“Money, it’s a gas
Grab that cash with both hands and make a stash
Money, so they say
Is the root of all evil today”
                                                                                                    -Pink Floyd, Dark side of the Moon, 1973

In the good ol’ days, money used to be made of wood, metal, or paper. But for many of us today, it is just a number in our bank accounts accessible online. The fundamental purpose of money is to be a store of value, a medium of exchange and a standard for deferred payment. Money must be durable, divisible, fungible, and portable across a network of people. In this world of same-day-shipping, drones, and mission Pluto, one would think transferring hard-earned money across networks/countries must be easy. Alas….

“It’s faster to send money overseas through a FedEx envelope than international wire.” —Ripple Labs, @SAP Financial Services Forum, June 2015.

Of course exaggeration, but you get the drift. Any business owner or A/R department will tell you that they would like to receive money faster with lesser transaction charges. Most of the current systems used in the financial industry were invented before internet-age. Thus there seems to be a good case for disruptive innovation in this space.

Today’s prominent innovations:

In the last few years most of the innovations around payment systems have been incremental. Starbucks Wallet, Apple Pay, Square etc. are primarily front end changes, to make consumer experience better. While these are really useful initiatives, they are unfortunately not going to improve the clunky underlying plumbing layers of the banks and FIs. Other initiatives such as Same-day-ACH and Check 21 Act (Digital Checks) will certainly play a key role in easing today’s pains.

The stuff of tomorrow (and the day after):

Among the many disruptive developments, cryptocurrency shows promise. Cryptocurrency is virtual or digital currency that makes it easier to transfer funds. Its defining feature is that it is not issued by any central authority. Decentralized is the operative term.

The first such currency to capture public imagination was of course, Bitcoin, in 2009. Litecoin, Namecoin, PPCoin followed. Coinbase, BitPay, Ripple and Stellar seem to be leading the efforts now.

ACH may be legacy and broken. But in 2014, ACH network did ~23 billion payment txns amounting to ~$40 trillion. And P2P payments are estimated to be just $5-10 billion.

The purpose of all digital currencies is to do away with walled gardens of financial networks (eg – Governments, Banks, credit cards etc) and make real-time transfers. Ripple is an open source payments system still in beta with a digital currency called XRP. Stellar is also another open source protocol for exchange of value. You can think of these as a shared public database and global ledger. A process called ‘consensus’ allows computers on the network to automatically agree on changes to the ledger within seconds, without needing to go through a central clearinghouse. This public ledger is called ‘blockchain’ and can be thought of as the underlying technology behind cryptocurrencies. Blockchain is seeing increasing adoption by many institutions (Breaking News: JP Morgan, Goldman Sachs, Barclays etc. have just announced their adoption of blockchain) to make their operations faster, efficient and transparent. A process called ‘mining’ serves to verify and add transactions to the block chain (ledger) as well as to release new cryptocurrencies.

“Payment systems today are where email was in the early ‘80s. Every provider built their own system (eg: MCI Mail) for their customers and if people used different systems they couldn’t easily interact with each other”

Metaphorically, if you think of Wire, ACH etc. as Latin & Greek, bitcoin was supposed to have been English. It is just another language, but much simpler. But the next generation of digital currencies positions itself as a form of ‘common grammar’ that helps those speaking different languages understand one another.

How will SMBs benefit? (In a far-off Utopian world!)
– Vendor gets the payments in seconds/minutes. Not hours/days
– Better management of cash flows and working capital
– Reduction of transaction charges (for credit cards etc.)
– Transfer of money across international borders will become easier

– More P2P than B2B; All of these systems are still in beta
– Due to the anonymous nature of the txns, money laundering & scandals are possible (recall Mt Gox incident)
– Compliance issues
– Resistance from incumbents (Governments, banks and other FIs)
– Yet to build trust/legitimacy
– Volatility of crypto currencies

Commonwealth Bank of Australia (Revenue: $20B+), one of Australia’s big 4 banks plans to pilot cryptocurrencies to settle payments. Westpac and ANZ are also in early stage experiments. Emerging markets can be the launch pad for digital currencies in the absence of strong traditional financial services systems.

But this is not just about Bitcoin or Ripple or any other system that is still at works in an obscure garage. Broadly, the payments ecosystem will need to move towards a future where:

– Payments need to evolve from Near Real time to Real time (from days to minutes to seconds)
– Decentralized payment networks, modelled like internet, should take center stage (distributed consensus)
– Metaphorically, the payment ecosystem should move away from the information-sharing models of the proprietary email systems of the 80s (eg: CompuServe) to resemble the more modern emailing/social media communication trends of this decade
– Meaningful data such as the invoice information can be sent along with payments. In today’s world such additional information gets chopped off.

ACH may be legacy but it is based on the world’s leading currency and it is a leader in the world’s largest consumer economy. When the dust settles, we know that disruptive innovation is a chaotic process that can take several years to attain mainstream. So the big question is whether Cryptocurrency can lead to the (slow) death of the paper checks and other legacy payment infrastructure that rules the B2B roost today. Willing to bet your $? Or bitcoins or XRP?