Bitcoin and blockchains have completely overtaken financial media. By now, you've surely seen an endless number of articles making promises about how blockchains are changing or revolutionizing the world.
The title of my article might suggest this is more of the same. But this isn't a baffling story about how Long Island Iced Tea tripled in value only because it changed its name to Long Blockchain. (If you're curious, it's fallen back again and is now a penny stock.)
Instead, this article is a real-world example using real numbers of how blockchains actually are changing the payments industry for the better. With billions of dollars at stake in this market, it could provide a significant opportunity for investors.
The payments opportunity
Our business world is founded on capitalism and runs on efficiency. Companies have people, products, and technologies that they're using to make as much money as possible while paying the lowest possible cost to do so.
Many of those costs come in tangible form. There's steel required to make manufacturing plants and electric bills that must be paid for corporate headquarters. But there's also a huge cost tied up in the more intangible form of simply moving money from one bank account to another. This is a cost that companies derive no benefit from. So it makes sense to keep it as low as possible, without disrupting operations.
As such, you'd think the business world has gotten pretty efficient at sending money by now. Right? After all, technology has evolved dramatically during the past few decades. We've moved from cash and checks to bank transfers and credit cards. And now, we even have digital wallets that can store our account information online.
But in reality, the payments space is still stuck in the Stone Age. Even with all of the technological innovations, North American businesses still use paper checks for $18 trillion of transactions each year. The manual effort required to process those checks costs $550 billion annually, which is more than twice as much as what America spends on education, veteran's affairs, homeland security, the State department, and NASA combined.
So why aren't businesses innovating in payments? Perhaps it's because each improvement has offered only an incremental benefit. Changing from ingrained processes is hard, and smaller businesses might not think a few marginal basis points of profit is worth all of the time and effort of learning something new.
In addition, the "solutions" are still siphoning quite a bit of money off the top. Even the cutting-edge digital solutions offered by PayPal or Square still charge an average of 2.9% per transaction, which largely goes to covering the interchange fees and merchant discounts of our established financial infrastructure. Regardless of what car you drive on the payments highway, you still need to stop at the tollbooths.
The time has come for a new highway. The payments space desperately needs a breakthrough.
Rather than incremental improvements that nickel-and-dime customers at every opportunity, the payments industry really needs a modern platform that makes every transaction absolutely free. Companies would pay a fixed monthly fee to get unlimited usage for all of their financial activity.
Fiscally responsible CFOs would love this. They could finally move capital at maximum efficiency, which would greatly reward both their companies and their shareholders. A greater number of transactions would equate to a lower cost per transaction. So the greater the adoption, the more valuable the platform would become.
There's a lot to unpack about what blockchains are and why they're useful. For the purposes of this article, it's most important to know that they are transparent and decentralized financial ledgers. That means all of the transactions across an entire organization can be seen by everyone on the network and in real time.
This is a quantum leap from how the business world works today. Vertically integrated empires have built highly complex supply chains to manage every single step between the beginning raw materials and the final end sale to consumers.
Take Starbucks (NASDAQ:SBUX) as a perfect example. Starbucks has been the gold star of supply chain management for decades. It has optimized logistics and ensured excellent final product quality, while also prioritizing socially responsible practices such as fair wages for coffee growers.
But its supply chain is also incredibly complex. Here's how it works: 300,000 global coffee growers sell to local co-ops, which sell to warehouses, which sell to shipping carriers, which sell to receiving carriers, which sell to roasteries, which sell to distribution centers, which sell to retail stores, which sell to consumers. Every step of that path involves transactions where payment costs slow-drip out, just like a fresh-brewed cup of joe.
Interestingly, our gold star supply chain prodigy Starbucks has recently been overhauling its system. And it's replacing it with blockchains.
Unlike much of the enterprise software world, blockchain projects don't come from the ground up within organizations. Any individual department (i.e., individual step of the supply chain) has no incentive to adopt a blockchain. It could potentially downsize their division -- or even worse, make it obsolete. No one wants to risk writing themselves out of a job.
Instead, blockchain initiatives often come directly from the top. Corporate CEOs and CFOs recognize that paying 3%-plus on every transaction with vendors can quickly add up to tens or hundreds of millions of dollars annually. When you have a fiduciary responsibility to shareholders, you pay a lot of attention to saving that amount of money.
Even the old guard recognizes the disruptive potential of blockchains. Mastercard and Visa have both recently invested in Facebook's new Libra project. The payments space is fundamentally changing, and its leaders want to ensure their future relevance.
The Foolish bottom line
Capital efficiency is key, and blockchains will soon unlock billions of dollars of enterprise value. For example, click here for my discussion with Paystand CEO Jeremy Almond about how his company has been offering a "Payments as a Service" blockchain to the banking industry for the past six years.
Blockchains are no longer just white papers and theoretical discussions. They're actively changing the face of payments right now, and forward-thinking investors should be paying attention.