Split payments change the risk profile of a business.
Current financing of a small business is risky as you have no real influence over what they do with the funds to pay back the financing, forcing many costly extra rules. Suppose the payment was auto-split at the start, and nothing interfered with this process. In that case, the risk of not being paid is removed and is linked to the business’s activity, which opens a new incentive model for the financiers and risk visibility.
The idea of financing from cash flow isn’t new and has recently been used by payment providers, who have supplied working capital and then tapped into the payment channel to make sure they get paid, which they control. They minimise their risk as they have access to continuous live data that most don’t have (something we will come back to). This model is usually only available to specific business types and focuses on the business close in collecting payment from consumers. This creates lock-in and, in many ways, is a conflict of interest as you can’t switch to better deals or access other offers. This is an area where the big companies operate and make extra off this just because they have the size and skills to make this work.
We also see this in significant transactions, which have created billion-dollar companies financing invoices and using the insurance model to minimise the risk. Covid significantly impacted this as it changed the whole risk model, forcing several bankruptcies like Greenhills, a $10b business. On a personal scale, we see this in the mortgage space where you need to take out insurance if you are a risk, i.e. not a large enough deposit on your house. These activities have been to minimise risk, which is the biggest decider in financing anything, as we all want our money back and growth in value for it simultaneously.
Crypto is a tool that allows all these rules to be rewritten, not just as a copy of what happened before, but as a complete re-imaging of the possibility, as now, anyone can become part of the money chain.
The reason for this is history is a great teacher. We had seen this before with VoIP (voice over IP) and its impact on the telcos, where they had to change their whole world. We now have MoIP (Money over IP) and now starting to hit the scale of going from being a niche activity to being real and happening at speed, and this changeover will be quick as we are much more connected now.
The telecom sector offers a cautionary tale: When Voice-Over-Internet-Protocol (VOIP) was invented in 1995, most people disparaged it as a technology that couldn’t scale and wasn’t a threat to the telecom giants. Then, circa 2003, the technology to scale VOIP arrived — broadband — and within a flash, most of the telecom industry’s copper-wire networks became obsolete. Useless relics.
What does this mean?
With this whole new way of thinking, we can move away from the idea of dumb paper or plastic to smart money contracts. Part of this is the split payment model with which we can have a financing component that allows payment directly to the financer(s) as part of the payment contract. It can be 1c or $20 each time, creating a continuous cash flow that allows new data models to be applied to track risk and start early intervention processes.
This sounds hard right now as we are still thinking how we do it now, but the push will start in industries where this can happen quickly which is the creator, gig and consignment stock industries which are constrainted by the current models.
But, the real game is you can own part of something you are passionate about and impact what can happen, i.e. we can be part owners and have influence. This will be create the other push for change now as the “what’s in it for me” kicks in.
When you put this together with the trust in the ongoing data, contracts that operate without external influence, continuous and trusted cash flow, you get a new open asset class that the Defi world can access.
These contracts can now be put into marketplaces with data tools, where an owner of a contract wanting to finance it can then sell this revenue into the community, and they can trust it. We now have an open community that could be putting up $100 or $100k for a return. We see that the ones putting in a small bit of money normally have the time to improve the return as they are dealing with the product, which moves the risk profile even more downwards for them. This opens a micro loan model that could be for 4 weeks, 2 years or whatever is needed and is a known risk profile.
This is where a public chain works well, as now you have full automatic disclosure without the marketing bull, which is very strange for the normal banking world.
We have been working on this for a while, and it came from our work in building an online Yoga platform at https://www.bodymindlife.online.
We saw that a teacher’s class can now be converted to be an asset as it has clear, predictable future revenue as that data will be public, the power of the blockchain of transparency. Now with a smart money contract, they could sell part of this off under two models. One is just the typical financing model, or the other is part owner. Now, as a financer, you can influence success by promoting the class to generate more revenue, breaking the whole Google and Facebook tax we pay. Now we are playing a new game that is a positive spiral that we can all share in, the real part of what we want.
Now let’s take it to the next level, where the landlord of one of our studios is willing to get the split payment with a minimum amount per month to cover their base costs. They then recently approached us to help with marketing to grow the location’s success. So different to other landlords just looking at you paying for some space.
Or even in retail where stock is on consignment. As the product is sold, the payment can happen to the stock’s actual backers and the retailer is focused on selling.
And finally, the taxes could be paid as the product is sold or tax paid back when products are bought, allowing the tax office to capture the gig economy and the cash market and businesses stop being tax collectors and the paper work that comes from that.
The biggest impact will be how we think about our banking and regulator institutions, as it will be easy to go around them, just like it has happened before. The power of the banking and regulators will be the policing in many ways to drop the risk levels for the everyday user, but hopefully, they don’t go too far in protecting the old school networks who can’t or won’t change as historically that has shown to be a path to failure for all.
These new models allow the public to be part of the financial revolution instead of the current lockout model, as now they can put money into different projects they have a connection with. They now have transparency of what is happening instead of the closed book system we currently work with and the pain it causes.
We believe we can make better decisions faster once we have this to where we can trust the data, which is continuous and, therefore, harder to fake. For the small investor, the return can be better as they have the ability to have a direct influence where historically, investment has been a black box activity they have no input one. We can get back to the people and not the faceless market. We see in the future that the faceless investors will have some of their funds become funds of funds and act as the top-up of the small investor who is more of the scout and influencer for opportunities — something we already see in the VC market.
My last 2 cents
And finally, to answer the biggest concern, scammers. They will always exist, but they need shadows and grey areas to operate. As crypto takes hold, the light will become brighter as information will become much more free-flowing, and the crypto model is all about trustless data, so we can trust it. Right now, we are in the grey space, so they can operate, and as this is internet based, they can operate from anywhere at speed which is their advantage as they are focused on the gaps that exist right now. But that will slowly be closed as the most powerful force is the community of innovators who don’t like this, while the institutions that are slow will act as the final door for them. We just need innovators and institutions to work together on the agenda for all and leave all the baggage behind they both carry and remember the scammers will be working to cause conflict to stop this from happening as well as they also understand the power of media and community.
Make sure you read the other blogs in this series as I explore the power of smart money and how we can get there.
The next blog is talking about the changes need to make this become real.