Observations and personal opinions from Nothing Research Partner @bonnazhu. The following content does not constitute any investment advice.
After carefully studying the business model of Huma 2.0, I realized for the first time that Payfi and payments can also become interesting.
In short, Huma leverages blockchain and USDC to solve problems in cross-border payment remittances for traditional clients while packaging the generated fees into profits on-chain.
It can be said that PayFi is also a broad interpretation of RWA, and the on-chain payment business also showcases the allure of crypto financial engineering to some extent.
Traditional cross-border remittances vs. crypto payments
Traditional cross-border remittances and fund clearing mainly rely on SWIFT (Society for Worldwide Interbank Financial Telecommunication). In the process, the sender first pays the funds to a local bank or payment service provider's account. The bank then sends instructions to the recipient's bank through the SWIFT network, which may require passing through 1-3 intermediary banks, and finally, the receiving bank delivers the funds. The entire process takes at least one day.
To optimize the user's remittance experience, many payment service providers, such as Paypal and Wise, maintain fund pools at local banks to pre-store local currency, ensuring that they can rely on local clearing networks to make advance payments as soon as they receive user remittance instructions, reducing SWIFT network delays. They then replenish the fund pool with the sender's funds.
However, there is a problem: the fund pool cannot be moved. The larger the business scale and the more supported currencies, the more capital is tied up.
Moreover, the traditional model operates on a fixed fee structure, where a single transaction may incur sending fees, intermediary fees, and receiving fees, leading to transaction fees that can exceed 5%. Even though emerging payment service providers like Paypal and Wise have reduced their fees somewhat, the fixed fee structure remains unfriendly for small remittances, making costs a pain point.
This is the fundamental reason for the existence of crypto payments; it can significantly accelerate the speed of fund delivery, and low gas fees can greatly reduce remittance costs.
However, not all users use crypto wallets or accept cryptocurrencies. So how can we achieve cross-border remittances through blockchain?
Ripple model vs. Huma model
There are generally two so-called models:
The first originates from XRP, whose cross-border payment solution is a typical model without a fund pool and bilateral acceptance. Its core is: the sender pays local currency to the Ripple gateway, then the service provider exchanges the local currency for XRP (through market trading), and XRP is transferred to the service provider at the recipient's location via the Ripple blockchain. The recipient's service provider exchanges XRP for local fiat currency and delivers it to recipient B. In this model, there is no prepaid fund pool; all funds circulate in real-time, with XRP acting as a 'bridge currency.'
The second is Huma's prepaid fund pool model, where when a user initiates a remittance instruction and sends local currency to Huma, Huma will directly draw from the USDC in the prepaid fund pool and transfer it to the service provider in the recipient's locality, who will then convert it to local fiat currency and transfer it directly to the recipient.
In contrast, this model eliminates the waiting time for the initial step from local currency to digital currency in the Ripple model. It only requires the payment made by the payer to be added to the prepaid fund pool after the settlement is completed, resulting in higher efficiency. Additionally, since it utilizes a dollar stablecoin intermediary, its acceptance and liquidity are clearly much better than XRP.
What is the moat of the Huma model?
At this point, it should be clear that both Huma and traditional cross-border remittances operate on a prepaid fund pool model. One fund pool exists directly in fiat currency and is pre-funded by the payment service provider, while the other is crowdsourced and exists in the form of USDC, requiring the payment service provider to first convert it into local currency when payment needs to be made.
Setting aside these two minor differences, the main advantage of the Huma model over the traditional model is that traditional cross-border remittances mostly operate through the banking system, and SWIFT fees are considerably higher than blockchain transfers, thus giving Huma a clear advantage in small transfers.
But can this constitute a moat?
I don't think so. Payfi and crypto payments are currently based on the traditional banking system not fully embracing blockchain. However, payment service providers like Paypal, Wire, and Stripe have started experimenting with blockchain for payments, albeit not in a way that allows the market to share the profits from cross-border payment fees like Huma does. The longer this takes, the smaller the space for new native crypto payment projects may become.
Nevertheless, the model of Huma that packages revenue through crypto financial engineering and opens it up is still commendable. This is also the charm of crypto; you can access various native yields.
