Abstract
Many modern economic services reflect the importance of the time value of money. Services from payday loans to complex cross-border supply chain financing seek to offer customers flexible solutions to optimize cash flow. Blockchain-based solutions have already begun to enable more timely, efficient, and democratic provision of these crucial services under the collective name “PayFi”. As PayFi grows it may present novel payment solutions and create new economies. However, potential hurdles remain regarding market and regulatory acceptance of PayFi solutions.
Introduction to PayFi
PayFi (short for Payment Finance) is a group of services aiming to realize the original vision of blockchain as a peer to peer electronic cash system. Unlike decentralized finance (“DeFi”) solutions, which focus on broader financial services through decentralized platforms, PayFi solutions are specifically designed to provide real-time transaction settlement.
PayFi seeks to leverage cutting-edge blockchain technology to enable instantaneous processing of financial transactions, a crucial feature in supply chain financing, cross-border payments, and invoice financing among others. By integrating blockchain’s transparency, security, and efficiency with rapid transaction processing, PayFi potentially offers a transformative approach to enhance the speed and reliability of real-world financial operations.
As a novel paradigm, PayFi looks to streamline financial transactions while also democratizing access to liquidity, reducing transaction costs, and expanding global financial accessibility. As PayFi continues to evolve, it hopes to redefine the financial landscape, bridging the gap between traditional financial systems and the new possibilities offered by blockchain.
PayFi’s emergence may also prove a crucial development for investors seeking to build healthy crypto investment portfolios. Over the last 10 years the amount of value stored on blockchains has soared.
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Reports suggest that the total value of crypto assets in 2024 is approximately USD 2.41T. Estimates vary, but financial industry experts predict that the total value that will be stored on-chain by 2030 will be USD 10T to USD 25T. With so much value on-chain, it is important that investors have diverse on-chain investment opportunities to maximize the utility of their assets. While current staking and liquidity pool solutions offer investors some options, on-chain investment opportunities still lag behind TradFi alternatives. PayFi looks to provide the next step in the maturation of on-chain investing by bringing established financial services on-chain and enabling investors to avail themselves of new return-earning opportunities. Importantly, because current on-chain investments are generally correlated, PayFi’s new opportunities may allow for greater diversification of on-chain portfolios.
PayFi Verses TradFi Alternatives
PayFi offers several potential advantages over TradFi solutions. Below is a table comparing some of PayFi’s features and advantages over its TradFi counterparts.
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Market Sectors for Potential PayFi Solutions
Multiple market sectors and industries can benefit from well-designed PayFi solutions. Though PayFi is still relatively nascent, several PayFi solutions are available or are being built. The below market map, though not exhaustive, offers a glimpse into some of the projects looking to transform existing markets through PayFi solutions.
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In the cross-border payments sector, two PayFi companies, Arf Financial (“Arf”) and Huma Finance (“Huma”), have already gained significant traction.
Arf Financial
Arf is a global transaction services platform that first surpassed USD 1B in on-chain liquidity volume in March 2024. Arf’s infrastructure, with native on-ramping and off-ramping, uses real-world asset (“RWA”) based stablecoins to provide quick and efficient cross-border payment solutions. Specifically, Arf, in partnership with Circle, offers short-term USDC-based working capital loans to licensed financial institutions. The institutions use the loans to settle cross-border payments immediately with no additional collateral or prefunding required. Because of the on-chain loaning and settlement, the transactions are transparent and traceable.
Arf has crafted a careful business model to deal with the regulatory uncertainty that surrounds crypto and PayFi. Regulated under Swiss law, Arf only offers its PayFi cross-border payment services to licensed financial institutions to better ensure the regulatory compliance of all parties in each transaction. Further, Arf checks its borrowers’ quarterly audited financials and performs daily credit risk checks.
Even with their careful approach, Arf currently processes USD 1B per year in transactions. However, Arf’s co-founder and CEO Al Erhat N. states that the current demand for cross-border payment solutions is USD 1B per month.
As of October 2024, Arf has an on-chain volume of USD 2B and a total loan volume of USD 1B with 0 defaults. Arf also boasts a capital turnover of 3.85 times per month.
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Huma Finance
Another company contributing to PayFi’s development is Huma. Huma is a credit platform that tokenizes receivables and provides risk management services. Huma currently offers cross-border payment financing and digital-asset backed credit cards. Further offerings of instant settlement for RWAs, trade finance, and decentralized physical infrastructure networks (“DePIN”) financing are coming soon.
As of October 2024, Huma has financed total payments of USD 332M and has suffered 0 losses.
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Moreover, Huma is doing more than just offering PayFi solutions, it is building a PayFi platform for other PayFi apps to operate on. Huma’s PayFi Stack is an open stack designed to aid in the building of PayFi solutions. The PayFi Stack’s consists of the following six layers: transaction layer; currency layer; custody layer; compliance layer; financing layer; and application layer. With the PayFi Stack, Huma aims to provide a blueprint for PayFi solutions to build upon while encouraging cooperation and innovation across each layer and the PayFi Stack itself.
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Another interesting PayFi project currently being worked on is BSOS’s supply chain finance solution.
Supply Chain Financing
An integral part of international commerce, supply chain financing (“SCF”) can potentially benefit from PayFi. While it can be considered a subsection of cross-border payments, SCF is a massive market and is deserving of individual attention. In 2023 the SCF market had a global value of USD 2.347T. SCF is prominent because it presents a win-win-win solution for many businesses and financiers.
In SCF suppliers offer discounts to 3rd party financiers in return for immediate payment. The 3rd party financiers then take full payment from buyers according to their negotiated payment terms, be it 30, 60, or 90 days.
This process stabilizes the cash flow for both the supplier and the buyer. The supplier receives payment earlier than standard terms require, which may be vital to the continual operation of their business. Likewise, buyers improve their cash flow by delaying payment. Lastly, the financier receives the difference between the discounted price paid to the supplier and the full payment received from the buyer.
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Traditional SCF requires a complex web of contracts, letters of credit, and communication. PayFi can harness the advantages of blockchain to greatly simplify SCF. With smart contracts at the center of PayFi protocols, communication, documentation, and payments can be processed with much greater efficiency and speed as shown below.
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Additionally, traditional SCF is only available to relatively sophisticated parties, often requiring multiple years of audited financials before financing is available. Under PayFi, however, SCF can be simplified, sped up, and automated according to the parties’ preferences. PayFi’s greater efficiency can bring SCF to more businesses that previously did not have access to the full array of services under the traditional financial system due to size, industry, or location. Such potential democratization of SCF may work toward leveling global playing fields and opening up new supply-chain lines. Small businesses, new businesses, and/or geographically isolated businesses can secure previously unavailable financial services and participate in previously unavailable markets.
BSOS is already working on transforming SCF through PayFi. BSOS seeks to collaborate with diverse capital providers to ensure continued, healthy working capital flows and promote a resilient and sustainable supply chain. So far, BSOS has transacted over USD 20M in volume for over 350 corporations including Adidas and Intel.
As PayFi continues to grow, opportunities in additional markets will likely become attractive targets for new PayFi solutions. Two markets that may eventually benefit from PayFi solutions are the repurchase agreement market (“the repo market”) and payday loans.
The Repo Market
The repos market’s requirements for speed and transparency are potentially a perfect fit for PayFi’s capabilities. The repo market is where financial institutions engage in short-term borrowing and lending, typically overnight, using securities such as bonds as collateral. It is used by financial institutions to manage liquidity and finance inventories of securities. Central banks also participate in the repo market to implement monetary policy by influencing short-term interest rates. The repo market is beyond massive, the U.S. repo market alone moves USD 3T every day. In addition to speed and transparency, PayFi’s automation potential could add great value to the repo market and enable financial institutions to more efficiently borrow and lend money to each other to meet their liquidity and accounting demands.
Payday Loans
In the realm of personal finance, one market that may benefit from PayFi’s greater efficiency is payday loans. Payday loans are short-term, high-interest loans designed to provide immediate cash to individuals who need funds before their next paycheck. In 2021 the global payday loan market was worth approximately USD 33.5B. By 2028 the market is expected to be worth USD 42.6B. Specifically for the payday loan market, PayFi’s greater transaction speeds, greater accessibility, and greater transparency will be better able to serve borrowers. On the other side, payday loans’ risk-profile and short duration period (an average of two weeks) will add needed variety and diversification options for crypto investors to consider.
PayFi’s Potential to Enable New Markets
PayFi’s advantages may also allow for the emergence of new markets.
“Buy now pay never” is an interesting concept combining both investment and credit services in one on-chain account. In “buy now pay never” the user deposits crypto assets into a liquidity pool. The user can then purchase goods with their deposited assets. However, instead of the payment being withdrawn from the user’s principal in the account to pay for their purchase, the amount owed is treated as a receivable and is paid off over time by the returns earned in the account.
PayFi also has the potential to create new economies for influencers and content creators. Revenue for content creators flows in over time as views of their content accumulate. Unfortunately, even for steady creators the accumulation of views, and thus receipt of full payment, may take months or years. The drawn-out nature of the content creator revenue model can lead to inconsistent cash flow and liquidity issues. Much like SCF, PayFi can offer content creators a novel solution for short-term financing. Via liquidity pools, crypto investors can offer content creators advances on their revenue. Creators then will then pay back the advance as revenue flows in.
Such advances can provide content creators the liquidity they need to continue to create while providing a new investment option for crypto investors to realize returns on their on-chain assets.
However, such new markets are not without risks. Liquidity can evaporate quickly, borrowers can overestimate the size of future returns, and view counts with streaming revenue may never materialize. As new products are potentially launched both the PayFi solution providers and investors will need to move with caution.
Hurdles and Obstacles to Overcome
Though still nascent, PayFi has already shown some of its potential. As it matures, PayFi hopes to provide more and more benefit to businesses and investors. However, there are challenges hindering PayFi’s development.
Blockchain Liveness and Scalability
Payment services are vital to the international economy and any interruption to payments can create large-scale problems. Due to this blockchains need to showcase extreme reliability. Solana, reported as “the vanguard blockchain for institutional payment use-case adoption” has had 7 major outages since its mainnet launch in 2020. While blockchain’s growing pains are understandable, liveness issues are a risk that will likely slow PayFi’s adoption. As blockchains mature and improve PayFi can win the trust of institutions and customers, but it may be a long process.
Similarly, scalability must improve for PayFi to reach its potential. Visa can process over 65,000 transactions per second (“TPS”). In 2023 Visa processed approximately 720M transactions per day for a daily average TPS of 8,300. While Solana has a theoretical TPS of 710,000, to date its highest recorded max daily average TPS is around 1,500. Currently, Ethereum’s max recorded transaction processing capabilities is 62 TPS with the L2 Polygon hitting around 429 TPS. Arbitrum has hit a max recorded TPS of 944. Similarly, Tron’s max recorded TPS is reported at 272 while BNB Chain’s max reported TPS is 1,731. At present blockchains do not have the scale to match PayFi’s traditional alternatives.
Regulation
PayFi, like all blockchains, is hampered by regulatory uncertainty. Each potential PayFi solution seemingly faces a unique combination of regulatory requirements. Such requirements include factors like the jurisdiction of use (or users) and the TradFi alternative that jurisdictions judge to be closest to the PayFi solution.
For any cross-border payment PayFi project in the U.S. multiple regulators may claim oversight including; the Federal Reserve, the Department of the Treasury, the Office of Foreign Assets Control, the Office of Comptroller of the Currency, the SEC, the Consumer Financial Protection Bureau, state regulators, and the Financial Crimes Enforcement Network.
Likewise, provision of PayFi personal credit services in the U.S. is subject to oversight from; the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the Federal Trade Commission, state banking regulators, the Office of Foreign Assets Control, and the Financial Crimes Enforcement Network.
The regulation of payroll services in the U.S. includes oversight by, the IRS, the Department of Labor, the Financial Crimes Enforcement Network, the Consumer Financial Protection Bureau, the Federal Trade Commission, and state regulators.
Due to this complexity, PayFi regulatory compliance must be approached methodically and on a case-by-case basis.
For the time being, companies like Arf are creating regulatory precedent and clarity for PayFi through careful and well-thought-out business practices as discussed above.
Institutional Resistance
Much of PayFi’s potential advantage over TradFi stem from greater automation and the cutting out of intermediary parties. These intermediaries, often banks and other well-organized entities, are incentivized to protect the status quo and their established revenue streams. As such, PayFi solutions may likely face institutional pressures, doubts, and dismissals from established TradFi powers.
Volatility
As mentioned above, greater on-chain liquidity can cut both ways. Capital in TradFi is generally stickier while on-chain assets can move quickly. PayFi solutions must be diligent in maintaining the liquidity they rely on to operate. Token and point reward schemes may be useful in maintaining liquidity, but PayFi projects must prioritize competitive returns or they may suddenly find that all of their liquidity has moved to a more efficient competitor.
Concluding Remarks
More so than DeFi, PayFi represents the promises of blockchain. PayFi also potentially represents a significant advancement over TradFi alternatives by offering real-time settlements, enhanced security, reduced costs, global accessibility, programmability, transparency, and improved scalability.
Through continued creativity, effort, and time, PayFi has the potential to become a transformative force in the financial industry that will provide more efficient, secure, and inclusive alternatives to conventional financial systems.
If anyone wishes to contact me with questions, comments, or observations about PayFi please feel free to DM on X @Lawsker15.
Table Sources
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2 Id. at page 2.
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