Now that we have seen how instant settlement can affect the construction industry let’s see the next industry that can have a huge impact - logistics.
To begin, let's examine the logistics industry through the lens of an online order example. What unfolds when we select a product on a website that requires delivery to our door? Who are the entities involved in this process, and what does the payment process entail?
So I pick something from the website and order it. I pay for it and wait for the product to be delivered to my door and hope that what will arrive at my door is what I expect.
Because I am paying upfront, I am taking the risk in this case. I may choose to pay on delivery but the risk for all involved does not disappear, it is just shifted to who is taking that risk now, the seller. But more on that a bit later.
When using a card for payment, a 1.5%-3% transaction fee is typically charged by the bank issuing the card. After payment, the retailer or seller is notified to send the product to the buyer's address. Subsequently, the retailer arranges delivery through a logistics company. A delivery person is dispatched to the warehouse to collect the ordered product along with others, optimizing the route. The product then navigates through the delivery company's ecosystem, involving various warehouses and personnel, until it reaches the final delivery person who brings it to the buyer's doorstep.
The efficient movement of the product through space is generally understood within the system so that is not the problem. Faster delivery benefits everyone involved, as quick and reliable service enhances customer satisfaction and loyalty. However, the actual delivery personnel may not directly benefit from the speed of delivery, but we'll delve into that aspect later. Swift delivery is crucial for customer retention, as a prompt and reliable service encourages customers to choose the same platform for future orders rather than seeking alternatives.
Where Are The Problems Then?
The logistics industry, much like the construction industry we discussed in the previous article here, has problems that predominantly revolve around payment processes. These payment-related issues cascade into other aspects of the logistics chain.
Let's trace the journey of money in this context:
- I make a card payment to the website, and the bank deducts a 1-3% transaction fee from the retail value.
- The website, having received the payment, needs to pay the retailer the value of the product, and again, the bank deducts 1-3% from this payment.
- The retailer, in turn, has to pay the delivery company, with the bank deducting another 1-3% from this transaction.
The above is just about the fees to the bank. What about the settlement between all the entities involved in the delivery?
- The website receives their money from me fast, unless it is an international delivery it is the same day.
- The website then batches all the payments that have to be paid to the retailer for the month so they do not have to pay each individual sale to them. They most likely will pay once a month so it could be up to 30-day credit at this point.
- Then the retailer has the same arrangement with the delivery company and there is up to a 30-day delay of the payment at this point also.
The monthly batching of payments may streamline processes, but it introduces a significant element of risk into the transaction chain. If any entity in this chain were to face financial issues, such as bankruptcy, within 30 days, the subsequent parties may never receive the funds they are owed. This risk compounds throughout the logistics ecosystem, emphasizing the need for more secure and efficient payments.
If I opt to pay on delivery, the risk dynamic in logistics is inverted - the money is collected by the delivery company, then forwarded to the retailer, and eventually passed on to the website. This way of operating has introduced additional complexities. As the number of orders increases, individual financial ledgers between the companies become more intricate due to the waiting period for money to reach the designated recipient. There is a ledger between the website and the retailer, tracking how many orders have been paid to the website and are awaiting payment. There is another ledger between the delivery company and the retailer, which, in turn, is awaiting payment. Regardless of my preferred payment method as the buyer, the retailer remains significantly exposed because they never receive the money first. The third-party risk for them is consistently high.
In both scenarios, the banking system charges fees of 3% or more for each delivery, and various parties face multiple third-party risks depending on the order of payment. To provide a more nuanced understanding of risk, it's crucial to note that even if all involved entities are reliable and face no business issues, this doesn't eliminate counterparty risk associated with the banks themselves. In the event of a bank failure, even a well-intentioned company may find itself unable to settle its debts, highlighting the vulnerability inherent in the current financial infrastructure.
Other Problems In The Logistics Ecosystem
The system encounters additional challenges within the workforce, particularly among delivery personnel. A fundamental conflict exists between these workers and the companies they serve. Workers are compensated for their time, while companies derive revenue from delivered products. This misalignment of incentives prompts companies to set aggressive targets for delivery personnel. When I run a marathon I do not sprint because I will burn out in the first part of the race. I have to pace myself to finish and may increase or decrease the speed depending on the particular situation. When you make the delivery men “sprint” in the “marathon” of delivering packages, it is only a matter of time before they burn out and quit much sooner than finding their pace and finishing their month/year the proper way.
The intense pressure to meet unrealistic delivery targets can have severe consequences on the quality of service provided by delivery workers. The rush to complete deliveries quickly may lead to damaged products and unattended packages that get stolen. Additionally, they do not have time for bathroom breaks and have to figure out how to do their business in the delivery vehicle. This not only impacts the overall customer experience but also poses risks to the well-being of the workers themselves.
The burnout process is expedited by the mental struggle faced by delivery personnel. A conflicting incentive structure compounds the challenge: while the company seeks maximum exploitation for increased profits, delivery personnel are motivated to minimize their workload since their compensation remains constant. This incongruity not only hampers the optimization of profits for both parties but also introduces mental stress for the delivery personnel. How do you expect to have no friction between them if both parties wanting to increase their profits means they have to do completely opposite actions.
Another source of friction between the delivery company and its personnel revolves around the vehicles they use. Similar to the issue of tool maintenance in the construction industry, the lack of ownership over the vehicles leads to neglect in upkeep. The company, focused on maximizing profits, may exploit the delivery personnel, who, in turn, might exploit the vehicles to enhance their personal gains. This dynamic creates a detrimental cycle where both parties prioritize individual interests over the long-term well-being of the shared resources.
Instant Split Payments And Delivery Dynamics
The most apparent benefit is that the banking system would not levy fees of 4.5%-9% for each product delivered. Even if funds are transferred between entities, the fees in the Lightning Network would be approximately 0.3%. This alone marks a significant improvement, reducing transaction costs by an order of magnitude compared to the current system. Now, let's delve deeper into additional advantages.
The risks associated with multiple third parties are eradicated in this ecosystem. There's only one third-party risk, namely the buyer of the product. As soon as the buyer receives the product, they make a Lightning Network payment. Moreover, the delivery company, the retailer, and the website all receive their payments simultaneously without funds passing from one to another. The split payment will crush the fees even further because it is one payment so the fee is ~0.1%. Just to mention that those fees do not go to the banking system, they go to the LSPs like us at Breez that are facilitating the actual payment. And because we are a non-custodial solution we do not introduce any third-party risk. There is no waiting at any point for someone to settle their bill with someone else. All participants have their funds instantly and decide what to do with them from then on.
This is a huge improvement, and just that is enough for someone to disrupt the logistics payments market, but the effects of instant split payment do not stop there.
The adoption of instant split payments in the logistics industry will significantly alter the incentives for all delivery workers. A key transformation is the shift from receiving compensation solely for time - to being actively engaged in each payment related to their deliveries. Similar to how companies receive split payments, with each entity getting its share, every individual in the delivery company involved in moving the product can now receive their share too. The funds received by the delivery company will be split further, ensuring that delivery personnel are paid for their specific contributions rather than time spent. This eliminates the need for brutal targets, allowing those who deliver more packages to receive proportional compensation for their work and fostering a fair and performance-based payment structure.
In this new paradigm of instant split payments, delivery workers will be incentivized to use their own vehicles for product deliveries. When using a company vehicle, their share of the payment for each delivery is smaller. However, if they utilize their personal vehicle, the percentage from each delivery will be more substantial, directly contributing to their earnings. This shift encourages a sense of ownership and responsibility among delivery personnel, fostering a more efficient and cost-effective system.
The revolutionary aspect of this system is that it opens up opportunities for anyone with a vehicle to become a convenient and flexible delivery person. Individuals can integrate delivery tasks into their existing plans, making extra bitcoin while heading in a specific direction. This decentralized approach allows for the optimization of routes on an individual basis. People with their own vehicles are no longer bound to a single delivery company; instead, they can work for various companies in their local area. This not only encourages individual optimization of routes but also shifts the focus to serving those expecting deliveries rather than working solely for a centralized delivery company. The reputation of the app will be enhanced by well-delivered packages, creating a positive feedback loop for more orders in the future, akin to the success of platforms like Uber.
Absolutely, the introduction of an instant settlement system with split payments has the potential to decentralize various aspects of the delivery ecosystem:
- Decentralization of Delivery Companies: Logistics can shift from a few large delivery companies to numerous small entities and even individuals participating in the delivery process. This allows for a more distributed and flexible delivery network.
- Decentralization of Income for Delivery Personnel: Delivery individuals will no longer be reliant on a centralized source of income. Instead, they can participate in each delivery payment, earning money directly proportional to their contribution, thereby decentralizing their income.
- Decentralization of Options for Buyers: Buyers will have a broader range of options for who delivers their products. With a more decentralized delivery ecosystem, they can choose from various delivery providers, including independent agents and smaller delivery companies.
Overall, this decentralization has the potential to create a more efficient, adaptable, and user-centric delivery system.
Now there needs to be a person who understands the logistics market and makes that app. Unlike the construction companies, this will be even more decentralized because many more individuals can manage a delivery. Not everyone can manage a complex construction project but anyone can deliver something. Remember in the past the newspaper kids? A person with his scooter can deliver a few packages to his neighbors on the way. That will also have a social layer effect by bonding you more and more with the people in your area. We can use that in big urban areas because most of the time we are passing our neighbors without saying “Hello”. And the neighbors will prefer to receive product deliveries from people that they are familiar with. The potential for a decentralized and more community-oriented delivery system is quite exciting
Now let’s go and deliver that app.
This is a guest post by Ivan Makedonski. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.