Digital Transformation » Technology » Could blockchain be the answer to a $9 trillion problem?

“Hey Finance, what’s our blockchain plan?” If you haven’t already been asked this question by your organisation’s business leaders, then steel yourself for an avalanche of questions in the very near future.

Blockchain is probably best known as the technology behind Bitcoin and other cryptocurrencies. The long-term value of Bitcoin is uncertain, but the underlying technology has the potential to revolutionise business across a range of industries.

Blockchain is essentially a giant ledger that records information. In the case of cryptocurrencies like Bitcoin, it stores information on who owns how much of the currency. It can store other useful data too, such as confirmation of order dispatch and receipt, information that is vital when managing payments across a complex supply chain. Because a blockchain records all transactions between a company and its vendors and customers, it creates an immutable record of transactions without the need for third-party validation.

Rather than storing this information in one place, blockchain shares it across a distributed network of computers. Since no single entity is in control of the data, every entry is authenticated and confirmed by the network and can never be altered. This means that CFOs have access to “one version of the truth” for every single order or transaction.

An antiquated process

Trade finance, the umbrella term for the financing of importing or exporting of goods / services domestically and internationally, is one of the areas most likely to benefit from blockchain technology.

The concept of trade finance has been in existence, in some form or another, since the first written language. The whole point of a letter of credit was to provide certainty of payment to the seller.

Fast-forward to the modern era and little has changed.

Despite rapid advances in technology, the vast majority of trade finance still relies on traditional paper intensive processes. These processes are notoriously opaque, making them prone to delays, errors and even fraud. Essential, paper multiplying documents like bills of lading and letters of credit make paying and getting paid notoriously long. It’s a heavily fragmented system, full of bureaucracy and creaking inefficiency.

A system where everyone loses

The high degree of friction involved in making payments this way pushes up costs and makes scalability a real challenge. What you end up with is a two tiered system, where trade finance options are typically only available to a small group of key trading partners. The rest simply have to put up with extended payment terms. This creates significant challenges for the overall health and diversity of the supply chain, something CFOs should be concerned with, given the link between a well-functioning supply chain and the overall financial health of a business. Just look at Carillion.

The World Trade Organisation (WTO) estimates that more than 50%  of international trade finance requests by medium and small to medium enterprises (MSMEs) are rejected. Those that are able to secure deals face high costs, and long delays when it comes to getting paid.

Globally, over $9 trillion in trade assets languishes on supplier balance sheets as receivables. Meanwhile, various studies show that companies are waiting longer and longer to get paid. Research by trade credit insurance provider Euler Hermes shows the number of days it takes for suppliers to be paid for their goods or services has grown by one-tenth since 2008 to 66 days. This trend is expected to continue in 2018. Many suppliers pay the price through delays, disruption to delivery, and even bankruptcy. It’s a situation where everyone loses out.

The tools for trust

The problem comes down to trust. In a recent blog, we explain that financing is either inaccessible or expensive to MSMEs because the financier lacks insight into the business of the supplier, the buyer or both. We can resolve the whole challenge of unlocking access to global supply chain finance if we can share a richer set of information. Information that reflects the innate worth of companies’ trade relationships to the people making risk decisions on providing finance.

The introduction of cloud-based technology is already helping organisations get rid of manual siloes by connecting invoicing, approval, payment and working capital lending onto one platform. Not only does this increase efficiency and reduce costs, it also makes the whole process far more transparent.

Enter the blockchain

Blockchain technology effectively supercharges this level of trust and transparency by creating a single, tamper-proof record of transactions widely regarded as unhackable. This degree of transparency is highly significant because if you can guarantee that sellers are the real owners and the exchange will be certain and immutable, you greatly reduce your exposure to risk and can make payments very quickly.

Governments and industries across the world have been quick to get behind the idea of using blockchain to ease the flow of cash between businesses. A report from the European Banking Association released in May concluded:

“By facilitating easy access to data and end-to-end transparency of the entire value chain, crypto-technologies can create a level playing field for all parties involved in a trade transaction….The exchange of trade data and auditability of a participant’s credit history can also help increase speed, efficiency, and security in financing between buyers, sellers, and their banks.”

In addition to improvements in efficiency, blockchain can boost finance executives’ decision-making. Ask any CFO today to tell you how they achieve a clear view of cash flow across their business. The likelihood is that they won’t be able to, at least not in real-time, and not without a certain margin of error. But with blockchain there is no margin for error. Having “one version of the truth” means information on every transaction is 100% accurate, all the time. This means decision-makers have access to the necessary data every step of the way, allowing them to see and track every liquid movement of capital.

If it fulfils its early promise, blockchain will have significant implications for the role of the finance department, the CFO, and the wider business. This evolution will happen step-by-step. But anyone thinking this is still science fiction need only look at the level of investment banks and financial institutions are putting into real-world applications.

Only last month, HSBC processed the world’s first commercially viable trade finance transaction using blockchain. And shortly afterwards, we announced our own partnership with global banks, including Santander, HSBC and others to offer blockchain trade finance options through our cloud-based platform.

Yes, it’s early days. Yes, there is still a great deal of unhelpful hype around this technology. But anyone in the finance function not already formulating a position around blockchain is likely to get left behind very quickly.