Blockchain in B2B payments: opportunities and challenges

Financial institutions are spending time and resources to find out how much business they can gain by adopting blockchain technology. This hype on the bank side does not correspond to similar interest from corporations, nor it’s clear whether blockchain technology creates similar business opportunities for each side. Yet, a significant roadblock must be removed. That is, the extremely poor understanding corporate people have about blockchain. In a January 2016 survey, 95 corporate executives—66 of whom were supply chain and treasury managers, with the remaining coming from IT, legal, and sales— were asked if they were familiar at all with the term “blockchain”.

Over 80% answered “no”. The first step of the journey is thus to align on terms and definitions. Consider blockchain as a “secured spreadsheet” that sits in the cloud that multiple parties can review. Each of the transactions that are a part of it is guaranteed by a set of cryptographic keys and all transactions are stored in one database. The blockchain is essentially an enormous database that runs across a global network of independent computers.

Main characteristics of blockchain

- Irrevocability: There is an irrevocable trail (i.e., time-stamping) of all the transactions that have ever been made, which makes attempts at hacking or fraud unsuccessful.

- Title transfer: It allows property whose ownership is controlled via the blockchain (i.e. physical property such as cars, phones or houses).

- Distributed: The ledger represents the truth because mass collaboration constantly reconciles, without having the need to trust because that’s built into the mechanism.

- Smart contracts: Perhaps the most relevant blockchain feature, smart contracts are self-executing contractual states, stored on the blockchain, which nobody controls and, therefore, everyone can trust. The code can control and restrict how the data is accessed and used.

Where do we go from here?
A bitcoin that transfers ownership of title of a crypto-currency can be applied between two parties that exchange goods for money in business-to-business (B2B) transactions. B2B partners would best benefit from blockchain-based applications in the increasingly global B2B payments. There are complexities with foreign payments that are not experienced in domestic payments, such as foreign exchange, value-added taxes in certain countries, interfaces with many clearing and settlement networks, and the need to understand and apply specific country laws with regard to payments processing. Knowledge about the status of payments can be even more important than settling the payment itself. The status of payments may affect the ability of a buyer to make a purchase from a seller, depending on the amount of credit extended by the seller to the purchaser. It may also impact future pricing provided by the seller to a buyer. For time-critical payments, knowing the location of a particular transaction in the payment process allows the payer to take action if the payment is delayed. The more corporate treasurers know about outgoing and incoming payments, the better their cash forecasts.

Blockchain and B2B payments
This article examines which blockchain drivers best apply to current B2B payment process elements and intermediaries – e.g., banks, network providers, clearing and settlement structures. Rather than revolutionary, the analysis determines how blockchain supports, improves, and- eventually- replaces current B2B payments processes (see Figure 1).

Figure 1: Blockchain Features Applied to B2B Payment Process Elements

Source: Aite Group

When paying the supplier, the buyer issues a payment instruction from its accounts payable to the bank. This initiates the transfer of title of currency and a time-stamp makes the transaction irrevocable. The intermediary bank may enjoy blockchain’s irrevocability and title transfer to secure the uniqueness and traceability of the transactions underpinning the cash transfer. The distributed nature of the blockchain ledger avoids any delayed centralized control of AML screening, checking of availability of funds, and clearing, billing, and reporting activities. All executed operations are validated within.

The ledger offers the extra capability to the bank to swiftly handle format translations from the client’s accounting system. A smart contract on the blockchain provides the bank with the capability to charge transparent and auditable service fees. The distributed ledger operates as the connectivity software that the clearing network provides to all trading parties and intermediaries. The network is also capable of offering timestamping services as well as detect transactions that may trigger the execution of smart contract applications. Format translations can be easily offered as a value added service.

The beneficiary bank receives notice of an irrevocable transfer of cash title that the distributed ledger renders valid and immediately executable. The ledger also streamlines all necessary account management verifications to validate the payment data. The seller’s account is immediately credited, and all subsequent regulatory and accounting reporting is made auditable and irrevocable. Bank services can be charged via smart contract applications agreed between the parties. The blockchain enables the seller i.e., the B2B payment receiving party - to update the accounts receivable database with a payment confirmation that becomes an auditable transaction.

Blockchain is certainly not the panacea for all problems, but the frequency of applied features to the B2B payment processes tells, however, that all parties involved could strongly benefit from this technology without the need for anyone to be removed.

About Enrico Camerinelli:

Enrico Camerinelli is a senior analyst at Aite Group specializing in wholesale banking, cash and trade finance, and payments. He brings a strong European focus to Aite Group’s Wholesale Banking practice. Mr. Camerinelli has been widely quoted by publications ranging from American Banker to the Financial Times.

About Aite Group:

Aite Group is an independent research and advisory firm focused on business, technology, and regulatory issues and their impact on the financial services industry. With expertise in banking, payments, wealth management, capital markets, and insurance, Aite Groups analysts work with clients as partner, advisor, and catalyst.

This article was first published in the B2B Fintech: Payments, Supply Chain Finance & E-invoicing Guide 2016. For more expert views on B2B payments, blockchain and innovation in payments & banking, download the guide here.