most common one—naturally—was “How does it all work?”

Coming out of those discussions, we wanted to share the highlights of our conversations with SPEDN shoppers, including more detail about how we’ve upgraded the payments infrastructure as well as what exactly happens every time you pay using the new SPEDN app—not to mention how payments will work in any other app that uses the Flexa network.

The path to native acceptance

First things first: at Flexa, we believe in a future where merchants can accept cryptocurrency natively, without any intermediary third parties. (After all, isn’t that exactly what Bitcoin was designed to do in the first place?) And getting to that point is perhaps the biggest, thorniest, chicken-and-egg question in our industry. We built Flexa to be as merchant-friendly as possible, and therefore, it’s our take that the best way to significantly advance widespread adoption is by enabling cryptocurrency spending on the consumer side while still helping merchants to receive payment in fiat.

Today, if merchants can “accept” cryptocurrency while dealing in fiat, then they can avoid all of the regulatory and accounting uncertainty presently related to digital assets — not to mention, the IT and security headaches involved with the management of private keys and wallet addresses. They can also avoid worrying about exchanging cryptocurrency for fiat in order to pay their vendors, people, suppliers, and expenses. (If you’ve ever worked in a large corporation that’s not a tech company, you probably have a good idea of what this entails.) On top of this, merchants who settle in fiat can maintain their own transaction privacy by keeping economic data off of the blockchain.

Until the consumer side of the equation moves forward significantly, most medium and large merchants simply cannot justify the effort and cost required to coordinate each of the cross-enterprise teams necessary to integrate cryptocurrency payments natively — and this often means the difference between launching and not launching a product in this decade.

The retail payments problem

Retail payments are a notoriously expensive, fraud-prone, and onerous problem—not only for merchants, but also for consumers around the world.

As we’ve stated previously, we don’t consider the Flexa network a solution in search of a problem. Instead, we believe that cryptocurrencies present an opportunity to finally fix the problems of retail payments once and for all, and that the easiest way to scale that approach is by integrating directly with a merchant’s existing hardware and software.

Meanwhile, in our conversations with merchants about accepting cryptocurrency in this manner—which, it should be noted, necessarily means settlement in fiat—we’ve found that there has been a great deal of interest and excitement at the prospect.

To enable cryptocurrency acceptance via existing hardware and software in the United States, there are generally two approaches available:

Partner with a bank to issue a fiat-backed prepaid debit card, and process payments over the existing (and expensive) debit interchange payment rails. With a debit card, customers can “load” their prepaid debit card in advance and convert cryptocurrency to fiat on demand (like the BitPay Card), or make trades as they spend (like the Coinbase Card in the UK). Partner with merchants and their processors to make payments to a merchant’s bank directly. This entails building connections to merchants and soliciting these integrations on an individual basis—but with the right infrastructure in place, it avoids the costs and fraud involved with settling through any of the existing interchange networks.

The larger picture of privacy

While it would have been straightforward to issue a prepaid debit card—and benefit from existing ecosystems and frameworks such as virtual prepaid cards, Durbin caps, and single-message rates—we elected to take the alternate route, and make payments directly to merchants.

Importantly, issuing a debit card would have necessitated adherence to all of the existing Know Your Customer verifications and credit checks currently involved with opening a bank or payment card account. We want to make payments more accessible in addition to more efficient, and the current ecosystem’s barriers to entry can be especially prohibitive to some.

At a high level, we looked at these options as the difference between bolting cryptocurrency payments on top of the existing card payments ecosystem (which, as a reminder, were first introduced in 1950) and building a new, digitally-native payments ecosystem with cryptocurrencies. We don’t believe that cryptocurrency payments should become dependent on the existing Visa and Mastercard debit networks and their customer data requirements.

A Clover point-of-sale terminal showing the Flexa payment option alongside more traditional methods.

By partnering with merchants directly, we have a far greater ability to limit the personal information required to process payments while adhering to anti–money laundering laws in various jurisdictions around the world.

How retail payments are conducted on Flexa

Despite the rate at which payments are shifting to e-commerce, a whopping 89.8% of retail payments in the United States still take place offline. For Flexa to work in these contexts, we designed an approach that uses closed-loop payments and stored value accounts in their most rudimental form.

Before we dive into details, a quick primer: in payments, all transactions are a.) made from an account and b.) processed via payment rails. After all, at the most basic level, every single payment instrument we use is just a number in a database: whether a credit card account, a gift card account, a bank account, a general-use prepaid card account, or some other account entirely.

In the world of payment rails, an “open-loop” or “interchange” rail refers to anything that accesses an ecosystem outside of a merchant’s direct purview, and includes debit and credit transactions as well as bank transfers and wires. Alternatively, a “closed-loop” rail refers to the merchant’s own infrastructure, and is usually faster, more efficient, and less expensive, because it doesn’t route across the interchange of many intermediaries and third parties. These types of payments include store credit cards, gift cards, merchandise credits, coupon cards, and reward cards, among others.

Fundamentally, a closed-loop payment requires a transaction to be funded from a ledger called a “stored value account,” which is effectively a simplified bank account, but without a personal identity or individual owner directly attached to it. Most store-brand gift cards and merchandise credits are stored value accounts, but with an extra layer of recognized ownership that is regulated on a state-by-state level through a process called escheatment. The lack of ownership in Flexa-powered stored value accounts is not only critical to how our payment process works, but also intrinsic to the network’s status as a money services business.

To enable cryptocurrency transactions at retail points-of-sale, Flexa uses a universal and backwards-compatible barcode format called a flexcode, which conveys closed-loop and transaction-specific stored value account data through a customer’s mobile device. The flexcode represents a payment transaction authorization with these three characteristics:

First, Flexa transactions are specific. Unlike a gift card or merchandise credit, a flexcode representing a Flexa-powered stored value account is used only once, which preserves the security of the system and prevents fraud. This “tokenization” approach is similar to the EMV chip and 3-D Secure cryptography embedded in modern-day credit and debit card transactions around the world.

Second, Flexa transactions are ephemeral. Flexcodes and the retail stored value accounts behind them only exist at the moment of transaction. This means that each transaction is locked to the real cryptocurrency exchange rate, and there is no pre-loading or pre-exchanging required by the person spending. Afterward, the flexcode and stored value account are expired.

Finally, Flexa transactions are secured — but not funded — until after a transaction takes place. This is perhaps the key difference between Flexa’s integrations with merchants and that of other closed-loop approaches, as well as the key similarity to credit and debit networks—and just what’s made them so scalable. When paying with a flexcode, the Flexa-enabled stored value account is secured by cryptocurrency value instead of being funded by fiat money, and therefore represents a pre-authorization or a letter of credit. As in credit and debit networks, merchants receive settlement after each transaction takes place (and after the corresponding amount of cryptocurrency has been converted to fiat) through any preferred settlement method.

Upon payment, merchant point-of-sale systems can interpret Flexa transactions in a number of different ways: