Disrupting $40T B2B Payment Industry

In January 2021, Bloccelerate VC invested in CoreChain Technologies, with our Venture Partner, Joe Giordano, joining the board. We saw this use case as a low hanging fruit for disruption by the blockchain technology because the status quo is so clearly broken. 47% of B2B payments are still processed via paper checks - mind blowing statistics considering this is a $40T industry in North America alone. Just a few months later, CoreChain already processed over $500 million worth of B2B payments - still a small fraction of the $40T market. This is the original investment memo describing Bloccelerate's thesis behind CoreChain investment.

  1. Investment Summary

CoreChain is a pre-seed blockchain B2B payments company led by a former seasoned executive from Visa and MasterCard, Chris Aguas. Prior to launching CoreChain, Chris was recruited to lead product efforts for EFS (Electronic Fund Source) before its acquisition by WEX for $1.1B. 

CoreChain aims to make B2B payments easy, frictionless, and cheap for enterprise customers. Their strategy is similar to that of Stripe’s in their go-to-market strategy. Rather than going direct to end customers, Stripe engaged up-and-coming web marketplaces like Uber, Lyft and Postmates. Similarly, CoreChain is targeting B2B channel partners like PaymentWorks, which integrate CoreChain solutions into their product offering.

Total addressable market for this problem is $100B-$200B, should CoreChain succeed in competing against paper checks, ACH processing, and other payment methods that pose difficulty with retrospective reconciliation. While PaymentWorks is currently CoreChain’s first and only paying customer and channel partner, this client alone has the potential to generate close to $200M/year in revenue for CoreChain, based on their annual buyer to supplier volume.

Given the large and growing market in combination with the experienced founder with deep industry expertise, we believe this presents a lucrative investment opportunity. Growing adoption of contactless payment technologies, further proliferation of CBDCs (Central Bank Backed Digital Currencies) and stablecoins, as well as the growing fintech adoption are key market trends poised to accelerate CoreChain’s disruptive growth and exit potential. 

  1. Product Overview 

CoreChain’s blockchain-based payment infrastructure is a B2B payments enhancement platform that seeks to offer value-added services on payments between enterprises.

In the status quo, payments among businesses are slow, inefficient, and costly, relying mostly on paper checks. In addition, the current payment infrastructure lacks the ability to convey structured, or standardized, meta-data on what service or goods these payments are made for, or the relevant contracts they pertain to. The availability of this data “about the payments” to live alongside the transaction would allow for more expedient coordination among different stakeholders for assessing the true state of assets and liabilities in corporate accounts.

The Corda enabled solution provided by CoreChain has three distinct contemplated stages in its evolution. The first phase of the product, which the current users have begun to enjoy in test cases, allows for capturing of enriched files about payments and keep these data points available for approved market participants to use in automatic reconciliation and revisit at a future date for audit purposes. 

As it stands, in the current iteration of the product, CoreChain captures data about payments (such as verification credentials of the receiver or invoice information), issues a transaction on SWIFT or wire payment rails and pairs the transaction identifier with the metadata. The availability of such data reduces the costs of tracking and reconciling of accurate payments. 

The future stages of the product include a phase two - supply chain finance module. The contemplated offering on the part of the entrepreneurial team includes features that would allow for tokenization of invoices and thereby allow financing institutions, or other parties, to buy out invoices or other accounts receivables from the players in the network. 

Last phase of CoreChain’s roadmap offers the ability to perform the payments with crypto-native tokens. Recent regulation approving bank’s use of stable coins for settlement purposes will likely offer an opportunity for CoreChain to accelerate this product offering.

  1. Team

Senior Leadership Team

 

Chris Aguas, the CEO, holds a BSEE, BA, and a MBA from Stanford. Having spent many years in the payments, Chris has a deep understanding of the industry, leading to several successful exits. He previously founded and served as COO of Esenta, a company developing ATM and remote deposit capture banking solutions for regional and community banks, which was acquired by Jack Henry for $134MM in 2017. 

He also served as SVP of product for Electronic Funds Source (EFS), which was acquired for $1.1B by WEX in 2016. Chris has also held management positions at Visa (VP, Product) and Mastercard (Group Director, Small Business Products). 

RJ Herrick serves as CTO. RJ has 20+ years of full stack development experience, serving as Director of Information Systems at The Connection, a healthcare organization which he helped transition to electronic records. He was Head of Education at DappDevs, a dapp ecosystem in Connecticut, and taught blockchain development workshops at the University of Connecticut. 

Board of Directors

Currently, Chris Aguas (CEO) and Randy Shuken sit on the board. 

Randy Shuken holds a BA from UC Berkeley and an MBA from Columbia. Randy held positions at MasterCard from 1990-2015, where he spent his latter years Head of Corporate Strategy and the Group Head of Information Services. At MasterCard he spearheaded new initiatives leveraging data analytics and led various acquisitions. 

Joe Giordano from Bloccelerate VC will be joining the board at the completion of this financing round.

Broader Team

Beyond the executive team, CoreChain has 6 other full-time employees: 3 developers, 1 operations, and 2 business analysts. 

  1. Use Cases

As mentioned in the previous section, the company follows a phased approach to implementing their product vision. Specifically, the current version of the CoreChain product only offers the metadata layer functionality allowing buyers and sellers to track the data around invoices and payments, while later versions will include the supply chain finance capability, as well as the functionality to handle cryptocurrency and stablecoin transactions. This section discussed each phase of use case implementation in more detail. 

Phase I: Payments Metadata Layer

 

Similar to how Stripe provides APIs so that businesses can focus on their core products rather than on consumer payments processing, CoreChain intends to accomplish the same objective in the business-to-business space. The goal of phase I is to move customers onto CoreChain’s B2B payment network. This transition is supported by using a familiar, traditional backend for payments processing. That means that this phase will be the least disruptive, yet necessary step in their journey of transforming B2B payments. 

PaymentWorks is the first CoreChain channel partner and customer. PaymontWorks is a B2B fraud detection and prevention platform enabling its enterprise customers, such as Dartmouth University and NYU Langone, with a business identity platform processing $32B in annual volume to reduce risk of payment fraud and ensure compliance. While PaymentWork’s customers would like to use PaymentWorks as their one stop for both identity verification services as well as their supplier payment platform, payment processing services have not been core to PaymentWork’s capabilities prior to CoreChain Integration. Thus, the customers of PaymentWorks would have to export data back into their own ERP systems and handle payments on their own. This process is extremely inefficient. 

 Now, CoreChain sells their technology to PaymentWorks, allowing PaymentWorks to process payments through CoreChain. To initiate a payment on CoreChain, instructions can be received through a channel partner (i.e. PaymentWorks) or directly from a buyer. These instructions can come through many formats, such as a flat file, CoreChain’s REST API, or web interface. CoreChain takes those instructions apart and stores key elements such as identities, amount, and date on their DLT, verifying and validating pieces along the way. The instructions are then converted into an acceptable format and sent to the buyer’s (i.e. a PaymentWorks customer, such as Dartmouth) financial institution that subsequently sends money to the supplier through ACH or check. In other words, CoreChain’s technology allows buyers and suppliers to see a single version of truth on the status of their invoices and payments at all times. 

 

CoreChain intends to primarily white label their technology to channel partners. They are primarily looking for second tier business-software-automation companies that are large enough to have many clients, but not large enough to have built out their own payments processing system. The company charges 50-150 basis points on the transaction volution, as well as an annual licensing fee of $50,000 per customer. After having successfully processed $30M in payment volume in 2020, resulting in $100K in revenue, CoreChain is currently in the process of expanding their solution to other channel partners and customers.  

Phase II: Supply Chain Finance 

Once the CoreChain solution is integrated with the buyer’s ERP system, where the key set of documents, such as invoices, have been tokenized, the system will have visibility into which invoices are outstanding and are due to be paid. If the high likelihood of the payment of the impending invoices is established, the CoreChain platform can be in a position to help suppliers unlock working capital and thereby solve liquidity problems. 

That could be done by either advancing funds in anticipation of the upcoming payment by CoreChain directly,  facilitating such financing by the buyer, or facilitating financing by another independent 3rd party, such as a partner or an independent financial institution. The third option would entail a marketplace approach, whereby a tokenized invoice could become a tradeable smart contract open for competitive bidding by many parties. The blockchain technology based CoreChain solution becomes increasingly helpful as a single source of truth, the more parties become involved in such an ecosystem.

At this stage, if executed correctly, CoreChain could deliver on a very significant upside allowing for value-chain finance.  While it is a new financing model altogether, trustless and transparent tracking of the state of payments could allow multiple stakeholders to be entitled to future revenues of a final product. This kind of model could eliminate, in large part, the need to seek out external financing, as the participants in the value chain can begin to finance a part of the product they are contributing to and stand to gain from the future proceeds of this product. 

As a result, this new model of trade-finance could emerge. It will significantly ease the supplier’s working capital constraints prevalent in the market today. Instead of one-to-many financing events that transpire between a financing institution and multiple parties in the value chain, smart contracts would stand to protect the collections each player is poised to receive  from the future proceeds of the product they helped deliver. Ultimately, the claims on future revenues can also be traded by the value chain participants.

Bringing supply chain financing capability to the market, especially in the small and midsize businesses space, will address a massive pain point in the market. Currently, there is an estimated $16T liquidity shortage for SMB suppliers. Oftentimes, suppliers have to borrow funds at 36%+ interest rate to cover their costs in anticipation of the impending invoice payment. While the current version of CoreChain’s product does not support this supply chain financing functionality, the team envisions this use case to come to fruition as a part of the phase II of their road map. 

Phase III: Crypto & Stablecoin Transaction Rails 

In the conceived phase three of the product roadmap, the contemplated development is to allow for crypto currencies (including stable coins) as the means of settling business to business payments. 

In its current state, the service offering  has a few shortcomings that phase 3 improvements will remediate. Specifically, CoreChain platform acquires the infrastructure specific transaction identifier (e.g. wire identifier) and pairs it to the value-add data (e.g.vendor verification documentation that a partner provided). Wire and SWIFT transfers, however, are centralized, and therefore, not immutable, irrefutable, or irreversible. 

When CoreChain obtains the wire transaction number and pairs it with the data for later ease of reconciling and audit, the legacy infrastructures can still pose a challenge where transactions may be interrupted, corrupted or reversed. The data paired to a transaction lives on the blockchain, but the underlying transaction may not complete as planned, and this will create frustration on the part of the channel partners and their customers. 

These customer experience challenges are only partially mitigated by the integration to the legacy systems available in phase I. Ultimately, the pace of reaching finality on the transactions will always lag behind crypto-native settlement systems. Cancelled transactions, non-compliant transactions, or reversed transactions on legacy systems could take multiple business days instead of seconds or minutes to settle. CoreChain’s advance towards accommodating crypto-native currencies will help improve the settlement times, confidence, and costs involved with the settlements. 

This upgrade to the crypto-native instantaneous and programmable payments infrastructure will ultimately reduce the dependency on legacy systems, as well as ease the automated execution, accounting, and auditing transactions that should be governed by contractual terms.

Lastly, accommodation of blockchain-powered currencies will take CoreChain one step closer to accommodating crypto assets that stand in for vouchers, option, or synthetic assets, some of which may be more directly relevant to the lines of business for the counterparties involved in the exchange, offering further efficiencies over centrally controlled, trust requiring and slower systems.

  1. Total Addressable Market 

Considering that CoreChain’s ultimate strategy is to enable cheap, efficient, and fast B2B payments, total addressable market for CoreChain is a function of two variables: 

  1.  Total transaction volume of buyer to supplier expenditures
  2.  The average fees currently being charged on a typical transaction by incumbent players for facilitating such business to business (b2b) payments. 

According to the Visa Commercial Consumption report from 2013, there is a total of $40T worth of buyer to supplier expenditures annually in North America alone. As the graph below demonstrates, as of 2016, 41% of these expenditures transacted via check, 34% via ACH, 13% via wire, and 9% via cards. Approximately 16 billion individual checks and 22.9 billion ACH transfers, and are being processed on an annual basis. 

Graph 1: Distribution of Payment Methods By Major Suppliers (Source: 2016 Payments Report)

We could estimate the total addressable market by rectifying the above numbers with the typical costs associated with each payment method. As the graph below demonstrates, a typical cost for checks starts at $3/per check transaction, 25 cents per ACH transaction, 1.5% for debit card transaction, 2% for a credit card transaction and $14 per wire. That brings the Total Addressable Market to a sum of $48B in checks expenditures, $5.7B in ACH costs, $54B in card processing costs, and a significant amount of wire costs that is more challenging to estimate given lack of data. Altogether, we can estimate that the Total Addressable Market for B2B Payments to $100B-$200B / per year.

Graph 2: AFP Payments Survey Results (Source)

5.1 Key Market Industry Trends

Trend #1. Contactless B2B Payments & Invoicing 

The significant portion of B2B payments today - roughly 41% as of 2019 - are conducted via checks. In fact, smaller businesses, with less than $1B in turnover and with more than 1000 B2B business transactions per month are more likely to leverage checks as their primary means of their B2B payments. While the use of checks has declined in half, from 81% in 2004 to 42% today, 97% of financial professionals still use some form of checks for their business to business operations. 

The reason for slow adoption of other electronic means traditionally has been complexities associated with the process switch, as well as cybersecurity considerations that are especially applicable to wire payments - “82 percent of organizations were victims of attempted fraud or a fraud attack in 2018.” Additional reasons associated with reluctance in moving away from the check based payments methods has been lack of IT resources and increased costs needed for an organization to transition to an electronic payment method.

Despite the reluctance, last year COVID spread has transformed how businesses adopt digital technologies, and thereby abandon legacy paper-based payment methods. While data is yet to be published confirming the trend, there are a number of qualitative indicators pointing to this important inflection point in the B2B payment space.

Trend #2. Rise of CBDCs and Stablecoins

Central Bank Backed Digital currencies and other privately held stablecoins have seen a significant rise in adoption over the past few years. This trend has been further accelerated by COVID-19 in 2020, as more organizations develop an adverse reaction to cash and other forms of paper-based payment methods.  Specifically, we have seen a 10x increase, from $2B in the circulation of stablecoins in 2019 to $20B+ in circulation in 2020. As the adoption of these digital assets continue to increase, the need for the payment infrastructure compatible with these assets will continue to become more acute. Corechain’s technology, as it continues to evolve, will be in a position to take advantage of this growing trend. 

Trend #3: Rise in Fintech Adoption

According to a recent EY fintech report, “the global adoption of fintech services has moved upward from 16% in 2015 to 64%.” As graph 3 below demonstrates, the number of fintech start-ups has also grown significantly in 2020. That includes both companies in the B2C and B2B space. The primary drivers behind the fintech adoption growth are increased efficiencies, lowered costs, and regulatory reasons. That also means that any company that is in the business of generating value from intermediating business to business services (e.g. procurement) could benefit from adding on fintech-like capabilities (e.g. payment processing). That is where CoreChain’s channel partner strategy could drive significant revenues. The more PaymentWorks-like channel partners emerge looking for complementary fintech capabilities, the more prospective channel partners CoreChain will have a chance to go after. That means that  more end customers will be able to reach. 

Graph 3: Number of Fintech startups worldwide from 2018 to 2020, by region (Source: Statista)

5.2 Go To Market Strategy

 

CoreChain’s go-to-market strategy primarily relies on channel partners, rather than going directly to end-consumers. The company plans to provide white-labeled, API centric services to channel partners, becoming a “Stripe for B2B.” Their ideal channel partners are B2B companies that are large enough to have many clients and transactions, but not large enough to actually have integrated native payments processing for those transactions. More specifically, CoreChain plans to target second-tier business-service-automation companies in real estate, professional services, oil & gas, manufacturing, construction, and healthcare. PaymentWorks (discussed in Use Cases - Phase I) is a prime example of an ideal channel partner as they are providing identity services for 50 enterprise buyers and 100,000 suppliers, managing $30B-$40B worth of buyer to supplier transactions. However, without CoreChain, companies like PaymentWorks are unable to process that payment data forcing PaymentWorks’ customers would have to move off the platform to perform purchasing transactions. 

VI. Risks 

The evolution of downstream risks that CoreChain will face is heavily tied to the different developmental stages the product will likely have to undergo. In phase one, where there is no use of crypto assets or value-add receivables finance, the company will face different risks as compared to the risk involved in the later stages. 

  • Incumbent Risk

Initially,  the greatest risk for CoreChain will revolve around rapid acquisition of new channel partners, with the significant enough transaction volume and client base sophisticated enough to desire the use of blockchain verification capabilities for their transaction data. The risk of not acquiring customers fast enough is not construed in vacuum. In fact, the risk is significant when considered in the context of many incumbents who can begin to offer a blockchain powered metadata layer about payments they process. Existing players and new companies may step in to offer more secure, simpler or easier-to-customize solutions. In particular, it's worth mentioning that existing payment rail providers like Stripe or PayPal can easily offer such services leveraging their market penetration and user network effect. However, since the incumbent’s infrastructure is not leveraging blockchain technology, they will fundamentally be at a disadvantage in comparison to a blockchain-based offering. 

  • Compliance Risk

As soon as CoreChain evolves into a true payment processing platform, it will face significant compliance and regulatory challenges. It will likely become subject to a number of regulatory restrictions and will be required to obtain a number of licenses, such as the money transmitter license, etc. In phase 2, in the context of making the shift in the product offering to include credit instruments, the compliance risks might be further extenuated. Therefore, it is critical that we pay close attention to their compliance framework, their processes, and establish ways to mitigate these risks. One potential solution to this challenge is to recruit an experienced Chief Compliance Officer. 

  • Market Risk

In phase 3, while the implementation of stablecoins looks like a promising point of development that will allow both the transactions and the enhanced details about the transaction to be blockchain native, this strategy also presents an inherent risk. It is conceivable that the very stable coins that may be gaining in adoption -  that are built on top of the popular blockchains of that era (ranging form ETH, TRX or  AVAX) - may also build out its own B2B payment reconciliation and processing infrastructure, therefore eliminating the need to the CoreChain’s offering.

  • Team Risks

Beyond these risks that in large part pertain to retaining product-market fit in evolving competitive landscape and market conditions, there are internal team risks associated with the CoreChain investment.

Based on a series of references that we have completed, the CTO has been found as an energetic, high social skill, but mid-competence developer who does not have a demonstrated track record of hiring an engineering team or a strong founder experience. He may need to be complemented by high-throughput engineering work to meet the demands of multiple channel partners and the multiplying number of clients  within each channel partner as well as to remain agile for product pivots. 

Another internal risk is CEO’s close ties to possible competitors. Two particularly close individuals who may be called ‘friends of the company’ have declined working opportunities at CoreChain, one due to non-compete agreement and another for other reasons. Although these individuals would be fully capable of performing the functions and CoreChain would stand to gain from these hires, the individuals who have declined working with Corechain may in fact be close enough to the company to leak information that may cost CoreChain a period of high spending. What could be further damaging is that these individuals, the privacy of which we have retained, are materially involved with business to business remittance businesses and could potentially compete with CoreChain.

VII. Competitive Landscape

CoreChain primarily provides offerings in payment automation and supply-chain financing areas. While most companies use traditional web-based technologies to specialize in one or the other, CoreChain’s unique DLT platform allows it to target both areas, providing a unique synergy compared to its competitors. The graphic shows where CoreChain stands compared to some competitors. 

Graph 4: CoreChain’s Competitive Landscape (Source: CoreChain’s investment presentation)

Unlike most other competitors, CoreChain does not interface with clients, but rather aims to enable other payment related networks to offer capabilities that will render them technically superior to existing players. The following section takes a deeper dive into a few specific competitors and analyzes how CoreChain is differentiated. 

What it does: AvidXchange provides software specializing in automating accounts payable processes. More specifically, its services mainly help manage the routing, approval, and payment of invoices. 

How CoreChain is differentiated: CoreChain provides APIs so that other platforms can build in payment processing systems, while AvidXchange provides software to manage invoices. AvidXchange is large enough to have built out payment processing, but many smaller companies will not and CoreChain will be able to white-label to those companies. 

  • 2020 Market Cap / Valuation: $1.65B

What it Does: Nvoicepay tracks, updates, and maintains supplier payment data so that buyers can automate and make electronic payments. They attempt to expedite the transition from paper checks to electronic payments for B2B payments.

How CoreChain is Differentiated: While the end goal of transitioning to electronic payments is the same, CoreChain and Nvoicepay solve different root problems. Nvoicepay targets the data mess that an individual supplier may have, while CoreChain targets an individual platform's inability to process payments from buyer to supplier. 

  • 2020 Market Cap / Valuation: $219mm

Plaid

What it Does: Plaid provides APIs that allow developers to securely and easily connect users to their financial institutions (over 11,000 supported). For example, if a user wants to connect their bank to Coinbase and make a deposit, that bridge is established and supported by Plaid APIs. Other customers include Venmo and Robinhood. 

How CoreChain is Differentiated: Plaid specializes in building payment processing rails in the very specific, but complex niche of financial institutions in the B2C space. CoreChain simplifies payment processing between enterprise buyers and suppliers.

  • 2020 Market Cap / Valuation: Acquired by Visa for $5.3B in 2020

Coupa Software

What it Does: Coupa provides spend management and analytics. It has a cloud based architecture that monitors and optimizes costs in procurements, accounts payable, and expense management. The results are presented to the user on a dashboard. 

How CoreChain is Differentiated: CoreChain does not compete in cost optimization, but rather in the ability for platforms to process payments. Coupa and CoreChain could in fact be used together. 

  • 2020 Revenues: $389.7mm
  • 2020 Market Cap / Valuation: 23.73B

VIII. KPIs to Track

In order to assess company progress on a consistent basis, we will leverage the following set of KPIs to determine whether the company is tracking in the right direction: 

1. Number of channel partner clients

At this early stage of CoreChain’s development, PaymentWorks is the only paying channel partner client. Current relationship is a partnership, in which CoreChain complements PaymentWorks product offering by providing a single version of truth on the payment information between a buyer and a supplier. The more volume of payment transactions CoreChain is able to process, the more revenue it will generate. In order to grow and eliminate their dependency on PaymentWorks, CoreChain must aggressively target other similar channel partners where it can provide similar functionality in exchange for charging  50-150 bps (basis points) on transaction volume. 

2. Total transaction volume processed by CoreChain

An additional variable that is highly correlated with the number of channel partners is the total transaction volume processed by CoreChain. For example, CoreChain’s current partner, PaymentWorks, is already working with 50 enterprise buyers and 100K suppliers such as Cabarrus County, Johns Hopkins, Dartmouth, Beck, and are managing over $40B in spending between their buyers and suppliers. That means that channel partner alone could generate a combined value of $200M/year (50bps*$40B). The more other similar channel partners CoreChain brings on board, the higher transaction volume it will be able to generate.

3. Average transaction size by client

Third important variable for us to keep track of is the average transaction size by client. The larger the average transaction size becomes, the more mission-critical CoreChain technology becomes to the functionality of the underlying customer. That also triggers a set of compliance and regulatory concerns, necessitating new licenses such as money transmitter license, PCI compliance, etc. 

Other KPIs that we will keep an eye on include total number of channel partner prospects, total transaction volume and average transaction size by channel, and total value of digital assets, including stablecoins, processed by Corechain platform. 

Do you have any questions or comments about this memo? Feel free to discuss them on Twitter @KMitselmakher @materionaut @bloccelerate

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