- Oct 27, 2021 3:06 am GMT
This item is part of the Special Issue - 2021-10 - Advances in Utility Digitalization, click here for more
Utility companies have historically been behind when it comes to technological innovation for consumers. Online billing portals, SMS payments, and app development have become mainstream in only the last ten or so years. It's safe to say that suggesting utility companies accept cryptocurrency for payment might sound like a stretch, but I think you should hear me out.
With four rounds of cash infusion into the tumbling U.S. economy, $6.3 trillion has been committed or distributed into the economy to bring it back to life. This insane amount of money getting pumped into the country — and, likewise, worldwide — leads to an uncontrollable onset of inflation.
Despite all checks and balances, there seems to be an endless pile of fiat currencies worldwide. Dividing any asset by this infinite amount of money to buy makes that asset value reaches close to zero; we all know this from Economics 101. Under such a fear, investors and asset owners generally convert a good portion of their fiat investments into precious metal investments (think: gold). However, there is fear that gold and other precious metals may not be that rare — and, therefore, not precious — with new advances in space exploration. That fear causes investors to look at alternatives, hence Elon Musk's interest in buying Bitcoins and the drama thereafter, which I will discuss later. Bitcoins, by their nature, are finite — 21 million in all — which means that there should be fewer bitcoins than the demand, nudging the price per unit higher as the supply decreases.
Yet, while legacy banks and seasoned CFOs shout that cryptocurrency is unstable, I think it's a vital piece of our financial conversation to be had.
How Do Transactions Work?
With no centralized bank, when a payment transaction happens, for instance, within the Bitcoin (BTC) network, registered miners compete to get the work to book transactions on the BTC blockchain ledger. The transaction fee doesn't depend on the amount being transferred. It depends on the amount of data being transferred and the speed at which it needs to be settled. The sender could select a "fee rate," which influences the speed of the transaction settlement, depending on the network load of pending transactions that need compensation. The higher the fee rate, the faster the settlement. This fee rate is available to the miners participating in the network as an incentive to compete to assist in settling the transaction faster. It must be noted that wallets and exchanges can only estimate the cost and time for settlement based on network loans and exchange rates fees at the time of submission of the transaction. In almost all cases, it differs from the actual time and actual cost to settle the transaction. That alone is an intriguing prospect for anyone accepting payments from customers.
But, because we're so used to how things have worked in the past, it's difficult for some people to wrap their heads around how transactions occur.
Say a person wants to make a transaction. They send their Bitcoin to the person providing them the goods or services they're purchasing. That transaction is sent to Bitcoin networks to be verified as a valid transaction.
To verify the transaction, miners in the network solve something called Proof of Work. The Proof of Work is a challenging puzzle that requires quite a bit of computation power to solve. The miner who solves the puzzle creates a block that shows the transaction and adds it to the digital ledger or the blockchain.
From there, the transaction becomes verified. The miner who solves the puzzle is rewarded with new Bitcoins, and the original recipient of the transaction is paid.
From that explanation, you can glean some of the other benefits for merchants. There is a finite amount of Bitcoin to be mined, meaning transactions are safe from chargebacks or payment reversals as there must be money in the wallet to make a purchase. While the stock prices of Bitcoin and other cryptocurrencies seem volatile now, that finite amount stabilizes the value in the long run, unlike our traditional currencies.
For Bitcoin to be readily accepted as a full-fledged viable alternative to fiat currencies, it has to overcome its inherent scale limitation. To fully understand the magnitude of the restriction, compare the Bitcoin network's ability of a minuscule seven transactions per second to the more than 65,000 transactions per second for the Visa network.
To overcome this shortcoming, a parallel network to the Bitcoin network was developed and is now being used to transact low-value transactions at unprecedented heights of at least 1 million transactions per second. This network is appropriately dubbed the Lightning Network.
The economy of these transactions interestingly solves another critical problem of conversion from and to fiat currencies. Currently, the average fee on the Lightning Network clocks in at about one satoshi — the smallest Bitcoin unit that's worth a fraction of a cent — per hop. A transaction could involve one or more hops before it reaches the final recipient. All in all, this is a meager fee compared to transaction fees in the present-day popular payment systems. It is hard to provide a clear estimate for the cost of a transaction based on the number of hops a transaction takes to reach a recipient; hence there are limitations imposed by different lightning networks on maximum hops, where most adhere to a maximum of 20 hops, while having algorithms to minimize these hops.
It should come as little surprise that the faster a utility company can collect outstanding bills, the better. That's why days sales outstanding (DSO) is a primary KPI for the finance department of most organizations, including those in the utility industry. Understanding how many days it takes for the utility company to collect gives clarity to its financial health.
Many utility companies collect on a net-30 basis with payment processing fees of 1.3% to 3.4%. Imagine "energy-on-tap," where utilities could bill hourly, daily, or weekly instead of the standard monthly basis. The energy acquisition, selling, and collecting cycle could be reduced by 45 days or more. Residential consumers pay for services a smaller and manageable payment amount down from $30 to $150 per month to $1 to $5 per day. Rate cases, tariff updates, billing cycles, proration, automated and real-time meter readings, public service commission approvals, and so on would need to work out the logistics. This is possible because of the ability to process smaller transactions at a fraction of the present cost.
This approach reduces the DSO, risk to collect, and bad debt-write-off considerably, allowing utilities to recognize revenue at a previously unimaginable pace. For instance, the charts below compare the two approaches.
The first graph represents a data series of monthly billing. The blue represents the bill amount, and the orange represents the payment amount trend line for a typical Net 22 days invoice due date calculation.
The second data series represents a "crypto-lightning" system producing daily bills per account represented by the blue line and accepting immediate smart-small payments represented by the yellow payment trend line, using a Net 1 due date approach.
It's assumed that the consumers' payment behavior is the same in the two situations, meaning people who will pay in 22 days after receiving their monthly invoice will continue to pay in 1 day of receiving a daily invoice. This model also does not consider people who pay immediately after receiving the bill despite the Net 22 due date on the bill. The industry average of 15% uncollected bills by the due date is considered for both scenarios.
For a monthly cycle, you can see the collection of receivables starts 52 (30 + 22 = 52) days after the 1st day of consumption, in the case of the Net 22 due date scenario. The 30 days in the above calculation represent the monthly cycle durations and the 22 days represent the net due date on a bill from the billing date.
In the daily billing and Net 1 due date cycle, the receivables are raised the next day of consumption. They are due the very next day (i.e., Net 1 due date), resulting in a 51-day total reduction in the revenue cycle using this approach. This latter process would need an auto-pay arrangement to further benefit from this efficiency and some loyalty points or incentive program to take it to market and increase adoption. All of this is entirely possible due to enormous savings for the utility rolling such a disruptive payment model!
All of this is possible due to a drastic reduction in payment processing cost using the Lightning Network. The same payment savings program can be proposed for pre-paid scenarios already in play in many utilities worldwide.
While the utilities benefit from all of this, the consumer also benefits from smaller regular payments and could benefit from loyalty programs associated with crypto payments.
Regulations and Compliances
There are 57 overseas territories and 193 nation-states. Between each lies numerous electric, water and gas systems, grids, and networks of pipes, all of which have their own technologies, regulations, compliance needs, and government oversight. In the U.S., the laws are maintained at the state level, offering variations in compliance needs and commission requirements across each one of them. For these utilities to accept cryptocurrencies in the form of payment in exchange for the commodity they sell/service, it could require an act of God. Or, at least, acceptance of crypto assets as a suitable and acceptable alternative tender by everyone — especially their customers, the financial institutions they work with, the governments they report to, and the commissions that constantly moderate them.
Adoption and User Behavior
One of the biggest obstacles for anything concerning an exchange is enough people adopting that mode of exchange to make it viable. Some people think that bitcoin is in the fourth stage of adoption, the trial period where people start dabbling in the product and make or break the adoption of bitcoin. Still, user behavior is a challenge. This isn't so much of a new product as it is a complete cultural paradigm shift in how we think and use currencies.
People are continuously shying away from using bitcoin despite the surge in stocks, media attention, and instantaneous transactions. First, it takes a bit of tech-savviness to set up a digital wallet. Second, the comfort level with new currency is shaky at best and downright terrifying at worst.
I'm still optimistic. How did we move from bartering to the gold standard? Then, to cash? Then, to credit options? We're constantly innovating and improving our situations. I'd be hard-pressed to think that we won't be able to do it again.
Perhaps most importantly, securing the darn "digital coin" from cyber thieves is an art by itself. A crypto coin cannot be seen, felt, or smelled like a crisp green dollar note; however, it can be put away securely in a safe, limiting its transact-ability! Several options exist that allow for offline storage of your public and private keys, which prevent online exposure and potential theft. Each comes with its own risk-benefit, and none of which is common knowledge and very unnerving when it comes to safeguarding the asset. And once a coin is lost, I'll be blunt: the art of recovering your lost cryptocurrency is as flaky as it is to recover cash stolen out of your wallet. Sophisticated hackers exploit the best parts of bitcoin — decentralization and anonymity — for their own gain through several security imperfections, however complicated and exponentially difficult it is.
As more users jump on the train, we will inevitably see more scams, hacks, and fraud cases pop up. This, coupled with the fact that there are no remediation policies in place — like chargebacks or refunds that credit cards have — leaves room for improvement on the security front.
Accounting and Taxes
Accepting cryptocurrencies from customers is one aspect of the payment process. The other elements that would need to be reviewed and signed off from a business perspective for a utility are accounting, hedging, and investments. Utilities that accept or invest in cryptocurrency will need to make an effort to understand the changing regulatory environment and will also need to factor in the tax and accounting obligations that will are required of them. The IRS released IRS Notice 2014–21 in 2014, declaring that for U.S. income tax purposes, a cryptocurrency is a piece of property and not a currency. This means that the character of the stored virtual currency should be treated as business property, investment property, or other property. Therefore, the general U.S. tax principles that apply to any property transaction should be used to exchange cryptocurrencies.
While technology is the eager enabler for business problems and requirements, it needs to evolve where central ERP systems used globally by the utilities around the world can accommodate acceptance of a virtual currency — one that is treated as a property in some countries and as a currency in others — as a payment method. These ERP systems will need to provide acceptable processes, methods, and reports to assist with billing, collection, returns, refunds, chargebacks, payouts, disbursement, profit, and investments.
If you haven't been living under a rock, you've seen cryptocurrency prices rising on the stock market the past few years. But the upswings and crashes sow discord among mainstream users and delegitimize bitcoin as an acceptable currency. With value fluctuations come financial accountability and potential tax implications for the utilities that are challenging and need to be built around a strong business strategy and committed around a deliberate financial transformation. Still, advocates like myself see the potential and predict the widespread acceptance of bitcoin, even if fiat currency is here to stay.
I'm aware that nothing about this is perfect, and we're still in the infancy stage with this bleeding-edge technological shift. We're still struggling with compliance, acceptance, conversion, local taxation, and the lack of a universal framework.
But we have to understand one thing: the train has left the station. People are participating in digital coin transactions. Now that we're identifying the problems, we need to talk about solutions and what types of organizations may be necessary to implement them.
While this is a relatively new payment form, I don't anticipate it going anywhere. All companies — utilities and otherwise — are wise to start getting curious about how they can integrate Bitcoin and cryptocurrency into their payment options.
We believe the trick to increasing the acceptance of cryptocurrency in mainstream business today is to make the user experience seamless for the parties involved in the payment transaction. People are comfortable with fiat currency bank accounts and payouts. These accounts could be connected with the Lightning Network for peer-to-peer or peer-to-business transactions. Instant and frictionless conversion capability, accepting fiat currency deposits, and transfer and withdrawals from the Lightning Network would accelerate the adoption and provided seamless integration and benefits.
With this in mind, imagine the day when your monthly payment processing cost could go down by 75% to 80% — or even more! I bet that would be another problem; it would perhaps allow the public service commissions to reverse existing approved rate cases. It seems that you can never win.
Scalability is one of the most pressing issues facing mainstream adoption of bitcoin and other cryptocurrencies. Currently, only about seven transactions per second can happen on the blockchain. This constraint was an attempt to keep the blockchain secure and decentralized. With mass adoption, though, the amount of transactions handled per second needs to be exponentially greater. Visa, for example, handles about 1,700 transactions per second (although Visa claims a whopping 24,000 transactions per second, a widely debated figure). Similarly, Mastercard uses a network that claims to handle 5000 transactions per second.
Still, we are teetering on a massively disruptive moment for currencies and processing payments. Utilities would do well to look into these possibilities for the future.
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