On invoices, collecting cash & the promise of smart contracts
We’ve seen tremendous innovation in the payments space over the last decade. Fintech and developer-friendly companies like Stripe have made building delightful payment workflows a breeze and much of the “new subscription economy” is built upon these providers. If you’re a customer of Uber, Netflix or Spotify, then you are most likely transacting via a service like Stripe already.
Yet, so much of the B2B world is still stuck in the invoice paradigm. If a company is selling services or software beyond a few hundred dollars, most likely its customers are paying via an invoice (often a physical piece of paper too), not credit card.
This poses a variety of challenges for suppliers.
Running my last company, cash collection and hunting invoices took significant time. As a small, cash-strapped startup, collecting cash on time is key, yet at times it felt like every customer (even the happy ones!) was against us.
Smaller customers would delay payments due to cash flow whilst larger enterprises would instead try to optimise their cash flows for P/L purposes and were very deliberate about when they would pay the invoice.
In addition, larger customers often knew how important they were to us and knew we would likely want to avoid sending their invoices to credit collection agencies. Credit agencies also generally work in one market (in conjunction with a government-debt-agency), so cross-border enforcement of on-time payments is another challenge.
This is the reality of B2B payments today. Collecting invoice payments for B2B is still a huge pain, despite all the innovation in the payments space. In addition, the administrative overhead cost of preparing/sending invoices for suppliers, and processing/paying invoices for customers must be astronomical.
This leaves me thinking that there is still significant room to innovate in the payments space, specifically around invoice workflows for B2B transactions that do not involve credit cards.
Programmable Money & Smart Contracts
It’s of course been impossible to miss the hype and buzz around cryptocurrencies and blockchain over the past 5 years.
Whilst it’s not entirely clear yet whether cryptocurrency does indeed represent the next big quantum leap for global finance (I’m nowhere near qualified to answer that question), there are a number of interesting ideas that have sprung out of it.
One is the idea of “Smart Contracts” which put simply is programmable money and transactions. The Wikipedia definition of a Smart Contract is pretty concise.
A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts allow the performance of credible transactions without third parties. These transactions are trackable and irreversible.
Now, Smart Contracts is not actually a new concept, in fact the term was first coined by Nick Szabo in 1997 in a paper entitled: Formalizing and Securing Relationships on Public Networks.
As a quick side note, the paper is a fascinating read, as the author was in 1997 already considering the role of cryptographic mechanisms to enforce these contracts. Definitely ahead of his time!
One can easily envisage how smart contracts could be used to revolutionise B2B payments. Two parties (a customer and a supplier) enter a contract, at which time a transaction is agreed upon, scheduled and then executed programmatically when the terms of the contract are met. Once the contract is “signed”, neither party can back out of the transaction and the specifics of how much $ and when are locked in.
It was recently revealed that IKEA Iceland had accepted payment from a customer via a digital currency, brokered via a smart contract.
“Programmable money regulated by governments will become the foundation for e-commerce payments because they enable so called ‘smart contracts.’ Smart contracts have many use cases. For example they can be used to generate ‘Smart Invoices’, which are invoices that basically settle themselves,” said Gert Sylvest, co-founder of Tradeshift and GM of Tradeshift Frontiers, a digital incubation unit.
A one-off, proof-of-concept transaction in Iceland is one thing, transforming the world of B2B payments is another, and will no doubt require huge changes to global financial infrastructure.
However, the promise of programmable money and smart contracts is an exciting one that has the potential to transform how the worlds businesses get paid, and pay others. It’s definitely a space to keep an eye on.
Until next time,