One would be hard-pressed to find someone who doesn’t know someone investing in cryptocurrency today. As consumers feel more comfortable in the digital currency waters, legacy financial institutions (FIs) and even regulators are beginning to show signs of support for the technology.
But corporates remain largely unconvinced that blockchain and crypto can solve their biggest commercial payment problems – let alone emerge as the way of the future.
“If I’m sitting in risk and compliance in an organization and someone mentions the word ‘crypto,’ I’m on my back foot already,” said Worldpay Global Head of Strategy Eric Queathem in a recent discussion with Karen Webster.
Part of the problem, he continued, is that “crypto” means a million different things to a million different people. It might be an asset class for an individual investor, or a central bank digital currency (CBDC) under development by a government. In order for the B2B payments and corporate finance value proposition to be clear, the crypto ecosystem as a whole must make progress with real-world applications and problem-solving.
It will take time, and the market remains in its infancy, but Queathem said the development of niche applications – with an emphasis on usability – can showcase the potential for blockchain, smart contracts and other related tools to ease the B2B pain points that haven’t yet been tackled through traditional payment rails.
Beginning As An Asset Class
B2B payments stand as one of the “ripest” areas for disruption, considering how many pressing pain points exist in the market today, as well as the relative lack of innovative disruption in the space. Queathem pointed to the high volume of paper (in the form of paper checks as well as documentation that accompanies a transaction), settlement and reconciliation inefficiencies, and a lack of real-time visibility and B2B interaction that continue to weigh down corporates.
While efforts to innovate fiat payment rails have kept some of these frictions in mind, their solutions do not offer the breadth of problem-solving needed for a complete transformation of the commercial payments space, he said.
Blockchain and cryptocurrency technologies have the potential to deliver that scope, but it won’t happen all at once. There must be a deliberate evolution of the marketplace, but Queathem said it’s already begun, as more firms feel comfortable holding crypto on the balance sheets. “Businesses are moving quickly behind that, and asking a lot of good questions about what it means for them as an asset class,” he noted. “The next big phase is the application – and that’s really what decentralized finance is.”
A Niche Approach
The gradual acceleration of decentralized finance (DeFi) disruption is, to some, a testament to how versatile blockchain and crypto technologies can be. Indeed, Queathem said that propelling the next stage of evolution for crypto in B2B payments will require real-world applications of these tools, yet within niche segments of the B2B payments ecosystem.
He pointed to Worldpay’s own efforts in the airline industry as one example of DeFi’s gradual expansion into corporate payments. The firm’s Project Polo, now dubbed Worldpay Exchange, deploys smart contract technology to automatically facilitate B2B payments between airlines in scenarios of codesharing or canceled flights, in which the customer must be booked on another airline.
With a nuanced understanding of the unique pricing parameters and rules that dictate when a payment is triggered, and for how much, the solution can facilitate that transaction in real time with the transparency and data availability required to streamline settlement and reporting.
As these niche applications emerge, an emphasis on usability, security and compliance will be essential to gaining traction – and to driving the ecosystem toward its next evolutionary phase. “What you’re going to find really early on is a lot of these niche types of solutions,” Queathem said. “Over time, you’ll see consolidation, because like any other payment rail, as we know, scale matters.”
Financial service incumbents like leading banks have already proven instrumental in helping these niche solutions gain traction. But they play an arguably even more important role for the space in that they demonstrate trust in the technologies that, for many corporates and regulators, remain confusing and complex.
The cross-border CBDC transaction between France and Singapore earlier this month, or El Salvador‘s decision to consider bitcoin as legal tender, reflect governments’ and big banks’ role in legitimizing these tools. But incumbents and the public sector still have plenty to be concerned about, Queathem said.
Much of the industry’s scrutiny, he said, revolves around an understanding of where the money is coming from and where it’s going, as well as technology’s ability to ensure security. Know Your Customer (KYC) compliance and transparency are essential to scaling up, just as they are for traditional rails, and blockchain as a transparent ledger is already positioned to deliver on these requirements, according to Queathem.
The market still needs regulators’ efforts to understand the technology in order to mitigate the risks that can emerge from shadow banking, and investments are still needed to create the infrastructure that can render DeFi solutions usable among corporates – that is, solve their biggest B2B payment pain points while integrating seamlessly within their workflows and organizations.
In the meantime, a focus on creating real-world applications will help drive progress – and with consolidation on the horizon, Queathem said that innovators will be the ultimate winners. “The incumbents supporting these transaction flows today are best-positioned to innovate,” he said. “That’s the mindset we have when approaching the industry. The winners should be those who are able to innovate in their existing customer base.”