With blockchain, we will enter a world where we know everything about a company we are doing business with, while knowing nothing about them at all. This is an odd concept, but it’s a process that we are already familiar with.
Take online credit card purchases as an prime example. When we buy a product online on a site we have never interacted with, the e-commerce retailer knows very little about us, but they are willing (and perhaps eager) to do business with us, having absolute confidence in the outcome--their ability to get paid.
They know nothing about our ability or willingness to actually pay our credit card bill, but that isn’t important to them. They know that as soon as this transaction clears, that their funds will be on the way. The settlement process that the banks and Visa/MasterCard have established give them confidence that they will be paid.
For this, they have a responsibility to perform as well. For the same reasons that our e-commerce merchant has confidence in their ability to get paid, we consumers have the same degree of confidence in our ability to get the product that we paid for. The merchant must ship the goods that match the order they sent us, they must charge our card once for the agreed amount, and they must provide us some recourse if the goods are not up to snuff or we change our mind. It’s likely I know a bit more about the merchant than the merchant knows about me, but regardless, it’s amazing that trillions of dollars are transacted in this fashion every single year.
When we interact using credit cards, both the merchant and the consumer have rights and responsibilities that are afforded to them. If either party fails to perform, then the card network (Visa/MC) has a set of rules established for recourse. Most of the transactional responsibility falls upon the merchant: in exchange for being provided quick access to cash, they are required to perform and provide a dispute resolution process. The consumer has little transactional responsibility. Their responsibility lies with their obligations to the issuer of the card, most often a bank. The bank has established a line of credit to the consumer and the consumer must meet their payment obligations on this line of credit. If they fail to perform, the bank is still on the hook and must collect against the consumer.
For all of the work involved, there is a significant cost to providing these services. The card networks receive a significant portion of their income from interchange fees. Interchange fees are separate to the credit card interest fees that are paid to the banks for the line of credit. Interchange is basically the toll fee that a merchant pays every time they accept a credit card. Interchange varies based on card type, merchant time, value of merchandise, and all sorts of factors, but it can be as low as .70% (70 bps) to 5% or (500 bps).
The reason only a fraction of b2b payments ever involve a credit card is primarily for this reason--the interchange is expensive. As the payment size gets larger, the more significant these fees become. Take a truckload that is $1,000. If the shipper used a credit card, this could cost the merchant as much as $35 just for honoring the card for payment. That might sound expensive, but when you consider this is a card-not-present transaction and a premium class card, it could run this expensive. If a broker hopes to make 12% on the load, $30 would knock out nearly 25% of the load profit.
Enter smart contracts. With blockchain smart contracts, an agreement could be created between a shipper and broker. The shipper would outline their performance requirements: transit time, equipment type, regular shipment updates, etc. This would all be coded into the smart contract, along with the rate and some tie into cryptocurrency or smart payment settlement. Additionally, things like detention, TONU, and accessorials are all laid out in the design of the smart contract. The currency method is also mentioned so that both the buyer and seller know how they expect to get paid.
Once the load is tendered, the smart contract goes into force. It has been activated. Now, both parties are expected to perform. If either party drops the ball, there will be penalties and those would have been coded into the agreement. Along the life of the load, the required messages are being ledgered into the contract. Perhaps these are circle of service messages or ELD codes, showing regular updates on the progress of the load. At the end of the load, the driver would submit the proof-of-delivery (POD) and this would trigger a settlement message to the smart contract, allowing the money to be transfered. The money could be an IOU (securitized debt obligation), an escrow release from one US bank account to another, or a transfer of cryptocurrency.
Regardless of how the carrier receives payment or the shipper pays the carrier, the transaction in this example is far superior to a credit card e-commerce transaction. The smart contract did not require a card network to facilitate it. There was no MasterCard or Visa--all of this was done without an intermediary. Not only would this be far cheaper than going through the Visa or MasterCard payment rails, the transaction would be far superior in terms of the outcome.
For all of its advantages over other methods, the card networks have a lot of limitations. Their networks can only handle a limited amount of data and they don’t know a lot about the transaction itself. It still requires a sophisticated processing infrastructure behind it and all money must be transferred through all of the parties in the transaction chain. This creates costs and limits how flexible these transaction sets can be.
With smart contracts, two counter-parties can agree to practically anything they want. They don’t have to pay a third party and so long as the specifications of the contract are understood and properly coded, the outcome is exact to spec. Consider it a built-to-order payment network.
The innovations of smart contracts, blockchain, and other technology standards requires industry players to collaborate. BiTA has been formed to provide this forum among market participants. If you are interested in having your voice heard, we strongly encourage you to join.
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