With an economic recession over the last decade and the exponentially growing digital landscape, the financial industry has faced challenges concerning trust, reliability, and value. The banking industry is considered somewhat outdated and businesses have started to seek out alternative options for their transactions and assets.
One such solution has come in the way of blockchain technology. It has already started to transform how large financial institutions conduct their business, as well as the way payments, are conducted and fulfilled.
According to reports, 78% of businesses have reported attempted or actual B2B payments fraud last year. It is true that manual processes still proliferate the B2B market and many fraudulent claims are as a result of this but there has been a larger movement to digital systems of late. B2B firms want to have more of a B2C type experience but complications come where suppliers have different systems and preferred methods. As well as this, companies tend to like having more control over outgoing payments than a consumer might do, in terms of both the amount and timing.
It is thought that as many as 47% of B2B payments in the US are still made by paper check. In the UK, a report from GoCardless shows that 52% of all B2B payments are still done via old fashioned bank transfer.
However, there are innate problems with these traditional B2B methods. For example, every payment is generally initiated by the payer. This means the process of getting paid is out of the hands of the business trying to collect payment. In turn, this creates bad experiences through having to start awkward conversations about money with your suppliers or third parties. As well as this, payments might need high levels of manual intervention and admin to reconcile them within company accounts.
Bank transfers also lack payer protection if they send amounts to the wrong account and could be prone to human errors such as sending incorrect values.
The answer to these problems could well lie in blockchain technology.
What is Blockchain?
A blockchain is a public ledger of information collected via a network that sits on top of the internet. There is not an institution like a bank that owns blockchain technology, in fact, it is not owned or controlled by anybody. However, individual blockchains within the technology might be owned by an organization. What we mean by this is that the technology is a concept behind the operation of blockchain which can be replicated by whoever needs to use it.
A blockchain could be explained within six steps:
- A transaction is requested
- The transaction is broadcast to a network of nodes
- The network validates the transaction using algorithms
- The transaction is unified with other transactions as a block of data
- The new block is added to the blockchain in a transparent and unalterable way
- The transaction is complete
The key takeaway here is that blockchain can automatically check itself, like a digital auditing system. The data within it cannot be changed, making it incredibly secure when it comes to cybercrime.
According to Deltec Bank, Bahamas – “Transactions between parties within a blockchain can be recorded efficiently and in a verifiable and permanent way, making it perfect for the B2B world.”
Blockchain in B2B Payments
There are several ways in which blockchain can benefit B2B payment processes. Firstly, a blockchain will store blocks of identical information across its network. In doing this, the validity of transactions is ensured on not only the main ledger but across an entire network of them. This means that errors can be pretty much negated entirely and can never happen until all parties involved in the blockchain are in agreement.
Blockchain technology also ensures that B2B transactions are always safe and secure. The data is stored in a distributed ledger and is not the ownership of anyone. As well as that, it cannot be changed or deleted by any of the blockchain parties. The fact that the data is shared in this way makes everything very transparent, unlikely traditional payments that are within private networks.
Given that transactions within a blockchain cannot be edited, businesses are using it to maintain an audit trail for items. For example, if one party buys a product from another, it has a lifelong digital footprint within the blockchain. There will always be proof of ownership and item value against the good that has been transacted by a blockchain.
Smart contracts are a major part of B2B blockchains. Instead of written or verbal contracts, businesses can embed their rules into a blockchain and set it up for automated execution once terms have been met.
As blockchains cannot be edited, the smart contract is 100% binding and means parties are obliged to meet specific terms. It takes away the need for the awkward conversations that we spoke about at the start of this article with traditional bank transfers. For example, the contract might say that as soon as a product is marked as delivered to the buyer, the payment is automatically triggered after 24 hours or whatever is stated in the rules.
In theory, blockchain is a method of making peer-to-peer transactions given that there is no bank involved. As payments do not need to go via a third party, they are actioned very quickly in a highly secure space.
SWIFT is using blockchain to do exactly that and have turned 3-day settlements into a 5-minute process.
Blockchain could revolutionize the B2B world where it comes to payments with its reliability and scalability. There is some way to go until all businesses accept it as the norm, given the drastic change from traditional banking. However, as more companies see the benefits of having an indisputable ledger of transactions with network transparency that can process transactions in seconds, take-up will only increase.
Disclaimer: The author of this text, Robin Trehan, has an Undergraduate degree in Economics, Masters in international business and finance and MBA in electronic business. Trehan is Senior VP at Deltec International www.deltecbank.com. The views, thoughts, and opinions expressed in this text are solely the views of the author, and not necessarily reflecting the views of Deltec International Group, its subsidiaries and/or employees.
About Deltec Bank
Headquartered in The Bahamas, Deltec is an independent financial services group that delivers bespoke solutions to meet clients’ unique needs. The Deltec group of companies includes Deltec Bank & Trust Limited, Deltec Fund Services Limited, and Deltec Investment Advisers Limited, Deltec Securities Ltd. and Long Cay Captive Management.