Today’s payment infrastructure is extremely confusing, slow, and difficult to navigate. Businesses have to be integrated with multiple platforms to send and receive payments from customers and suppliers. 

Check out Airbnb’s payout policy for their hosts below

https://www.airbnb.com/help/article/425/when-will-i-get-my-payout

Here’s an excerpt:

After Airbnb releases the payout, it takes some additional time for the money to get to you. The average processing time for each payout method is:

• ACH / Direct deposit: Up to 3 business days
• Bank transfer or international wire: 3–7 business days
• PayPal: Within 1 business day
• Western Union: 1 business day (US Pacific Time)
• Payoneer Prepaid Debit Card: Within 1 business day
• Alipay: Instant once Airbnb releases the payout (available for mainland China hosts only) 

That’s right you’re seeing this correctly. There are six different types of payout capabilities. Imagine how annoying this is for Airbnb.

There are so many factors at play:

• Host’s preference
• Host location and access to payment capabilities
• Expectations of payout timing per capability
• Type of currency

Only Alipay for mainland Chinese hosts allows for instant transfer. China has an advanced centralized payment ecosystem that is fully integrated within its citizen’s lives for both government obligations like taxes or merchants. Why are payments only instant in China? Why isn’t the rest of the world’s payments all integrated to have instant payments?

It’s also important that payment capabilities offered like bank transfers are also closed on the weekend and holidays and so expect additional delays then 🙂

Now Airbnb is a fairly large company with a strong balance sheet. COVID has not been easy for them as travel is down significantly, but they are in a position to manage the different forms of payouts, accounting, and treasury operations to manage a global business like this. 

On the other hand, imagine a small business trying to figure out how to accept these types of payments. Yes, retail has been largely figured out through the point of sales (POS) systems to route transactions through payment networks and their banks, but that’s just one part of the business. Merchants are also required to have a relationship with their suppliers and that’s not always on credit cards. Suppliers may have an existing expectation to receive funds via bank transfers or through one of the many capabilities. 

As you grow your business and increase your footprint globally, the payment problem becomes cumbersome and requires the appropriate resources to manage risks, obligations, and fraud promptly. 

Overall, payments are hard. It requires multiple parties such as banks and supporting capabilities, and resources to manage it effectively (especially if you’re operating globally).

Payments are typically ruled by incumbents that have been around for a long time. These capabilities were massive improvements to the ecosystem at the time that they were launched and have done a great job, but is lagging behind the demands of the future. Payment technology is indeed going through an evolution yet again.

Enter blockchain and digital currencies.

In 2009, Satoshi Nakamoto published a white paper articulating his vision for a P2P payment network that was completely decentralized with a native currency called bitcoin. The underlying technology for facilitating bitcoin from one party to another is called the blockchain. Blockchain is a distributed ledger that maintains all records of transactions for a digital currency quickly and efficiently. Since Nakamoto’s original invention, there have been many different iterations variations of the underlying blockchain for different use cases. There have been some like that are focused on high throughput for fast transactions or more customization/programmability. 

More importantly, blockchains have solved a very important problem called the double spend problem. The double spend problem means that a single currency or asset may not be spent twice by the same individual. If I pay someone $100 that means I no longer have $100. This is quite difficult on the internet. Today, if I send you an email with a picture, it does not mean I no longer have that picture but instead means that you and I both have the picture now. Money cannot function that way. The blockchain ledger is unique as it is able to pass a native currency from one party to another, but also displaying the ledger to all users of the transaction. Everyone can see publicly that Bob has sent money to Alice and so Bob no longer has those funds.

Another unique innovation is the usage of a private key. All digital currencies are backed by cryptographic keys. In digital currencies, the keys are the money. If I dropped a hundred dollar bill on the ground, and someone else picked it up, they are effectively the new owner of the hundred dollar bill. Similarly, if I lost my keys to my digital currencies and someone else picked it up, they would be the new owner of the digital currency.

The usage and development of these currencies have taken off significantly as the total digital currency market cap is almost $300B. Even companies like Facebook are building their own digital currencies backed by US dollars and a few other currencies. Facebook with its ~2B user’s entrance into digital currencies have put this technology on notice by many governments and Central Banks. Anytime you have ~2B users potentially using a private digital currency vs a central backed currency, it causes concern.

For the last three to five years Central Banks have explored this technology further and are now considering building their own Central Bank Digital Currencies (CBDC). CBDC is effectively a digital version of countries’ existing currency.

As mentioned before, China’s payment ecosystem is by far the most advanced in the world and the Chinese government has been one of the first governments to actively research digital currency technology. Back in April 2020, the Chinese have announced a small pilot of their digital currency in a few select cities with some of the major banks and merchants like Starbucks. 

This is a big deal. If the Chinese successfully launched their digital currency across a blockchain ledger, they would effectively be the first government to allow transfers to their currency globally quickly and efficiently. The possibilities are endless for an official government-backed digital currency.

What about the US? The US is a little behind than China and has only seriously explored this for the last year or so. The former chair of the CFTC Chris Giancarlo strongly believes that the US needs to be at the forefront of this technology and has started the Digital Dollar project.

The Digital Dollar project is a think tank that is focused on exploring and building out an implementation for the US CBDC. The project put out an extensive whitepaper if you want to do a deeper dive into the proposal and benefits of the US CBDC: Link 

This article takes you quickly through the current payment capabilities and usage to introducing you to CBDC and its potential. In the next post, we will talk about why the US needs to have its own CBDC and the different use cases and possibilities that it opens up.