While crypto industry enthusiasts may be well aware of decentralized finance (DeFi), a relatively new term, payment finance (PayFi) is gaining traction of late. The global payments industry is worth about $30 trillion or so, and Huma Finance aims to increase capital efficiency in this space, said Erbil Karaman, co-founder of Huma Finance.
On day 2 of the Solana Breakpoint event, AltCoinDesk spoke with Karaman about PayFi, its use cases, challenges facing the traditional payment finance space, and a lot more. In this detailed candid conversation with Karaman, he shares his thoughts on the innovative ways traditional PayFi models can be leveraged to generate sustainable yields on Solana.
What exactly is PayFi?
I might not have cash in my pocket right now, but I want to do a transaction with a merchant. So I finance the payment to the merchant using a credit card.
Erbil Karaman, Co-Founder, Huma Finance
In the above example, a credit card functions as a PayFi tool that helps the buyer finance their transaction. In the on-chain context, PayFi is making all these financial functions a lot more capital efficient and transparent using stablecoins and blockchains.
Karaman started by saying that before understanding Huma Finance, it’s important to first understand what PayFi is. He said that PayFi is something we deal with every day, such as credit card transactions, remittance services, trade finance, and others.
Addressing inefficiencies in traditional payment finance
Karaman highlighted that there are several challenges facing the traditional payment finance system today. While he and his team previously worked in a traditional fintech firm, they realized that there is a significant amount of capital inefficiency in the system.
He gave the example of remittance payments. Suppose a person sends money to Western Union in Istanbul, then the company needs to keep the money in accounts in Turkey to be able to finance that transaction. This practice creates $4 trillion of capital inefficiency a year.
At that time, Karaman realized that stablecoins can actually solve this problem by creating global liquidity pools. He also alluded to the recent favorable regulatory changes, especially in the US, that are laying the foundation for a stablecoin-based global payments finance system.
Favorable changes from regulatory lens
Since the beginning of US President Donald Trump’s second term, crypto regulations in the US have made a complete 180-degree turn. Several important bills, such as CLARITY, GENIUS, and others, indicate that the Trump administration holds a positive stance toward digital assets, and Karaman agrees.
GENIUS Act has changed things not only in the US but across the world because the US sets the rules when it comes to global finance.
Erbil Karaman, Co-Founder, Huma Finance
He added that several payment finance firms, including Western Union, Stripe, Revolut, and PayPal, have now become a lot more comfortable with stablecoins and embrace their use cases. Karaman noted that the next step is to ensure tokenized credit can be utilized in a regulatory framework.
Choosing Solana over other smart contract platforms
Karaman remarked that when it comes to payment financing, the heart of the problem is fast settlements and stablecoin liquidity. He noted that in the crypto ecosystem, the only other platform where you can develop a solution like Huma Finance is Ethereum.
However, the Ethereum mainnet does not offer fast settlements like Solana. As a result, Solana emerged as the only protocol with a diverse and rich stablecoin ecosystem and fast settlements.
An increasing number of global payments finance enterprises are onboarding Solana, and Huma Finance is doing the same.
How does Huma 2.0 ensure the yields are sustainable?
Huma 2.0, the permissionless DeFi yield-generating platform on Solana, is one of the project’s latest offerings. Karaman emphasized that sustainable yield generation is something Huma Finance takes very seriously.
He noted that while other protocols might care about numbers like total value locked (TVL) and other such “vanity metrics,” Huma Finance’s focus prioritizes high usage of capital to ensure greater capital efficiency.
If you can ensure high capital efficiency, then the enterprises that are using your product have a very good understanding about how much value you’re creating for them.
Erbil Karaman, Co-Founder, Huma Finance
He added that Huma Finance charges enterprises a rate of five to eight basis points, which is very comparable with the rate they are getting from TradFi. As a result, Huma Finance’s yield generation is very sustainable.
Looking ahead and closing thoughts
Towards the end of the interview, Karaman stated that Huma Finance’s biggest area of focus currently is to onboard as many enterprises as possible and capture an increasing amount of real-world payment flows. This way, they can bring uncorrelated yields to institutional players in DeFi and TradFi.
He also referred to Huma Finance’s Project Flywheel, which is geared toward creating leveraged yield products while addressing the three biggest risk elements – impairment loss, difference in price of assets between primary and secondary markets, and unpredictable leverage ratios.
