What exactly is the cross-border payment financing that the leader project Huma Finance in the PayFi track is doing?

The core of Huma's acquisition of community trust is the ability to put this information on-chain in the future, or to directly disclose part of the borrower's information, ensuring that the entire process of fund management is controllable.

Written by: Yue Xiaoyu

We can take a direct look at the overall business process of the Huma platform to have a comprehensive understanding.

1. User lends funds:

(1) Regular users (on-chain lenders) deposit stablecoins (USDC) through Huma's decentralized platform.

(2) No KYC required, lock funds through smart contracts to obtain fixed returns.

(3) Funds enter Huma's lending pool for borrowers to use.

2. Cross-border payment institutions提出借款需求：

(1) Compliant cross-border payment institutions (such as payment service providers holding financial licenses) register on the Huma platform and submit loan applications;

(2) Purpose of the loan: To provide fast cross-border payment services for the remitter (customer).

(3) Loan Amount: Usually for short-term advances (3-5 days), the amount matches the scale of the remittance.

3. Collateral Custody:

(1) Payment institutions need to provide collateral in equivalent fiat currency, namely the fiat currency A (such as euros) paid by the remitter;

(2) Deposit fiat currency into the regulatory account designated by Huma (managed by the licensed institution Arf acquired by Huma).

4. Borrow USDC and make the payment:

(1) Huma issues USDC loans to payment institutions through smart contracts;

(2) The payment institution uses USDC as an intermediary currency to transfer funds to country B via the blockchain (Solana).

(3) In Country B, the payment institution exchanges USDC for fiat currency B (such as USD) through local partners (exchanges or OTC service providers) and pays the recipient.

5. Repayment of Loan:

(1) The payment institution will use the escrowed fiat currency A (collateral) or subsequent funds from the remitter to exchange for USDC to repay Huma's loan principal and interest within 3-5 days (settlement period).

(2) Huma will return the principal and earnings to the lender, deducting the platform fees (interest spread, that is, the difference between the borrowing rate and the lending earnings).

6. Profit Distribution:

(1) The lender earns stable returns (assuming 10% annualized).

(2) Huma earns interest margins (e.g. borrowing interest rate 15% - lending income 10% = 5%).

(3) Payment institutions earn customer fees through fast payment services (below 1%-3% of Swift) and cover loan interest costs.

Roles and positions of various parties in the entire business process:

We can see that Huma has built a lending platform where ordinary users act as lenders, providing the source of funds, while cross-border payment institutions act as borrowers, borrowing funds.

In cross-border payment scenarios, the remitter pays the fiat currency A of country A. If using the traditional Swift settlement system, it takes 3-6 business days and incurs very high fees, which involve exchange rate differences and currency conversion fees, typically ranging from 1% to 3%.

After the cross-border payment institution receives the payment from the remitter, it does not directly use Swift, but instead uses USDC, a stablecoin, as an intermediary currency. Then, it borrows the stablecoin on the Huma platform and directly withdraws USDC as local currency B in the target country B. This payment process can be completed on the same day.

During the entire process, Huma provided short-term funding for cross-border remittance settlements in the form of USDC, while cross-border payment institutions needed to undergo one outbound and one inbound transaction.

Huma's lending side is a compliant cross-border payment institution, requiring equal value fiat currency collateral (such as the remitter's local currency), and the funds must be held in a regulated account to ensure manageable risk.

Lenders participate through on-chain smart contracts, without the need for KYC, directly depositing stablecoins.

The platform party needs to control the qualifications of the borrowing enterprises, loan applications, etc., and then earn the interest spread (the borrowing rate is higher than the lending yield).

Here I would like to highlight Huma Finance's acquisition of the company Arf:

Arf is a financial institution registered in Switzerland that provides stablecoin-based settlement services for licensed payment institutions globally.

So after Huma acquired Arf, it directly solved the licensing and compliance issues, using this entity to conduct business.

It is important to know that the most troublesome and also the biggest barrier in doing financial business is compliance.

Huma cleverly solved the compliance issue by acquiring a licensed institution while also establishing its own competitive barrier.

In summary:

The entire operating process and business model of Huma are relatively clear, but the off-chain part is still a black box, leaving a lot of room for operations.

Therefore, the core of Huma gaining community trust is the ability to put this information on the blockchain in the future, or to directly disclose part of the borrower's information, ensuring that the entire flow of funds is controllable.

It is also important to note that Huma aims to do more than just provide cross-border payment financing; this business is just a crucial entry point, and it will expand into more services in the future.

Cross-border payments represent a $4 trillion market, while credit cards account for a $16 trillion market, and it can also expand into the broader Trade Finance.

Overall, Huma is building a PayFi platform and PayFi ecosystem, which can be said to be a combination of a practical project and a narrative project, deserving of long-term attention.