How Digital Currencies Can Help Small Businesses

 Link: https://hbr.org/2022/05/how-digital-currencies-can-help-small-businesses

Name: Maria Ali

Id: 20171-22563

Small businesses have largely been ignored in the debate over digital currencies, despite the fact that they are a huge part of the US economy and stand to benefit greatly from cheaper, more efficient payment systems. These businesses operate on thin margins, have less bargaining power than larger corporations, and face cash flow issues as they wait to be paid for goods and services. Stable coins and digital currencies issued by central banks can be beneficial. These technologies can lower payment processing costs, allowing small businesses to keep more of what they earn while also significantly increasing the speed with which they are paid. This could significantly improve small businesses' liquidity and cash buffers, allowing them to survive and thrive in the face of negative economic shocks.

The Financial Fragility of Small Businesses

Most small businesses run on thin cash reserves. The average small business only has enough cash to last a month. As a result, they are extremely vulnerable to economic fluctuations, as evidenced by their collapse during the 2008 financial crisis and, more recently, the Covid-19 crisis.
There are numerous reasons for this, including their limited access to credit and fewer financial options than larger firms. Small businesses are frequently regarded as riskier by lenders because they struggle to provide the quantifiable metrics that large banks require when evaluating creditworthiness.

While small businesses have traditionally relied on community banks for funding, bank consolidations have further restricted this source of capital.Payment delays are one of the most pressing issues for small business. The difficulties in obtaining credit, combined with late payments, make it difficult for small businesses to maintain healthy cash buffers, increasing their exposure to economic shocks and limiting their ability to invest.Increased competition and innovation in payments could improve their long-term resilience and growth potential.

How Slow and Expensive Payments Hurt Small Businesses

The majority of consumer payments in the United States are now made with credit cards, a trend that has accelerated since the Covid-19 pandemic. While completely invisible to customers, merchants pay fees to card-issuing banks, card-network assessment, and payment processors that can exceed 3% of the transaction value and are expected to rise in the near future. Furthermore, it can take several days to receive the funds, increasing the working capital requirements of small businesses.This clearly disadvantages small businesses, especially given their thin margins, limited cash buffers, and high financing costs.

How Blockchain Technology Can Help

We need a more open and competitive payments infrastructure to change this. An open payments system will increase competition, lower transaction fees, and unbundle services that are currently included in all digital transactions, such as reversibility and charge backs, inter mediation, transaction risk assessment, and more, allowing businesses to pay for only what they require. Small businesses would ideally be able to do so without compromising which customers they can accept payments from, thanks to new forms of interoperability between digital wallets, banks, and legacy payment and card rails.Furthermore, transferring funds directly via blockchain would benefit both domestic and cross-border payments by reducing the number of intermediaries involved.

If this payment evolution is successful, small businesses will benefit from not only lower costs but also faster access to funds. If this payment evolution is successful, small businesses will benefit from not only lower costs but also faster access to funds. This would significantly improve their liquidity and cash buffers, allowing them to survive and thrive in the face of negative economic shocks.